INDIAN COMPANIES ACT

2013
 Definition of Company
A company means an association of individual formed for
some common purpose. But it is a voluntary association of
persons. It has capital divisible into parts, known as
shares, an artificial person created by a process of law, and
it has a perpetual succession and a common seal.

A Company is a voluntary association of persons formed for

the purpose of doing business, having a distinct name and
limited liability.
CHARACTERSTICS OF COMPANY
1. Separate Legal entity
2. Limited liability
3. Perpetual Succession
4. Common Seal
5. Transferability of Shares
6. Separate Property
7. Can Sue and be sued

Business Laws-Prof.Benny Pappachen

 1.Separate Legal Personality
A company incorporated under the Act is vested with a
corporate personality so it redundant bears its own name, acts
under a name, has a seal of its own and its assets are separate
and distinct from those of its members. It is a different ‘person’
from the members who compose it. Therefore, it can own
property, incurring debts, borrowing money, having a bank
account, employing people, entering contracts and suing or
being sued in the same manner as an individual.
Separate legal entity also act as veil between company and its
member. Which means that assets of the company shall be
used only for the objective of the company as set in
Memorandum of association and its liabilities should be paid by
itself and not from personal asset of the member of the
company.
 The Landmark Case Of

Salomon v. Salomon & Co Ltd

[1897] AC 22

Business Laws-Prof.Benny Pappachen

 Facts in brief
Aron Salomon had for many years carried on a prosperous
business as a leather merchant. In 1892, he decided to convert
it into a limited company and for that purpose Salomon &
Co. Ltd. was formed with Salomon, his wife, his daughter and
his four sons as members, and Salomon as Managing Director.

The company purchased the business of Salomon for £ 39,000.

The price was satisfied by £ 10,000 in debentures,
conferring a charge over all the company’s assets, £ 20,000 in
fully paid up £ 1 shares, and the balance in cash.

Seven shares were subscribed in cash by the members and the

result was that Salomon held 20,001 shares out of
20,007 shares issued, and each of the remaining six shares
was held by a member of his family.
Business Laws-Prof.Benny Pappachen
The company almost immediately ran into difficulties and only a
year later then holder of debentures (Salomon had transferred
his shares to another person) appointed a Receiver and the
company went into liquidation. On liquidation the situation of
the company was broadly like this:
Realisable value of Assets: £ 6,000; Liabilities:
Debentures-£ 10,000; Unsecured Debts- £ 7,000.

Thus, after paying off the debenture holders nothing would be

left for the unsecured creditors. An action was brought by the
liquidator against Salomon holding him liable to indemnify the
company against the company’s trading debts.

Business Laws-Prof.Benny Pappachen

Argument
The Liquidator contended that though Salomon &
Co. Ltd. Was incorporated under the Act, the
company never had an independent existence.
It was only a one man show since all the shares
except six were held by Salomon himself.
The vast preponderance of shares made Salomon
absolute master.
The business was solely conducted for and by him
and the company was mere sham and fraud.

Business Laws-Prof.Benny Pappachen

 Judgement
The House of Lords held that in order to determine the question
it is necessary to look at the statute itself. The sole guide must be
the statute itself.

In the present case, the Act provided that any seven or more
persons, associated for a lawful purpose may, by subscribing their
names to a memorandum of association.

The Act further provided that “no subscriber shall take less than
one share.” That there were seven actual living persons who held
shares in the company was never doubted.

Since the company fulfilled all the requirements of the

Act, the court held that the company had been validly
formed and was a real company.
Business Laws-Prof.Benny Pappachen
Lord Halsbury LC stated (at 30-31):
“… it seems to me impossible to dispute that once the
company is legally incorporated it must be treated like any
other independent person with its rights and liabilities
appropriate to itself, and that the motives of those who took
part in the promotion of the company are absolutely
irrelevant in discussing what those rights and liabilities
are…”

From this case comes the fundamental concept that

a company has a legal personality or identity
separate from its members.
A company is thus a legal ‘person'.

Business Laws-Prof.Benny Pappachen

CASE NAME : CATHERINE LEE V LEE’S AIR
FARMING LIMITED

CITATION(S) : [1961] UKPC 33, [1961] AC 12

 FACTS OF THE CASE
In 1954 the appellant’s husband Lee formed the company named LEE’S
AIR FARMING LTD. for the purpose of carrying on the business of aerial
top-dressing with 3000 thousand share of 1euro each forming share
capital of the company and out of which 2999 shares were owned by Lee
himself. Lee was also the director of the company. He exercised
unrestricted power to control the affairs of the company and made all the
decision relating to contracts of the company.
Company entered into various contract with insurance agencies for
insurance of its employees and few premiums of the policies were paid
through company's bank account for the personal policies taken by Lee in
its own name, but it was debited in the account of lee in company's book.
Lee apart from being the director of the company was also a pilot. In
March 1956, Lee was killed while piloting the aircraft during aerial top-
dressing. Lee’s wife who is appellant claimed worker compensation under
New Zealand Workers’ Compensation Act, 1922 as she claimed that Lee
during work as employee of the company.
The New Zealand Court of Appeal declined the claim of appellant as it
refused to hold that Lee was a worker, holding that a man could not in
effect, employ himself.
 ISSUE RAISED BY RESPONDENT

Respondent company claimed that Lee was owner of the

company and had maximum number of shares in the
company, so his wife is not entitled for workmen
compensation as he was not the employee of the company.
Respondent claimed that Mr. Lee couldn’t be the owner of the
company as there is no master-servant relation that exist
between him and the company.
 ADVICE BY PRIVY COUNCIL
Privy council in advised that claim of Mrs Lee is valid as Mr.
Lee can have a contract with the company he owned as
company is a separate legal entity. Lord Morris quoted Lord
Halsbury LC’s judgment in Salomon’s case, that company ‘was
a real thing’ and said that:
[“… Always assuming that the respondent company was not a
sham, then the capacity of the respondent company to make a
contract could not be impugned merely because the deceased
was an agent of the respondent company in its negotiation [of
Mr Lee’s contract of service].”
 2.Limited Liability
The liability of a member as a shareholder extends to the
contribution to the capital of the company up to the nominal
value of the shares held and not paid by him. Members, even
as a whole, are neither the owners of the company’s
undertakings nor liable for its debts. There are various
exceptions to the principle of limited liability.

In other words, a shareholder is liable to pay the balance, if

any, due on the shares held by him, when called upon to pay
and nothing more, even if the liabilities of the company far
exceed its assets. This means that the liability of a member is
limited.
 3.Perpetual Succession
An incorporated company never dies, except when it is wound
up as per law. A company, being a separate legal person is
unaffected by death or departure of any member, and it remains
the same entity, despite the total change in the membership. A
company’s life is determined by the terms of its Memorandum of
Association.

It may be perpetual, or it may continue for a specified time to

carry on a task or object as laid down in the Memorandum of
Association. Perpetual succession, therefore, means that the
membership of a company may keep changing from time to
time, but that shall not affect its continuity.
 4. Common Seal

Since the company has no physical existence, it must act through

its agents and all contracts entered by its agents must be under
the seal of the company. The Common Seal acts as the official
signature of a company. The name of the company must be
graved on its common seal.
The person, authorized to use the seal, should ensure that it is
kept under his personal custody and is used very carefully
because any deed, instrument or a document to which seal is
improperly or fraudulently affixed will involve the company in legal
action and litigation.
 5.Transferability of Shares
The capital of a company is divided into parts, called shares. The
shares are said to be a movable property and subject to certain
conditions, freely transferable, so that no shareholder is
permanently or necessarily wedded to a company. If the articles do
not provide anything for the transfer of shares and the Regulations
contained in Table “F” in Schedule I to the Companies Act, 2013,
are also expressly excluded, the transfer of shares will be governed
by the general law relating to the transfer of movable property.
A member may sell his shares in the open market and realize the
money invested by him. This provides liquidity to a member (as he
can freely sell his shares) and ensures stability to the company (as
the member is not withdrawing his money from the company). The
Stock Exchanges provide adequate facilities for the sale and
purchase of shares.
Further, as of now, in most of the listed companies, the shares are
also transferable through Electronic mode i.e. through Depository
Participants in dematerialized form instead of physical transfers.
 6. Separate Property

A company, as already observed, is a legal person distinct

from its members. It is therefore capable of owning, enjoying
and disposing of property in its own name. Although, the
capital and assets of the company are contributed by its
shareholders, they are not the private and joint owners of the
property of the company. The property of the company is not
the property of the shareholders; it is the property of the
company.
 7. Capacity to sue or be sued

A company is a body corporate, can sue and be sued in its own

name. To sue means to institute legal proceedings against (a
person) or to bring a suit in a court of law. All legal proceedings
against the company are to be instituted in its name. Similarly,
the company may bring an action against anyone in its own
name.
A company’s right to sue arises when some loss is caused to
the company, i.e. to the property or the personality of the
company. Hence, the company is entitled to sue for damages in
libel or slander as the case may be
A company, as a person distinct from its members, may even
sue one of its own members. A company has a right to seek
damages where a defamatory material published about it,
affects its business.
 LIFTING OF THE CORPORATE VEIL
In the eyes of law, a company is a legal person with a
separate entity distinct from its members of
shareholders. In essence it means that there is a veil or
curtain separating the legal entity of the company from
its members or shareholders.
When any fraudulent and dishonest use is made of the
legal entity, the individuals concerned will not be allowed
to take shelter behind the corporate personality. The Courts
will break through the corporate shell and apply the
principle of ‘lifting or piercing the corporate veil’. The
Court will make the members or the controlling
persons liable for debts and obligations of the
company.
Business Laws-Prof.Benny Pappachen
Circumstances to lift the corporate
veil…
The corporate veil can be lifted either
under the
• Statutory provisions
• Judicial interpretations
The statutory provisions are Provided under the
Companies Act, 1956 The other circumstances are
decided through Judicial interpretations, which
are based on facts of each case as per the decisions of
the court

Business Laws-Prof.Benny Pappachen

 Statutory circumstances for
lifting the corporate veil

• Reduction in membership- Less than seven in public

company and less than two if it is a private company
• Failure to refund application money- After the issue of
shares to the pubic, the company has to pay back the
initial payment to the unsuccessful applicants (SEBI
Guidelines- 130 Days), if they fail to do so, the corporate
veil can be lifted.
• Mis - description of companies name- While signing a
contract if the company’s name is not properly
described, then the corporate veil can be lifted.
Business Laws-Prof.Benny Pappachen
 Continued…..
• Misrepresentation in the prospectus- In case of
misrepresentation, the promoters, directors and every
other person responsible in this matter can be held
liable.

• Fraudulent Conduct- In case the company is carried on

with an intent to defraud the creditors, then the court
may lift the corporate veil.

• Holding and subsidiary companies- A subsidiary has a

distinct legal entity from the holding company other
than in a few circumstances, so if otherwise shown, the
court may under the Act , lift the corporate veil of the
subsidiary company.
Business Laws-Prof.Benny Pappachen
 Circumstances to lift the corporate veil
through JUDICIAL INTERPRETATIONS
When the court feels that there are no statutory
provisions which can pierce the corporate veil, and
the identity of the company is not the one which has
to exist, and the court has to interfere in order to
avoid the activities that are done in the name of the
company by persons managing them, it has been
empowered to do so……
The circumstances are…..

Business Laws-Prof.Benny Pappachen

Judicial interpretations by the
court are as follows:
• Protection of Revenue- When ever a company uses
its name for the purpose of tax evasion or to
circumvent tax obligations

• Prevention of fraud or Improper conduct- The

incorporation has been used for fraudulent
purpose, like defrauding the creditors, defeating
the purpose of law etc..

• Determination of the character of the company-

Enemy company or all the members being the
citizens of the enemy country.
Business Laws-Prof.Benny Pappachen
Other circumstances
• Where a company is used to avoid welfare
legislation- If a company is formed in order to
avoid the benefits to the workers like bonus, or
other statutory benefits..

• For determining the technical competence of the

company- To look into the competency of the
company or the shareholders or promoters

Business Laws-Prof.Benny Pappachen

Case Laws- Escorts Vs LIC
• This case dealt with a non-resident portfolio investment
scheme, which existed under the erstwhile Foreign Exchange
Regulation Act, 1973 (FERA).
• The scheme allowed non-resident companies, which were
owned by or in which the beneficial interest vested in non-
resident individuals of Indian nationality / origin was at least
60%, to invest in the shares of Indian companies.
• Investment was allowed to the extent of 1% of the paid-up
equity capital of such Indian companies, and could not exceed
a ceiling of 5%.
• Under the scheme, 13 companies, all owned by Caparo Group
Limited, invested in Escorts Limited – an Indian company.
• Importantly, 60% of the shares of Caparo Group Limited were
held by a trust, whose beneficiaries were Swraj Paul and
members of his family (all non-resident individuals of Indian
origin).
• The investment by the 13 Caparo Group companies was
challenged on the ground that it was an attempt at
circumventing the prescribed ceiling of investment of 1% under
the Scheme, and that, “One had only to pierce the corporate
veil to discover Mr. Swraj Paul lurking behind.”
Gilford Motor Company Ltd vs. Horne

In this case, Mr. Horne was an ex-employee of The Gilford

motor company and his employment contract provided that
he could not solicit the customers of the company. In order
to defeat this he incorporated a limited company in his
wife's name and solicited the customers of the company.
The company brought an action against him. The Court of
appeal was of the view that "the company was formed as a
device, a stratagy, in order to mask the effective carrying on
of business of Mr. Horne. “In this case it was clear that the
main purpose of incorporating the new company was to
perpetrate fraud.” Thus the court of appeal regarded it as a
mere sham to cloak his wrongdoings
TYPES OF COMPANIES
Companies are classified on the basis of
• Incorporation
• Liability of members
• Number of members
• Ownership
• Control

Business Laws-Prof.Benny Pappachen

ON THE BASIS OF INCORPORATION
1:Statutory company :These companies are those in
corporate under special act passed by the
parliament or the state legislature.
These are mostly concerned with public utilities.
Reserve Bank of India, LIC, GIC, Railways, Tramways,
NHAI.
2: Registered companies Those companies are
those formed and registered under the Indian
companies act.
BHEL, SAIL, GAIL, BEML, ONGC, etc…
Business Laws-Prof.Benny Pappachen
 ON THE BASIS OF LIABILITY
Limited Company
• Limited by Shares- In such companies, the liability is only
the amount which remains unpaid on the shares.
• Limited by Guarantee not having share capital-In this type
of companies the memorandum of Association limits the
members’ liability. It will be based on the undertaking that
has been given in MOA for their contribution in case of a
winding up.
• Limited by guarantee having share capital- In such cases ,
the liability would be based on the MOA towards the
guaranteed amount and the remaining would be from the
unpaid sums of the shares held by the person concerned.

Business Laws-Prof.Benny Pappachen

 ON THE BASIS OF LIABILITY
Unlimited Company
• There is no limit on the liability of the members. The
liability in such cases would extend to the whole amount
of the company’s debts and liabilities.

• When the company is wound up, the official liquidator

will call upon the members to discharge the liability.

• The details of the number of members with which the

company is registered and the amount of share capital
has to be stated in the Articles of Association (AOA).
Business Laws-Prof.Benny Pappachen
Continue…
• 2 :Unlimited companies
• A company not having any limit on the liability of its
members is termed as the unlimited companies.
• Unlimited companies – Section 12 specifically provides
that any 7 or more persons ( 2 or more in case of a
private company ) may form an incorporated company,
without limited liability. In case of such a company,
every member is liable for the debts of the company.
• It means in the case of winding up of the company, the
private property of the members can be taken over by
the creditors for the recovery of their dues i.e. debts.
Such companies are not popular in India.
Business Laws-Prof.Benny Pappachen
3.ON THE BASIS OF NO: OF MEMBERS
According to basis of the number of member
,Companies may be classified into
Four categories:-
a. Public Company.
b. Private Company.
c. Small Company.
d. One –person Company.
ON THE BASIS OF NO: OF MEMBERS
Public Company
According to Section 2(71) of the Companies Act ,2013, public
company is a company which-
A) is not a private company.
B) has minimum paid- up share capital Rs 5,00,000 or such higher
paid-up capital as may prescribed,
C) has seven or more members.
The Company can invite public for Subscription of shares and
debentures .The term public limited is added to its name at the time
of incorporation.
There is no restriction on the maximum number of members.
As per the provision of Companies Act,2013 ,a company which is a
subsidiary of a company (not being a private company ) shall be
deemed to be a public company even where such subsidiary
company continues to be a private company in Article of
Association(AOA).
A public company should have at least three directors. The name of
a public limited company must end with the word "Limited".
Business Laws-Prof.Benny Pappachen
 ON THE BASIS OF NO: OF MEMBERS
Private Company
• A private limited company must include the words
"private limited" with its name
• A company which has a minimum of two persons. They
have to subscribe to the MOA and AOA
• It should be have a minimum paid up capital of 1 lakh or
more as prescribed by the article.
• The maximum number of members to be 200 ( it does not
include members who are employed in the company,
persons who were formerly employed)
• The rights to transfer the shares are restricted in the Private
companies
continued….
Business Laws-Prof.Benny Pappachen
• Prohibits any invitation to the public to subscribe and
therefore it cannot issue a prospectus inviting the public to
subscribe for any shares in, or debentures of the company
• It prohibits acceptance of deposits from persons other
than its members, directors or their relatives.
• If two or more are holding one or more shares in a
company jointly, they shall for the purpose of this
definition, be treated as a single member.
• As there is no public accountability like a public company,
there is no rigorous surveillance.

Business Laws-Prof.Benny Pappachen

 Distinction Between Private Ltd. & Public Ltd.
Company

Private Ltd. Public Ltd.

 Minimum capital required is  Minimum capital required is
1,00,000 5,00,000
Minimum 2 and maximum 200 Minimum 7 members. No limit

members on maximum members

At least 2 directors At least 3 directors

 Non-transferable shares
 Transferable shares
 Restriction on invitation to
subscribe for shares  Invitation to subscribe for
shares is allowed
 No restriction on managerial
 Managerial remuneration
remuneration
cannot exceed 11% of net
 Can start business without profit
obtaining certificate of Can start business only after

Commencement and obtaining certificate of

Business Laws-Prof.Benny Pappachen
subsequently apply comencement
 Special Privileges of a Private Company
Over Public Company
1. Can be started with minimum 2 members
2. No provision regarding minimum subscription
3. No need to file a Prospectus or Statement in Lieu of Prospectus.
4. Further share issue
5. It can issue share capital of any kinds
6. Commence business immediately after getting certificate of
incorporation
7. Need not to keep index of members
8. Need not to hold a statutory meeting or file statutory report
9. Provision regarding maximum limit of Director’s or Manager’s
remuneration does not apply
Business Laws-Prof.Benny Pappachen
Small Company
The definition of a small company is provided under Section 2(85) of
the Companies Act, 2013. The Act defines a small company as a
company that is not a public company and has:
A paid-up share capital equal to or below Rs.4 crore
A turnover equal to or below Rs.40 crore
However, the concept of small companies does not apply to the
following companies:
A holding or a subsidiary company.
A company registered under section 8.
A body corporate or company governed by any special act.
Most startups in India are classified as small companies as they will
not have a paid-up capital of more than Rs.4crores and an annual
sales turnover of more than Rs.40 crores.
Following are the characteristics of a small company:
Low Profitability and Revenue
Fewer Employees
Smaller Market Area
Fewer locations
Benefits for a Small Company
Under the Companies Act, 2013

Board Meetings .- 2 is required

Annual Return –can be signed by CS or
Director
Cash Flow Statement- not compulsory
Auditors Rotation – not required
Fees and Charges - lesser
Abridged Forms.- Directors report / AGM
report not required(MGT-7A)
One Person company (OPC)
• The Companies Act, 2013 provides that an individual
can form a company with one single member and one
director. The director and member can be the same
person.
• OPC has the features of a company and the benefits of
a sole proprietorship.
• Only natural person who is an Indian citizen and
resident in India or NRI is eligible to incorporate OPC.
• Simpler legal and governance regime for operation and
maintenance
• Waives several compliance requirements.
• ‘Lives on’ even after the death/disability of the sole
member
• Appointment of another person as a nominee member
in the event of the subscriber’s death or his incapacity
• The paid-up share capital should not exceed fifty lakh
rupees
The paid-up share capital should not exceed fifty lakh
rupees and Turnover 2 crores
OPC to convert itself, within 6 months of the date on
which its paid-up share capital is increased beyond fifty
lakh rupees or the last day of the relevant period during
which its average annual turnover exceeds two crore
rupees, into either a private company with minimum of
two members and two directors or a public company with
at least of seven members and three directors in
accordance with the provisions of section 18 of the Act
Advantages Of OPC
• Legal status
• Easy to obtain funds
• Less compliances
• Easy incorporation
• Perpetual succession
Disadvantages Of OPC
Suitable for only small business
Restriction of business activities
Ownership and management
 ON THE BASIS OF LIABILITY
1. Companies with limited liability may two types :
(A). Companies limited by shares.
The liability of the members limited only up to
face value of the share. It may be public or a
private company.
The shareholders are not responsible for the
liabilities of the company and they cannot be
called upon to pay even a single paisa more than
that of the unpaid amount of the shares. These
types of companies are very popular in India.
The principles of limited liability attract
investors, to invest in the shares of the
Business Laws-Prof.Benny Pappachen
company.
 Continue…
B : Company Limited by Guarantee: The liability of members of
the company is limited up to specific amount guaranteed by
them. The purpose of such a guarantee is to enable the
company to have funds to meet its liability at the time of
winding up. The important features of such companies are:-
(a) Each member promises to pay a fixed amount in the event
of wind up.
(b) This amount is known as guarantee amount.
(c) The amount of guarantee is laid down in the Memorandum
of Association.
(d) The amount of guarantee is paid only in the case of
winding up of the company.
(e) Such a company may or may not have share capital
Business Laws-Prof.Benny Pappachen
 ON THE BASIS OF NUMBER OF
MEMBERS
1: Private companies :
• A company whose ownership is private. A private
company which has minimum paid up capital of one lakh
rupees.
• Can have a minimum of 2 and maximum of 200 members
• Has restricted the right to transfer its shares to any other
person
• The major ownership restrictions are:
• shareholders cannotsell or transfer their shares without
offering them first to other shareholders for purchase,
• shareholders cannot offer their shares to the generalpublic
over a stock exchange,

Business Laws-Prof.Benny Pappachen

Continue..
Restrictions imposed on private Companies:
• (1) A private limited company must include the words
"private limited" with its name.
(2) A private company must have its own Articles of
Association.
(3) The shares of private company are not transferable.
(4) A private company cannot invite public to subscribe its
shares or debentures.
(5) The maximum number of members in a private
company is restricted to 200.
(6) Every year private company must file three copies of
Balance Sheet and Profit and Loss Account together with
Auditors Report, to the Registrar of companies.
(7) A member of private company can appoint only one
Business Laws-Prof.Benny Pappachen
proxy.
Continue…
2: Public companies:A public company is a company with
securities (equity and debt) owned and traded by the general
public through the public capital markets.
• Has a minimum paid-up capital of rupees five lakhs or more
• Does not restrict the right to transfer its shares to any other
person
• Can invite general public for the subscription of its shares or
debentures
• Can invite or accept
• Public Company has to file the documents like Memorandum
of Association, Articles of Association and Prospectus with the
Registrar of Companies.
Business Laws-Prof.Benny Pappachen
Continue…
Public company has following features:-
(a)
• Public company collects capital from general public by
way of issuing shares and debentures,
(b) The shares of Public company are freely transferable,
(c)The liability of the members of Public Limited Company
is limited up to the extent of face value of he shares
purchased by them,
(d) Public company must collect minimum subscription and
must obtain Trading Certificate i.e. Certificate of
Commencement of Business to start the business,
(e) Public company must start its business within one year
of getting Incorporation Certificate otherwise it will be
wound up by the court,
(f) It is also compulsory for a Public Company to hold
statutory meeting within six months of obtaining "Trading
Business Laws-Prof.Benny Pappachen
 ON THE BASIS OF OWNERSHIP
1.A government company is one in
which, 51% or more, paid-up capital of the
company is taken over either by State
Government or by Central Government or by both.
Government companies are incorporated
under Indian Companies Act. It may be noted
that in a government company, government is
the major shareholder and majority of directors
are appointed by the government.
Business Laws-Prof.Benny Pappachen
ON THE BASIS OF OWNERSHIP

2.Foreign company
A company incorporated outside India, but having a
place of business in India.
If it does not have a place of business in India but only
has agents in India it cannot be considered to be foreign
company.
Ex: Citibank,Amazon,ABN AMRO,Honda ,mac Donalds
etc..

Business Laws-Prof.Benny Pappachen

What are the Ways in Which Foreign
companies can be Registered in India?

Joint venture
Wholly-owned subsidiary
Liaison office
Project office
Branch office
Section 8 company
• These are companies formed for charitable
objects like promotion of commerce, art, religion,
charity, sports etc…
• Uses its profits for the objective its been formed.
• No dividend to members
• Operates with special license from central
government
• Need not use word Ltd/Pvt ltd in its name

Business Laws-Prof.Benny Pappachen

 ON THE BASIS OF CONTROL
1: Holding Company:
Company which holds 50% or more paid up capital of another company i.e.
Subsidiary Company is known as the Holding Company. Holding Company
controls and manages the entire affairs of subsidiary company.
Holding company is the company which holds and control the other
company

2: Subsidiary company :
It is the company which is holded by other is known as subsidiary of
other Company whose more than half of the nominal value of share capital
Is held by another company or another company controls the
Composition of board of directors of such company.
The management of Subsidiary Company is controlled by Holding Company.
But Subsidiary Company does not lose its identity.

Business Laws-Prof.Benny Pappachen

 ON THE BASIS OF CONTROL
3.Associate Company
An associate company, also known as an affiliate company, is a
company in which a notable portion of shares is owned by a parent
company. The portion usually lies between 20% and 50%.
Ownership of higher than 50% of the stock legally turns it into
a subsidiary of the parent company.
Advantages
• Investing in associate companies allows larger companies to expand
their operations or enter into new markets.
• The association may serve as a prudent investment option, especially
for companies that are looking to purchase a majority stake in
another business, particularly in a competitor.
• Both the parent and associate companies can take advantage of
stable financial support, research and technological advancement,
and improved production capabilities.
• An associate company helps boost the parent company’s profitability
and overall value.
 Dormant Company
A Company or an Inactive company that has not made any significant
accounting transactions and has been formed and registered for a
future endeavor or to be retained as an asset or intellectual property
can apply to the Registrar in a prescribed manner to attain the status of
a Dormant Company, according to the Companies Act, 2013. A dormant
business.
• Can apply to revert to a company with an active status.
• For more than five consecutive financial years, a company cannot be
classified as dormant.
Why Obtain Dormant Status?
A Firm might become Dormant for a variety of reasons, including
It is possible to register a company as inactive when the owners are
planning to launch it and want to reserve a name for it.
When a company’s owners want to restructure it, they can apply for
Dormant Status.
If the business owner needs to take an extended period off for reasons
such as illness, travel, maternity leave, sabbatical, etc.
 Advantages of Dormant Company
under Companies Act, 2013
• A company may be founded to prepare for a
future undertaking. This indicates that the
promoters want to trade and hence preserve the
domain name.
• A Trademark of a Company Name is among the
intellectual property owned by a dormant
company. Others are not authorized to trade using
the name of the dormant company since it is
protected.
• It assists the company in projecting a more
positive image to potential consumers and/or
lenders.
 Producer Company
• Producer Companies provide a legal structure for farmers to collaborate
and engage in collective production, marketing, and selling of their
primary produce and export of primary produce of its members or import
of goods or services for their benefit and raising their living standards and
ensuring good status of their available assistance, incomes, and
profitability.
• These provisions aim to promote agricultural activities and rural
development in India.
• The primary produce includes the products of farmers or agriculture,
horticulture, animal husbandry, fisheries, dairy, beekeeping, or any other
primary produce that is specified by the central government.
A Producer Company can be founded by ten individuals (or more) or two
institutions (or more) or a mix of both (10 individuals and two institutions)
with one of the following business objectives such as marketing, grading,
export, selling, and other businesses.
Advantages of a Producer Company Registration
• A Producer Company’s ownership and membership are limited to
“principal producers” or “Producer Institution/s,” and member equity
cannot be sold. As a result, no one can take over the business or deprive
the primary producers of their livelihood.
• The minimum number of producers required to form a PC is ten, but the
maximum number of members is unlimited, and membership can be
raised as needed. This makes it simple for even ten people to form a
producer company.
 Contd…..
• Except for the clauses listed in the Producer Company Act
from 581-A to 581-ZL that distinguish it from a regular
private or limited company, the provisions of the Private
Limited Company Act will apply to producer firms (refer the
Producer Company Act for details). This gives a producer
company a professional structure.
• The members’ liability is restricted to the unpaid amount of
the shares they own. As a result, the members’ personal
assets are protected from business losses.
MEMORANDUM OF ASSOCIATION

Business Laws-Prof.Benny Pappachen

MEMORANDUM OF ASSOCIATION

It is an important document which defines

objectives, powers, scopes and relations of the
company with outsiders .

Business Laws-Prof.Benny Pappachen

 CLAUSES (CONTENTS) OF
MEMORANDUM OF ASSOCIATION
1. Name Clause.
2. Registered Office clause.
3. Objective Clause
4. Liability Clause.
5. Capital Clause.
6. Association Clause
7. Nominee clause for OPC

Note: The MoA must be signed by at least seven subscribers in the

case of Public Company and two in the case of Private company.
Business Laws-Prof.Benny Pappachen
 NAME CLAUSE
The Company is a legal entity. Therefore, it must have
its name to establish its identity.

REGISTERED OFFICE CLAUSE

Every company must have a registered office from
the day it starts its business or within 30 days of
getting the Certificate of Incorporation, whichever is
earlier Memorandum of Association must state the
name of the State in which the registered office of
the company is situated.

Business Laws-Prof.Benny Pappachen

OBJECTIVE CLAUSE
It is the essence of memorandum. it clearly
defines the sphere of the company activities.
It indicates a series of objects for which the
company is established.
HERE THE COMPANY SHOULD MENTION ITS
• MAIN OBJECTIVES
• SECONDARY OBJECTIVES
• OTHER OBJECTIVES
Business Laws-Prof.Benny Pappachen
LIABILITY CLAUSE
THE EXTENT AND NATURE OF THE LIABILITY OF
SHARESHOLDERS SHOULD BE STATED
LIKE
• LIMITED LIABILITY
• LIMITED BY GAURANTEE
• UNLIMITED
The liability of the members is limited to the extent of the
value of shares purchased by them.
In a case if a shareholder has to pay the unpaid amount on the
share investment, he can be compelled to pay to the extent of
unpaid amount on the shares, nothing more.

Business Laws-Prof.Benny Pappachen

CAPITAL CLAUSE
• Amount of share capital with which the
company is to be registered and its division
into shares of a fixed amount must be stated
in the Memorandum of Association of a
company limited by shares.
• THE AUTHORISED CAPITAL SHOULD BE
MENTIONED
• A COMPANY IS NOT AUTHORISED TO ISSUE
ABOVE AUTHORISED CAPITAL
Business Laws-Prof.Benny Pappachen
SUBSCRIPTION/ASSOCIATION CLAUSE
• THIS CLAUSE CONTAINS DELCARATION OF
MEMBERS
• THE NAMES, ADDRESSESS AND OCCUPATIONS
OF THE SUBSCRIBERS SHOULD BE MENTIONED
• THE SIGNATURES ARE TO BE ATTESTED BY
PROPER WITNESS

Business Laws-Prof.Benny Pappachen

 Doctrine of ultra vires
The expression “ultra vires” consists of two words:
‘ultra’ and ‘vires’. ‘Ultra’ means beyond and ‘Vires’
means powers. Thus, the expression ultra vires means
an act beyond the powers.
The object clause of the memorandum of the company
contains the object for which the company is formed.
An act of the company must not be beyond the object
clause otherwise it will be ultra vires and therefore,
void and cannot be ratified even if all the member wish
to ratify. This is called the doctrine of ultra vires.
(Ashbury Railway Carriage and Iron Company Ltd v. Riche )
Business Laws-Prof.Benny Pappachen
ASHBURY RAILWAY CARRIAGE & IRON CO.
LTD. vs. RICHE
FACTS OF THE CASE
Ashbury Railway Carriage and Iron Co. Ltd, in its MOA had
stated that the object of the incorporation of the company
was ‘to make or sell, or lend, or hire, railway carriages and
wagons, and all kinds of railway plants, fittings, machinery
and rolling stock; to carry on the business of the mechanical
engineers and the general contractors; to purchase and sell,
as merchants, timber, coal, metals, or other materials; and to
buy and sell any such materials on commission, or as agents.’
The directors of the company entered into a contract with
Riches, wherein a railway line was to be constructed in
Belgium, and the contract was for the financing of the
construction.
Business Laws-Prof.Benny Pappachen
Contd……..
The Clause 4 of the object clause specifically mentioned that
beyond the scope of the above-mentioned clause, there was
a need of a special resolution to indulge in any activity which
was beyond the scope of this clause of the object clause in
the MOA.

However, the company superseded this requirement and

agreed to give Riches the loan and financing they needed to
build the railway line. The contract which was thus entered
into by the company was ratified by all the members of the
company. However, later on, the company went back on
their side of the deal rejecting the contract that was entered
into by the company and Riches.

Riches sued the company for the breach of the contract and
claimed damage
Business Laws-Prof.Benny Pappachen
 Issue

Whether the company can enter into a contract

which is beyond the scope of the object clause in
the MOA of the company?

Business Laws-Prof.Benny Pappachen

 JUDGEMENT
The House of Lords held that the objectives of the company as
mentioned in the object clause of the company’s MOA were
absolute. House of Lords, in this case, applied this same principle and
held that the contract which had been entered into by the company
was beyond the scope of the object clause of the MOA of the
company.
The House of Lords also held that by entering into the concerned
contract with Riches, the company was in breach of the clauses that
had been included in the constitution of the Company. The clauses
that were included in the MOA did not allow the company to make a
contract.
Keeping this in mind, the House of Lords held that the transaction
concerned here was invalid, and thus, consequentially held that the
contract shall have no legal effect for the company or the Riches. The
judgment resulted in a defeat for Riches to have the contract enforced
since there could not be any breach. This was due to the fact that
there could not have been any contract to be breached in the first
place.

Business Laws-Prof.Benny Pappachen

 Analysis
The judgment laid down, in this case, laid the foundation of
the rule of ‘ultra vires”, which meant that the company was
only allowed to do what it had been enabled to do in the
object clause of the MOA. The rules, however, presented a lot
of problems for those who were supposed to deal with these
companies.
The MOA of the company is placed with the Registrar of
Companies, and anyone seeking to enter into a transaction
with a company would have had to access that concerned
MOA from the Registrar of Companies to ensure that the
company was allowed to enter into such transaction, or they
would find themselves in a position where they are stuck in
an unenforceable contract which would be considered as void
in the eyes of the law.
The Ashbury Railways case laid the foundation of the ultra vires
rules and confined the acts of the company within the ambit of
the object clause of theBusiness
MOA. Laws-Prof.Benny Pappachen
ARTICLES OF ASSOCIATION

Business Laws-Prof.Benny Pappachen

 AOA
The articles of association is a document that
contains the purpose of the company as well
as the duties and the responsibilities of its
members defined and recorded clearly. It is an
important document which needs to be filed
with the registrar of companies.

Business Laws-Prof.Benny Pappachen

 Contents in the Articles of Association
• Adoption of preliminary contracts.
• Number and value of shares
• Allotment of shares
• Calls on shares
• Transfer of shares
• Forfeiture,reissue,surrender of shares
• Alteration of share capital
• Share certificates
• Conversion of shares in to stocks
• Meetings and proceedings
• Voting rights , proxies and polls
• Appointment , Remmunaration,etc of Directors
• Borrowing powers ,. Dividend and Reserves,
• Accounts and audit , Procedure of winding up , Seal of the
company
Business Laws-Prof.Benny Pappachen
Difference Between MOA &AOA
MOA AOA
1. Determines the 1. It contains rules and
constitution and activities regulations of internal
of the co. management of co.
2. It is subsidiary to MOA& if
2. It is fundamental charter
conflicting, MOA would
3. Every co. must have a MOA prevail
4. Alteration of MOA is 3. Public company limited
difficult by shares may or may not
have AOA
4. Alteration is easier by
special resolution
Business Laws-Prof.Benny Pappachen
Constructive Notice of MOA & AOA
• MOA & AOA are public documents.
• Lodged with the Registrar and are open for inspection.
• Any person can obtain the inspection of these
documents.
• Duty of every person to inspect the documents before
dealing with the company.
• Thus MOA & AOA is presumed to be notice of public.
• Such notice is called “Constructive Notice”.
• Every person dealing with a company must read the
public documents of the company.
• If he does not read them, it is his fault
Business Laws-Prof.Benny Pappachen
Continue…
Every person dealing with the company is deemed to have
a constructive notice of the contents of the memorandum
and articles of the company.
An outsider dealing with the company is presumed to have
read the contents of the registered documents of the
company.
The further presumption is that he has not only read and
inspected the documents but has also
understood them fully in the proper sense. This is known as
the rule of constructive notice.
So, the doctrine or rule of constructive notice is a
presumption operating in favor of the company against the
outsider
Business Laws-Prof.Benny Pappachen
Doctrine of Indoor Management
(Turquand’s Rule)

Business Laws-Prof.Benny Pappachen

 Doctrine of Indoor Management
(Turquand’s Rule)
INTRODUCTION
The doctrine of indoor management was evolved 150
years ago. It is also known as Turquand’s rule. The role of
the doctrine of indoor management is opposed to the
role of the doctrine of constructive notice. The doctrine
of constructive notice protects the company against
outsiders whereas the doctrine of indoor management
protects outsiders against the actions of the company.
This doctrine also is a possible safeguard against the
possibility of abusing the doctrine of constructive notice.

Business Laws-Prof.Benny Pappachen

 Contd……..
The person entering into a transaction with the company only
needed to satisfy that his proposed transaction is not
inconsistent with the articles and memorandum of the
company. He is not bound to see the internal irregularities of
the company and if there are any internal irregularities than
the company will be liable as the person has acted in the good
faith and he did not know about the internal arrangement of
the company.
The rule is based upon the obvious reason of convenience in
business relations. Firstly, the articles of association and
memorandum are public documents and they are open to the
public for inspection. Hence an outsider “is presumed to know
the constitution of a company, but what may or may not have
taken place within the doors that are closed to him.”

Business Laws-Prof.Benny Pappachen

 ORIGIN OF THE DOCTRINE
• This doctrine was laid down in the case of Royal British Bank V.
Turquand
• The directors of the company borrowed some money from the
plaintiff. The article of the company provides for the borrowing of
money on bonds but there was a necessary condition that a
resolution should be passed in general meeting. Now in this case
shareholders claims that as there was no such resolution passed
in general meeting so the company is not bound to pay the
money. It was held that the company is bound to pay back the
loan. As directors could borrow but subjected to the resolution,
so the plaintiff had the right to infer that the necessary resolution
must have been passed.
• It was held that Turquand can sue the company on the strength
of the bond. As he was entitled to assume that the necessary
resolution had been passed. Lord Hatherly observed- “Outsiders
are bound to know the external position of the company, but are
not bound to know its indoor management.”

Business Laws-Prof.Benny Pappachen

 Exceptions To The Doctrine Of
Indoor Management
• Where the outsider had knowledge of irregularity
• No knowledge of memorandum and articles- again, the rule cannot be
invoked by a person on the ground that he doesn’t have the knowledge
of memorandum and articles and thus he did rely on them.
• Forgery- The rule does not apply to the transaction involving forgery or
illegal or transactions which are void ab initio. .
• Negligence- the doctrine of indoor management, in no way, rewards
those who behave negligently
• The doctrine will not apply where the question is in regard to the very
existence of an agency
• This doctrine is also not applicable where a pre-condition is required to
be fulfilled before the company itself can exercise a particular power. In
other words, the act done is not merely ultra vires the directors/officers
but ultra vires the company itself
Business Laws-Prof.Benny Pappachen
Kotla Venkataswamy v. Chinta
Ramamurthy AIR 1934 Madras 579.

In the article of the company there was written that if the

company’s property will be mortgaged (mortgage means
loan on immovable property) then in the articles there was a
provision that the company if it mortgage the company’s
property then in the mortgage deed there will be requirement
of three signatures that is of the managing director, working
director and the company’s secretary.

These three people’s signature is mandatory that is what the

articles provision is about of that company. But in reality what
happens there was only two signatures on the mortgage
deed which is of secretary and working director and there
was no signature of the company’s managing director. And
the plaintiff (lady) accepted the deed which was only
executed by the secretary and director.
Then Court held that he mortgage deed was invalid due to only two
signatures over it, but the plaintiff cannot claim under this deed. As
it was presumed that the lady was known about that fact that in the
articles this provision of three signatures is there so, court held that
it is been presumed that you have gone through the articles of the
company or read the articles before dealing with the company.

And hence she was not entitled to claim from the company. She
was liable for her own wrong that she haven’t gone through the
articles of the company. Company is not made liable. So, from this
case we have correlated the Doctrine Of Constructive Notice.

So, we can say that this doctrine of constructive notice works in the
favor of the company not the outsiders as , it has been presumed
that the outsiders before dealing with the company has read the
articles and memorandum of the company. So if any mischief
happens then company is not liable for that as the in the eyes of
law it is the presumption of the knowledge before dealing with the
company.
 PROMOTERS
Before a company can be formed, there must
be some persons who have an intention to
form a company and who take the necessary
steps to carry that intention into operation.
Such persons are called ‘promoters’

Business Laws-Prof.Benny Pappachen

 FUNCTIONS OF PROMOTERS:
• To discover an idea for establishing a company.
• To make detailed investigations about the demand for the
product, availability of power, labour, raw material.
• To investigate the idea and know whether the formation
of the company is possible and profitable.
• To find out suitable persons who are willing to act as first
directors of the company. To settle the name of
company.
• To select bank, legal advisor, auditor, underwriter for the
company.
• To submit all the documents required for incorporation
with the registrar.
• To make proper arrangement for the office of the
company.
Business Laws-Prof.Benny Pappachen
 DUTIES AND OBLIGATION OF
PROMOTERS
The promoters must disclose fully all the material facts
regarding the formation of a company.

The promoters must faithfully disclose all the facts

relating to the property which they want to sell to the
company.
The promoters must not make an unfair use of their
position.
To disclose the liability and pay the secret profits if
promoters have earned.
Business Laws-Prof.Benny Pappachen
 REMUNERATION OF PROMOTERS
• He may be paid a certain lump sum.
• He may be given shares of the company.
• He may be given commission of the shares
sold by the company.
• He may be given an option to buy the shares
of the company at par when their market
price is higher.
• He may sell his own property to the company
at higher price and earn profit.
Business Laws-Prof.Benny Pappachen
 Liability of the promoter
1.A promoter can be compelled by the company to hand
over any secret profit which he has made without full
disclosure to the company.
2.The company can also sue for the rescission of the
contract of sale by the promoter where the promoter has
not disclosed his interest therein.
3.the promoters are criminally liable for the issue of
prospectus containing untrue statements.
4. A company may proceed against a promoter on action
for deceit or breach of duty under section 543.

Business Laws-Prof.Benny Pappachen

What is pre-incorporation contract?

Promoters are the person obliged to promote a company to

operational level ensuring it running successfully. Therefore, the
promoters enter into various contracts necessary to promote
company. These contracts also include those executed with the
professionals for company registration or those imperative to float
company.

As a company is artificial person that is unborn unless the

registration process is completed, it cannot enter execute any
agreement before incorporation. Therefore, these contracts entered
by the promoters are made in their own name. Hence, these
contracts are known as pre-incorporation contract or promoter’s
contract. Such contracts are inevitable for company registration and
therefore are also recognized by Companies Act and also by
Specific Relief Act.
 Whether Pre-Incorporation Contracts Entered by
Promoters are Binding on the Company?
• While execution, the contracts are entered by the promoters on
behalf of the company. Although, the promoters act as agent of the
company to represent its interest, while registration, the principal is
not in the existence.
• Therefore, the contracts entered by the promoters do not bind the
company or the third party. The validity and enforceability of the
pre-incorporation contracts is always in question. However, the fix
lies in Section 15 and 19 of the Specific Relief Act, 1963.

Section 15(h) provides that the company may ask for specific performance
from the third party if the pre-incorporation contracts are entered by
promoters for the purpose of the company and subject to terms of
incorporation of company. This condition can only be applied if the company
has expressly shown the acceptance of such contracts after its incorporation
and communicated the same to concerned third party (i.e. the other party).
Under similar circumstances, specific performance may be enforced against
the company by the other party to the contract u/s 19(e) of Specific Relief Act.
Hence, for enforcement of the contract by the company against the
other party to contract,

1.Accept the contracts through passing a resolution for acceptance of contracts

and actions by the promoters for the incorporation of the company and related
matters.
2.Novation of contract: On completion of novation of contract, the new contract
would be binding the parties. The novation provides an opportunity to replace
the liability of the promoters with that of company. In simple words, the contract
would be reconstituted in a manner that contracting party was the company and
no longer the promoters.
Such actions of acceptance are essential after registration of private company
as it owns a separate legal identity to operate in its own name and promoters
will not be personally liable for such contract entered for and on behalf of the
company.
 CASE LAW

Erlanger v New Sombrero Phosphate Co

(1878)
Facts

•Erlanger was a French banker who bought the lease for the
Anguilian island of “Sombrero”, phosphate mining for £55,000.
•Erlanger then established New Erlanger Phosphate Co
(Phosphate), before selling Sombrero’s lease to Phosphate
for £110,000 through a nominee.
•One of Phosphate’s directors was the Lord Mayor of London, who
was independent of Erlanger’s initial group of founders. Two other
directors were abroad, and the other directors were puppet directors
of Erlanger.
•Due to Erlanger’s strong control over Phosphate, the company was
essentially an extension of Erlanger. Phosphate ratified the sale of
the lease.
•Many people invested in Phosphate due to Erlanger’s skills at
promotion. Eventually, the investors realised that Erlanger had sold
the lease to Phosphate for double the price he had bought it for, and
Phosphate sued Erlanger for recession due to non-disclosure and an
account of profits.
Issues
•Was Erlanger liable to Phosphate due to not disclosing to his conflict
of interest?

Held
•Erlanger was a promoter for Phosphate. The House of Lords
unanimously held that the relationship between a promoter and a
newly formed company attracts a fiduciary relationship.
•The majority (Lord Cairns LC dissenting) also held that the contract
can be rescinded.
•A promoter owes duties of good faith and honesty to the company.
•Erlanger should have declared any conflicting interests to the
company promoted and cannot make any “secret profits”.
•A promoter who breaches any duty to the company by failing to
disclose to the company conflicting interests would be liable. The
company is able to seek remedies such as rescission of contract and
recovery of profits.
•A constructive trust can also be formed for the profits gained by the
promoter in breach of his or her duties.
PROSPECTUS

Business Laws-Prof.Benny Pappachen

Prospectus
• It is a valuable document containing
important details about a company
• A prospectus is thus any document which
invites the public to provide funds to the
company by way of deposits or subscriptions
to its shares and debentures.
• It should be duly signed by the company.

Business Laws-Prof.Benny Pappachen

 Importance of Prospectus
• It is an invitation to the public to subscribe to the
shares and debentures of the company.
• It informs public about the company and stimulates
people to invest money in the company.
• It provides an authentic record of the terms and
conditions on which shares and debentures have been
issued.
• It identifies the persons who can be held responsible
for any untrue or incorrect statements made in it.
• It reflects the business policies and programes of the
company.
• It helps the investors to take investment decisions.
Business Laws-Prof.Benny Pappachen
Contents of the prospectus
It contains the following details about the company:
• Name of the company
• Address of the Registered office.
• Nature and objects of business
• Capital structure
• History of the company
• Particulars about Underwriters,auditors,brokers,bankers
• Date of opening and closing subscription list
• Name of stock exchanges where applications for listing has been
made
• Information about material contracts with managerial personnel
• Outstanding liabilities
• Financial information.
• Consent of managerial personnel
• Management perception of risk factors.
• Statutory or other information.
Business Laws-Prof.Benny Pappachen
 Types of Prospectus

These are of different types. Some of them are:-

1.Red Herring

2.Shelf

3.Abridged

4.Deemed
1.Red herring Prospectus:
A red herring prospectus is a prospectus used when there is a
book built public issue. It contains all the material facts and
information excluding the price or quantum of the securities
offered for sale. It contains information concerning the
company’s operations and future prospects, but the relevant
details about the offering are not mentioned.

2.Shelf Prospectus:
Shelf prospectus can be defined as a prospectus that has been
issued by any public financial institution, company or bank for
one or more issues of securities or class of securities as
mentioned in the prospectus. When a shelf prospectus is issued
then the issuer does not need to issue a separate prospectus for
each offering he can offer or sell securities without issuing any
further prospectus
3. Abridged Prospectus:
An abridged prospectus as the name signifies is the
summarized offer document containing salient features of an
ordinary prospectus. It is issued together with the company’s
application form of pubic issue.

4.Deemed Prospectus:
When any company to offer securities for sale to the public,
allots or agrees to allot securities, the document will be
considered as a deemed prospectus through which the offer is
made to the public for sale. A deemed prospectus has been
stated under section 25(1) of the Companies Act, 2013.The
document is deemed to be a prospectus of a company for all
purposes and all the provision of content and liabilities of a
prospectus will be applied upon it.
Copy of Prospectus

Business Laws-Prof.Benny Pappachen

 DLF VS SEBI-Case Law
• The case hinges around DLF's Rs 9,000-crore IPO in 2007. In
the year preceding the IPO, over the space of 48 hours, DLF had
effectively transferred about 280 subsidiaries to a holding
company, Felicite Builders, which was then sold to three women,
wives of top employees of the company, for about Rs 2 crore.
• This allowed the company to omit disclosures about these 281
companies in its final prospectus, published in January 2007.
These companies together held about 4,000 acres of land, which
was shown in the prospectus as "land to which DLF has sole
development rights-owned by DLF's subsidiaries". SEBI member
Rajeev Kumar Agarwal, in an order last October, ruled against
these transactions and barred the already cash-strapped
company from accessing the capital markets for three years. (The
SEBI investigation was on the basis of a complaint by Kimsuk
Krishna Sinha, a Delhi based real estate agent.)
• The Securities and Exchange Board of India has imposed
a total fine of Rs 86 crore on property developer DLF, its
chairman KP Singh and several other related entities,
including subsidiaries and its top management for not
disclosing certain material information and facts in its IPO
document.

The regulator on Thursday in two separate orders

imposed monetary penalties on DLF and its seven top
officials for alleged fraudulent and unfair trade practices
and several other related entities. ..
 Derry Vs Peek- Case Law
Facts of Derry v Peek
In the prospectus released by the defendant company, it was stated that
the company was permitted to use trams that were powered by steam,
rather than by horses. In reality, the company did not possess such a right
as this had to be approved by a Board of Trade. Gaining the approval for
such a claim from the Board was considered a formality in such
circumstances and the claim was put forward in the prospectus with this
information in mind. However, the claim of the company for this right was
later refused by the Board. The individuals who had purchased a stake in
the business, upon reliance on the statement, brought a claim for deceit
against the defendant’s business after it became liquidated.
Issue in Derry v Peek
It is important to note that the law regarding false misrepresentation was
still developing and this was an important case in doing so. In this case, the
court was required to assess the statement made by the defendant
company in its prospectus to see whether the statement was fraudulent or
simply incorrect.
Decision/Outcome of Derry v Peek
The claim of the shareholders was rejected by the House of Lords. The
court held that it was not proven by the shareholders that the director of the
company was dishonest in his belief. The court defined fraudulent
misrepresentation as a statement known to be false or a statement made
recklessly or carelessly as to the truth of the statement. On this basis, the
plaintiff could not claim against the defendant company for deceit.
 MEMBERS OF COMPANY
• A person whose name is entered in the register of members of a
company becomes a member of that company. The register
includes every single detail about the member like name, address,
occupation, date of becoming a member, etc. It also includes every
person who holds company’s shares and whose name is entered
as the beneficial owners in depository records.

• The liabilities of members are limited to the amount of shares held

by them in the case of a company having share capital while in the
case of a company limited by guarantee the liability of members is
limited to the amount of guarantee given by them. But, in the case
of an unlimited company the members have to contribute from his
personal assets to pay the debts.

• The members cannot take part in the management of the company,

i.e. the management of the company is looked after by the Board of
Directors. Although the right to appoint and remove the directors is
in the hands of members.
 Methods of acquiring membership of a company-
• By subscribing to the MOA of the company before its registration.
(Statutory members) “The subscriber to the Memorandum must take the
agreed number of shares directly from the company and must make the
payment in cash.
• By agreeing with the company to take shares and being placed on the
register of members. (Two conditions must be fulfilled – written agreement to
take the shares and the person name to appear on the register of members)
• By acquiring qualification shares ( By the directors who have signed and
delivered to the registrar a written undertaking to take qualification shares and
to pay for them becomes members of the company and they are treated as if
they are subscribers to the MOA.)
• By taking a transfer of shares and being placed on the register of
members. (This can be done by sending an instrument in writing to the
company completed in all respect and when the name of the transferee is
entered in the records of the company he becomes a member.)
• By transmission of shares (In transmission of shares, the ownership of
shares passes to the legal representative of the deceased member by
operation of law. In the case of transmission there is no need of any instrument
of transfer only the willingness to become member of the legal representative
is required.)
• By registration on succession to a deceased or bankrupt member.
• By allowing his name apart from an agreement to become member to be
on the register of members.
BASIS FOR COMPARISON MEMBER SHAREHOLDER
Meaning A person whose name is The person who owns
entered in the register of the shares of a company
members of a company, is known as shareholder.
is the registered member
of the company.
Defined in Section 2 (55) Not defined
Share Warrant The holder of a share The holder of a share
warrant is not a member. warrant is a shareholder.
Company Every company must The company limited by
have a minimum number shares can have
of members. shareholders.
Memorandum The person who signs After signing the
the memorandum of memorandum, a person
association with the can be a shareholder
company becomes a only when the shares are
member. allotted to him.
 How is Membership Terminated
There are two ways of termination that is the Voluntary
Termination, and the Compulsory Termination.
A. Voluntary Termination: A person ceases to be a member
of a company by doing the following act:
• By the transfer of shares.
• By forfeiture of shares.
• By the surrender of shares.
• By exercising lien by the company.
• By issue of share warrants.
• By redemption of shares.
• By the buyback of shares by the company.
• By irregularity in the allotment.
• By repudiating the contract on the ground of false or
misleading statements regarding the prospects of the
company.
B. Compulsory Termination: A person ceases to be a
member by operation of law in the following cases:
• By the transmission of shares.
• By insolvency of the person.
• By the order of the court on acquiring shares.
• On winding up to a company.
• On the death of the person.
 Rights and liabilities of the member
a) Rights of a member
1.The right to obtain a share certificate from the company.
2.Right to have his name entered in the register of members.
3.The right to transfer the securities under section 24 of the
Companies Act, 2013.
4.The right to receive the notice to general meetings, attend
the general meetings, and vote thereat.
5.The right to receive the dividend, that the dividend is
declared by the company.
6.The right to apply to the court seeking an injunction
restraining the directors from paying dividends out of
capitals.
7.Right to inspect and obtain extract and copies of the
registers, and indices of members, debenture holders, and
other security holders, and annual returns.
8.Right or obtain copies of the memorandum and articles.
b) Liabilities of a member
1.Companies limited shares: The most common are the
companies limited by the shares that may be a public
company or private company. In these companies, the
liabilities of members limited to the amount unpaid to the
shares.
2.Companies limited by guarantee: Based on the fixed
amount which members undertake to contribute to the
assets of the company the liability of the members is
limited on that basis.
3.Unlimited companies: These companies are those
without limited liability. Section 3 of the Companies Act,
2013 speaks about the formation of a company where it
says that seven or more persons can start the public
company and whereas two or more persons can start a
private company with or without limited liabilities.
DIRECTORS OF COMPANY

Business Laws-Prof.Benny Pappachen

Director’ is defined under section 2(34) of the Companies
Act, 2013, which states a director is a person appointed to
the board of the company. This means that any person
who is not appointed to the board of the company is not a
director.

‘Board’ or ‘Board of Directors’ of a company is defined

under section 2(10) of the Companies Act, 2013, which
means a collective body of company directors.
 Types of Directors in a Company

Managing Director
Managing director is a person who has substantial powers of
management of the company. He is given this power by
the articles of the company, agreement with the company,
passing resolution in the general meeting of the company, or
by the board of directors.

Small Shareholders Director

As per Rule 7 of the Companies (Appointment and Qualification
of Directors) Rules, 2014, every listed company having paid-up
share capital of Rs. 5 crores or more and also having one
thousand or more shareholders holding shares of the nominal
value of Rs. 20,000 or less may have a small shareholder
director elected by such small shareholders.
Residential Director
As per the law, every company needs to appoint a director who
has been in India and stayed for not less than 182 days in a
previous calendar year.
Women Director
A company, whether be it a private company or a public
company, would be required to appoint a minimum of one
woman director in case it satisfies any of the following criteria:
•The company is a listed company and its securities are listed
on the stock exchange.
•The paid-up capital of such a company is Rs.100 crore or
more with a turnover of Rs.300 crores or more.
Alternate Director
Alternate director refers to personnel appointed by the Board,
to fill in for a director who might be absent from the country, for
more than 3 months.
Additional Director
A person could be appointed as an additional director and can
occupy his post until the next Annual General Meeting. In
absence of the AGM, such term would conclude on the date on
which such AGM should have been held.

Alternate Director
Alternate director refers to personnel appointed by the Board,
to fill in for a director who might be absent from the country, for
more than 3 months.

Nominee Directors
Nominee directors could be appointed by a specific class of
shareholders, banks or lending financial institutions, third
parties through contracts, or by the Union Government in case
of oppression or mismanagement.
Executive Director
An executive director is the full-time working director of the
company. They look after the affairs of the company and have
a higher responsibility towards the company. They need to be
diligent and careful in all their dealings.

Non-executive Director
A non-executive director is a non-working director and is not
involved in the everyday working of the company. They might
participate in the planning or policy-making process and
challenge the executive directors to come up with decisions
that are in the best interest of the company.
Independent Director – Companies Act 2013
An independent director is a non-executive director who does
not have any kind of relationship with the company that may
affect the independence of his/her judgment. An independent
director should not have been a partner or executive director of
the auditors/lawyers/consultants of the company in preceding
three years or should not hold 2% or more of shares of the
company.
An independent director should preferably possess
appropriate skills, experience and knowledge in one or
more domains of finance, law, management, sales,
marketing, administration, research, corporate governance,
technical operations or other disciplines that are related to
the company’s business.
Requirement for Independent Director

As per the Companies Act 2013, all listed public limited

companies are mandatorily required to have at least one-third
of the total number of directors as an independent directors.
Unlisted public companies should appoint at least two
independent directors in the following situations:
1.If the paid up share capital is in excess of Rs.10 crores;
2.If the turnover is in excess of Rs.100 crores;
3.If the total of all the outstanding loans, debentures and
deposits is in excess of Rs.50 crores.
 Duties of an Independent Directors
1.Aid in bringing an independent judgment to bear on the Board’s
deliberations particularly on issues of strategy, performance, risk
management, resources, key appointments and standards of conduct;
2.Enable an objective view in the evaluation of the performance related
to board and management and meeting its goals
3.Satisfy themselves on the reliability of financial information and that
financial controls and the systems of risk management are considered
robust and defensible;
4.Protect the interests of all stakeholders, mainly the minority
shareholders;
5.Balance the conflict of interest of the stakeholders;
6.Decide suitable levels of remuneration of executive directors, key
managerial personnel and senior management and have a major role
in appointing and where essential recommend removal of executive
directors, important managerial personnel and senior management;
7.Moderate and adjudicate in the interest of the company as a whole, in
the situations of conflict between the management as well as
shareholder’s interest. Business Laws-Prof.Benny Pappachen
 Disqualifications of a directors
A director can be disqualified for any of the following reasons:
•He is of an unsound mind and is declared so by the court.
•He is insolvent. Or he is in the process of declaring insolvency
and his application is pending.
•He has been convicted by a court of any offence (whether or not
involving moral turpitude) and has been imprisoned for at least
six months. However, if a person has been convicted of any
offence and has served a period of seven years or more, he shall
not be eligible to be appointed as a director in any company.
•If an order has been passed disqualifying him from being
appointed as a director by a court or Tribunal.
•He has not paid any calls with respect to any shares of the
company held by him, whether alone or jointly with others, and a
period of six months has elapsed from the last day fixed for the
payment of the call.
•He has been convicted of offences dealing with related party
transactions at any time during the last preceding five years.
•He has failed to acquireBusiness
a Director Identification
Laws-Prof.Benny Pappachen Number.
Duties of a company’s directors under the
Companies Act, 2013
Section 166 of the Companies Act 2013 stipulates the
following duties of the directors of a Company:
1.A director must function in line with the company’s Articles
of Association.
2.A director must act in the best interests of the company’s
stakeholders, in good faith and promote the company’s
objectives.
3.A director shall use independent judgment in carrying out
his responsibilities with due care, skill and diligence.
4.A director should constantly be aware of potential conflicts
of interest and endeavor to avoid them in the best interests of
the firm.
5.Before authorizing related party transactions, the director
must verify that appropriate considerations have taken place
and that the transactions are in the company’s best interests.
6.To assure that the company’s vigilance mechanism and
users are not prejudicially affected on such use.
7.Confidentiality of sensitive proprietary information, trade
secrets, technology, and undisclosed prices must be protected
and should not be released unless the board has approved it
or the law requires it.
8.A company’s director may not assign his or her office, and
any such assignment shall be invalid.
9.If a corporate director violates the terms of this section, he or
she will be fined not less than one lakh rupees but not more
than five lakh rupees.
 Legal Position of Directors
Directors as agents
A company can’t act in its own capacity. It would certainly need
assistance from someone who could act on the company’s behalf.
The director signs as well as curate the contracts on behalf of the
company. This way, the directors are referred to as the agent of the
company.

Directors as trustees
Directors also play the role of a trustee in a company. It is because
he looks upon and administers every work that could be in the
company’s interest. A trustee is someone you can trust for the
company’s assets. Not only this, a trustee would always perform in a
way that could lead to the company’s growth. Also, a trustee always
exercises certain powers like accepting or rejecting the transfers,
allotting the shares, making calls etc. Every director performs such
roles in the company, and thus, they can be referred to as the trustee.