Business LAW Sybcom SEM IV 2014-15 PDF

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MODULE 1: THE COMPANIES ACT, 2013 Q. 1] Define a ‘company’. State the characteristics of a company? CPMAILHTC Ans: Sec 3(1) of the Companies Act, 1956, defines a company as “a company formed and registered under this Act, or an existing company. An existing company means a company, formed and registered under any of the former Companies Acts.” The characteristics of a company are as follows: 1) Compulsory registration: A company must be incorporated (registered) compulsorily under the Companies Act. The association of individuals becomes a company only when it is registered under the provisions given in the act. 2) Membership: The minimum membership required for private and public company is 2 and 7 respectively, while the maximum membership required is 50 and unlimited respectively. 3) Artificial legal person: On registration, a company is given the status of an individual. As it is created under law, it is called as an artificial legal person. 4) Independent corporate personality: A company on registration has a separate legal identity of its own, which is different and distinct from the members who constitute it. (salomon vs. salomon) 5) Limited liability: The liability of the shareholders is limited to the unpaid amount on the face value of their shares. 6) Perpetual succession: A company enjoys perpetual existence. It would not cease to exist even if all its members die. The shares are easily transferable or transmitted to new members. 7) Hold and dispose of property: A company can hold and dispose of property in its own name. Property of the company cannot be treated as members property and vice versa. 8) Transferability of shares: The shares are easily transferable when compared to that of Partnership. Though in between a public and private company, its easier in former when compared to the latter. 9) Common seal: A company is an artificial person, with no physical existence. It acts through directors. The directors act on behalf of the company and enter into contracts by affixing company’s common seal. The common seal of a company is its official signature. Q. 2] Write a note on ‘Lifting of corporate veil’: Ans: Although as explained earlier, company is having a separate entity of its own and is only responsible for its actions, a need was felt that the veil in rare cases needs to be lifted to meet the ends of justice. This principle of ignoring the company’s corporate personality and examining the character of persons, in real control of the corporate affairs is called the ‘principle of lifting the corporate veil’ or ‘exceptions to the principle of independent corporate personality of the company. Circumstances for lifting of the corporate veil: 1. When the company formed is against public interest 2. Where the company has been formed for some fraudulent purpose 3. Where the company is formed for evasion of taxes 4. To investigate the relationship between Holding company and Subsidiary company 5. Any other circumstances where it is felt necessary (interest of members/creditors) Q. 3]

Distinction between ‘Public company’ and ‘Private company’.

Criteria

Private company

Public company

Members Minimum capital required Restriction on name Issue of Prospectus

Minimum = 2 & Maximum = 50 One lakh rupees

Minimum = 7 & Maximum = unlimited Five lakh rupees

A private company must add the words, “Private limited” at the end of its name A private company does not file a prospectus before issue of shares

No such restrictions for public company

Issue of shares to

A private company cannot issue shares

It is compulsory for a public company to file a prospectus before issue of securities A public company can issue shares to Page | 1

public Preparation of Articles of Association Minimum numbers of directors

to general public. They issue shares only to relatives, friends and employees Preparation of Articles of Association is compulsory for a private company

general public

Atleast 2 directors

Atleast 3 directors

A public may directly adopt contents of Table A given in the Companies Act.

Q. 4] What is ‘Memorandum of Association’? Explain its contents. Ans: “Memorandum means memorandum of association of a company originally formed or altered from time to time in pursuance of any previous companies law or of this Act.” In other words, the memorandum of association is the document which contains the rules regarding the constitution, activities or objects of the company. Contents: a) Name clause b) Domicile clause c) Objects clause d) Liability clause e) Capital clause f) Subscription clause Name Clause: Every Company must have a name of its own. The name gives the company a personal existence. The promoters, who select the name of the company, are required to take care that the name is not an undesirable one. Further, in case of public company with limited liability must add the word ‘Limited’ at the end of its name, and a private company, the word ‘Private Limited’ must be added at the end. Once the name is registered, it must be printed or affixed on the outside of every office or place of business, in a conspicuous position in letters easily legible, in the language in general use in the locality. Registered Office Clause: Every company must have a registered office. At the time of registration, the memorandum must contain the name of the State, in which the registered office of the company shall be situated. However, the company shall, from the date on which it commences its business or within thirty days of incorporation, whichever is earlier, have a registered office. The Registrar shall be intimated within thirty days of incorporation. Objects Clause: This clause defines the objects of the company and indicates what a company can do. The objects clause has to be divided into (1) Main objects of the company to be pursued by the company on its incorporation (2) Objects incidental or ancillary to the attainment of the main objects, and (3) Other objects of the company not included in (1) and (2). A company cannot go beyond the object clause without the approval of the shareholders and/or approval of the Central Government. However, it must be noted that objects cannot be illegal, immoral, opposed to public policy or the Act. Liability Clause: This clause states the nature of liability of the members. In case of a company with limited liability, it must state that the liability of the members is ‘limited whether it is by shares or by guarantee. Absence of this clause in the memorandum means that the liability of its members is unlimited. Capital Clause: This clause states the share capital with which a company is registered and the number and value of the shares into which it is divided.

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Subscription Clause: This clause is also known as association clause. It is a declaration made by the subscribers who have signed the memorandum of their intention to form a company. Atleast 7 members of public company and 2 members of private company shall sign the memorandum. Q. 5] Write a note on Doctrine of ‘Ultra Vires’. Ans: A company must function within the frame work of its objects mentioned in the ‘object clause’. The objects of a company serve — two fold functions (1) It tells what the company can do. (2) In the negative, it informs us what a company cannot do. “Anything that a company does, which is beyond the scope of the object clause is called ultra vires the object clause and is null and void. This doctrine was laid down in Ashbury Railway Carriages and Wagons Company v. Riche (1875) LR & HL 653.” Effects of Ultra Vires transactions: Contract void: Ultra vires transactions render the contract void, giving no legal rights to the company or the outsiders. Such contracts can never be ratified (confirmed). Property acquired under ultra vires transaction: If a company acquires property under an ultra vires transaction, the company’s right over the property shall be protected because assets so acquired represent corporate capital. Injunction: Any member may obtain an order of injunction from the Court to restrain the company from persisting in ultra vires act. Ultra vires borrowing: In case of an ultra vires borrowing, the lender has no right of action in respect of the loan to the company. But he has certain rights in respect of money received by the company provided the same is traceable. But the money lent by a company, not authorized to lend, can be recovered by it because the debtor will be stopped from pleading that the company had no power to lend. Directors personally liable: Directors, who part with the company’s money or property for ultra vires objects will be personally liable to restore to the company the funds used for such purpose. Liability for torts: A company can be made liable for any tort, if the following two conditions are satisfied, viz.: Firstly, the activity, in the course of which the tort has been committed, falls within the scope of the Memorandum of Association. Secondly, the servant of the company must have committed the tort within the course of his employment. Q. 6]

Distinction between: Memorandum of Association & Articles of Association Ans: Memorandum of Association Memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. The conditions are introduced for the benefit of the creditors, the shareholders and the outside public. The memorandum is a dominant instrument as it states the purposes for which the company has come into existence. Section 13 provides that some of the conditions of incorporation, contained in the Memorandum, such as the objects clause, and the registered office clause, cannot be altered except by the special resolution of the company and with the sanction of the Company Law Board or of

Articles of Association The Articles of Association are the internal regulations of the company. They provide the manner, in which the company is to be carried and its proceedings disposed of.

The Articles are always held to be subordinate to Memorandum because they are mere internal regulations of the company. Section 31, on the other hand, provides that the Articles of Association can be altered simply by a special resolution. It does not require the sanction of the Company Law Board or of any other authority.

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a Court of Law. If a company does something outside the scope of the objects stated in the Memorandum, it is absolutely null and void and incapable of ratification.

If a company does something in contravention of the provisions of its Articles, it is only an irregularity and can always be confirmed by the shareholders, and thus rectified.

Q. 7]

Explain the ‘Doctrine of Constructive Notice’ and ‘Doctrine of Indoor Management’ or Turquand rule. (V.V.V.IMP) [Note: Doctrine of Indoor management is also known as Turquand rule] Ans: DOCTRINE OF CONSTRUCTIVE NOTICE: The memorandum and articles of association of a company are public documents. Any person who is dealing with a company is presumed to have read and understood the proper meaning of the documents. In other words, no party can take the plea that he was ignorant of what have been stated in the memorandum and articles of association. The doctrine of constructive notice comes to the aid of a company vis-a-vis the outsiders. However, the doctrine has been described as an unreal doctrine, as it fails to take note of business realities. Hence, the rule has in reality been diluted. The Courts have held ‘if a person deals with the company in good faith and the person with whom he is dealing has ‘ostensible authority’ to deal on behalf of the company, the company will be held liable. Example: Although the articles had clearly stated that the directors could delegate all powers, but the power to borrow an overdraft taken by the managing agent without the sanction of the board was held to be binding on the company. Such a temporary loan was not governed by the rule incorporated in the articles. (Dehdradun Mussoorie Electric Tramway Co. vs. Jagmandardas, AIR (1932) All. 141). DOCTRINE OF INDOOR MANAGEMENT OR TURQUAND RULE: The doctrine of constructive notice protects the company in its dealings with outsiders, the doctrine of indoor management comes to the aid of the outsiders, while dealing with the company. The doctrine of indoor management implies, anyone dealing with the company who has no means of knowing about the internal functioning of the company has every right to presume that, things are happening the way it ought to happen. And any irregularity will not affect the rights of the outsiders. The company will not be allowed to escape liability. In other words the doctrine of indoor management is an exception to the doctrine of constructive notice. Case: In Royal British Bank v. Turquand (1856) 6E and B 327, the articles authorized its directors to borrow on bonds by a resolution passed at the general meeting of the company. A bond was issued against the borrowings made by the company without passing the required resolution. Held, the company was liable on the bond as the borrower could presume that the resolution had been passed before making the borrowing through the issue of bond. This came to be known as ‘Turquand Rule’.

(1) (2)

(3) (4) (5)

Exceptions to the Rule of Indoor Management: The doctrine of indoor management is subject to five exceptions: Knowledge of internal irregularities of the company: A person already aware of the irregularity, cannot claim protection under this rule. Suspicion of the internal irregularity: Where a person dealing with the company is placed in such circumstances, which are suspicious in nature and which invite inquiry, he is not protected by the doctrine. Acts void ab initio: This doctrine does not apply to acts that are void ab initio. Where the document is forged one. Acts, outside the apparent authority of the company: Where the acts of an officer do not fall within the apparent authority of such an officer, protection under the doctrine cannot be claimed. No knowledge of articles: A person who at the time of entering into a contract with a company, has no knowledge of the company’s articles of association, cannot be saved or protected by the doctrine.

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Q. 8]

Define ‘a member’. How can a person become a member of a company? Also explain how termination of membership happens? Ans: a member of a company means a person— i. who has subscribed his name to the memorandum. ii. any other person who has agreed in writing, to become a member and whose name is entered in the register of members. iii. every person, holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository (inserted by the Depositories Act, 1976).

A person may become a member of a company in the following ways: (1) By subscribing to the memorandum: Signatories to the memorandum ipso facto become members of the company on its incorporation. By virtue of being subscribers, they are deemed to have become members and must be entered in the register of members. Hence, neither application nor allotment of shares is necessary. (2) By undertaking to buy qualification shares: Where a person has signed an undertaking to take and pay for his qualification shares, he shall as regards those shares, be in the same position as if he had signed the memorandum for shares of that number or value. Thus an undertaking on the part of the director to buy qualification shares puts him in the position of a subscriber to the memorandum. He is deemed to be a member of the company and must be entered in the register of members. (3) By allotment: A person may acquire membership of a company by application and allotment of shares. (4) By transmission: On the death of a shareholder, shares are transmitted to his legal representatives, who become members of the company on their being entered in the register of members. (5) By transfer: A person who take shares from art existing member by sale, gift or some other transaction, acquires membership, on his name appearing in the register of members. (6) Membership by acquiescence and estoppels: A person is deemed to be a member of a company, if he allows his name to be put on the register of members or otherwise holds himself out as a member, even if there is no agreement to become a member. Thus, this liability springs into existence as a result of acquiescence and estoppels. (7) Joint members: When two or more persons hold share in a company in their joint names it is called a joint membership. In such a case, the name of the member appearing first is considered to be the main member for the purpose of sending notices, dividends, etc. Membership may be terminated in following manner: (1) Transfer of shares: The transferor ceases to be a member when the transferee is placed on the register of members. However, he remains liable to be placed in the ‘B’ list for one year, if the company goes into liquidation. (2) If his shares are forfeited by the company. (3) If the company sells his shares under some provision in its Articles, as for example, in the exercise of its rights to enforce a lien. (4) If he validly surrenders shares to the company, where such surrender is permitted. (5) If his shares are sold in execution of a decree of the Court. (6) If he rescinds the contract to take shares on the ground of misrepresentation in the prospectus or of irregular allotment, (7) If he is adjudicated insolvent. The shares of an insolvent vest in the Official Receiver or Assignee. (8) If he dies. However, the estate of the deceased member remains liable until the shares are registered in the name of his legal representative. (9) If redeemable preference shares are redeemed. (10) If the company is being wound up, a member remains liable as a contributor and is also entitled to share in the surplus assets, if any. Q. 9] What is a Prospectus? What are the legal requirements of Prospectus? Ans: Section 2(36) of the Companies Act, 1956 has defines Prospectus as “any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of shares in or debentures of a body corporate.” Page | 5

Different types of prospectus: • Abridged prospectus • Shelf prospectus • Red-herring prospectus Legal requirement of Prospectus: 1. A prospectus is required to be issued only after the incorporation of the company. 2. The prospectus must contain all the particulars, listed in Schedule II to the Companies’ Act. 3. The prospectus must be dated. 4. A prospectus must be signed by every person, mentioned therein as a director or a proposed director, or his agent. 5. Every application form for shares, issued by the company, must be accompanied by a copy of the prospectus except (a) application forms, issued for bona fide invitation to a person to enter into an underwriting agreement, and (b) application forms, issued to existing members and debenture holders. 6. A statement, relating to the affairs of the company by an expert, may be included in the prospectus. 7. Consent of the expert must be obtained in writing and this fact must be stated in the prospectus. The term “expert” includes an engineer, valuer, chartered accountant, and other person, whose profession gives authority to a statement, made by him. 8. No deposit can be invited without issuing an advertisement in a daily newspaper. The said advertisement must contain a statement, reflecting the company’s financial position issued by the Company and in such a form or in such a manner, as may be prescribed. 9. Before a prospectus is issued, a copy of it must be registered with the Registrar of Companies. 10. Prospectus shall be issued within 90 days of its registration (i.e. of prospectus).

Q. 10] Write a note on ‘Statement in lieu of prospectus’. Ans: A public limited company, (1) which has not issued a prospectus, o...