Business Law Module

Module II Definition and Meaning of Company (Sec.
3 (1) (1))
Company It means a company formed and registered under this Act or an existing company. Existing company It means a Company formed and registered under any of the previous companies laws. Justice Marshall A company is an artificial person. It has no physical existence. It is invisible and intangible. It exists only in contemplation of laws. Characteristics or Features Of A Company 1) Incorporated association : Company is an incorporated association A company is registered (i.e., incorporated) by complying with the prescribed formalities prescribed under the Act. Mandatory incorporation of a company the incorporation of a company is compulsory if the number of members of an association working for gain exceeds 20. (Sec 11) Number of members in a company The number of members shall be as follows: Nature of company Private Company Public Company Minimum 2 7 Maximum 50 No limit
2) Artificial person: (a) Company is an artificial person. (b) Company is not a fictitious person. (c) A company is a legal person. (d) A company is not a citizen. (e) A company acts by human agencies. 3) Separate legal entity corporate personality: On incorporation, a company becomes a legal person in the eyes of laws distinct from the individuals who are its members. 4) Perpetual succession: Since a company has an identity different from its members, death, insolvency, insanity, etc. of a member does not affect the continuity of the company. Therefore, it is said that a company has perpetual succession, i.e., it shall continue forever irrespective of the continuity of its members and directors. 5) Limited Liability: A company is a legal person separate from its members. Therefore, the members of a company cannot be held liable for the debts incurred by the company. The members are liable to pay only such amount as is due from them to the company as per the provisions of the Act and Memorandum. 6) Common seal: Since a company is an artificial person, it cannot sign like a natural person. Therefore, it has to act through its agents who are required to authenticate that they are acting on behalf of the company. 7) Transfer of shares : General provisions: Shares are movable property
Books Refered: A K Majundar , K C Garg & Vijay Gupta, Reddy & Appaniah & Yeshas Notes Page 1
Shares are transferable (Sec 82) Specific Provisions: Shares are freely transferable in a public company. Transferability of shares is restricted in a private company.
8) Separation of ownership from management: The management of the company lies in the hands of elected representative of members, commonly called as directors or Board of directors or simply the Board. The directors are appointed as well as removed by the members. Thus, the Act has ensured the ultimate control of members over the company. 9) Separate property: A company is capable of owing, enjoying and disposing of the property is its own name. No member can claim himself to be the owner of the companys property during its lifetime or even on its winding up. A shareholder does not have even and insurable interest in the property of the company. 10) Capacity to sue and be sued in its own name: A company is a legal person. Therefore, it can sue others and be sued in its own name. The creditors can make their claims only against the company and cannot proceed the shareholders.
Incorporation of a Company
Promotion and promoter Meaning of Promotion The term promotion means all those steps that are required to bring a company into existence , and then to set it going. Promotion means the preliminary steps undertaken by the promoter to bring a company into existence. The term promotion also includes such steps as are required after incorporation of the company until company is entitled to commence its business. In other word, promotion continues until the board of directors assume the management of the company. Stages in Promotion Promotion involves the following 4 stages : Generation of idea of starting a new company. Registration of the company. Floatation, i.e. raising of capital or arranging the financial resources so as to carry on its business operations. Obtaining the certificate of commencement of business. The first three stages are necessary for all the companies. However, the fourth stage is necessary only for a public company having share capital. Definition of Promoter Not Defined: The term promoter has not been defined anywhere in the act
Definition given by Palmer: Promoter is a person who originates a scheme for the formation of the company, gets the memorandum and articles prepared, executed and registered, and finds the first directors, settles the terms of preliminary cataracts and prospectus and makes arrangement for advertising and circulating the prospectus and placing the capital. Meaning of Promoter Promoter means a person who generates the idea of incorporating a company and takes all the effective steps to incorporate it. A promoter means a person who is instrumental in bringing into existence a company. Whether a person is a promoter or not shall depend upon the facts and circumstances of the case. A Professional is not a Promoter The term promoter shall not include any person acting in a professional capacity. Where a professional does any work relating to formation of the company on his own behalf, and does not receive any remuneration for such work, he is regarded as a promoter. Duties of a Promoter Not To Make Secret Profit Nature of profit made is to be disclosed. The promoters should not make profit from the company. The law does not prohibit making of a profit by the promoters or paying any remuneration to promoters. What the law prohibits is making of secret profit by promoters. In other words, a promoter can make a profit in respect of any transaction with the company, only if he makes a full and fair disclosure of such profit. Disclosure to whom? The fact that the promoters have made a profit must be disclosed to an independent board of directors. Full And Fair Disclosure Of Interest: A promoter must make full and fair disclosure of his interest in every transaction or contract with the company in which he is, directly or indirectly interested. Gluckstein V Barnes A syndicate of some persons was formed with the purpose of taking over a company already in existence, named Olympia The members of the syndicate purchased the debentures of Olympia at a discount, and thereafter purchased the whole company for 1,40,000 pounds. With the money received, Olympia; redeemed the debentures at par, and so the members of the syndicate made a gain of 20,000 pounds. Afterwards, the members of the syndicate incorporated a new company to which Olympia was sold at a profit of 20,000 pounds. The members of the syndicate disclosed the profit of 40,000 pounds made by them, but did not disclose the profit of 20,000 pounds. Since, disclosure was not made to the shareholders, the promoters were held liable to pay back the profit of 20, 000 pounds to the company incorporated by them. Legal position of a promoter A promoter is neither an agent nor a trustee of the company, since the company has not yet come into existence. However, his position is similar to that of an agent and trustee. A promoter stands in a fiduciary capacity towards the company. The position of a promoter is peculiar.
He cannot be an AGENT, because the Principal (i.e., the company) does not exist at the time of his efforts, and there cannot be an agent for a principal who does not exist in the eyes of Law. He cannot be a TRUSTEE of a company under incorporation as there is no trust in assistance at the time of his efforts. But it is clear from the statement of Justice Lindley in the case of Lindley & Wigpool Iron Ore Co. vs Bied. Justice Lindley observed, Although neither an agent for the co. nor a trustee for it before its formation, the old familiar principles of the law of agency and a trusteeship have been extended and very properly extended, to meet such cases. He can be considered as TRUSTEE as he is in Fiduciary Position (i.e., occupies a position of full of trust and confidence) towards the co., and so he is required to do so in respect of the things and the property of the Company. He can be considered AGENT as liabilities on all the contracts entered into by him with third parties for the company are later on taken over by the company.
Remedies available to the company against the promoters Where a promoter makes a secret profit, and afterwards this fact becomes known to the company, the company will have the following remedies: Rescission. The company may rescind the contract, even though the company had adopted the contract and communicated the fact of adoption to the other party to the contract. However, rescission must be made within a reasonable time. Recovery of secret profit. The company may recover the secret profit made by the promoter. Suit for breach of trust. The company may sue the promoters for breach of trust. Right of promoters to receive remuneration Case I. The company has not contracted to pay remuneration. If the company, after incorporation, has not made any contract with the promoters to pay remuneration to them, following provisions shall apply: The promoters shall have no right to : o Receive any remuneration from the company o Recover the expenses properly incurred by them for incorporation of the company. Even where the articles provide that the company shall pay remuneration to the promoters after incorporation, such a provision in the articles is not binding on the company.
Case II. The company has contracted to pay remuneration. If the company , after incorporation , makes a contract with the promoters to pay remuneration to them, the promoters shall have the right to Receive the remuneration that the company has contracted to pay Recover the expenses properly incurred by them for incorporation of the company. Mode of payment of remuneration Remuneration may be paid to the promoters in any of the following ways :
Reimbursement of expenditure properly incurred by the promoters for incorporation of the company. Issue of shares as discount. Right to subscribe for companys shares in future at a fixed price. Purchase of property of promoters at a higher price. Paying any lump sum remuneration to promoters Payment of commission to promoters on the purchase price of any property purchased by the company. Payment of commission to promotes on shares sold by the promoters Procedure For Incorporation / Registration Requirements of sec. 12 Association of persons : There must be an association of persons who are desirous of forming a company Stationary minimum number of members: If the company to be incorporated is a private company, the person so associated must be at least 2. Similarly , if the company to be incorporated is a public company, the persons so associated must be at least 7. Common object The persons so associated must have a common object to be pursued by the company. Lawful object The object for which the company is proposed to be incorporated must be lawful. Subscription: The memorandum and articles must be subscribed by at least 7 persons in case of a public company, and at least 2 persons in case of a private company. Compliance of formalities : The requirements of Companies Act in respect of registration must be complied with , i.e. , they must fulfill the formalities of incorporation, i.e. , applying for name, filing of required documents. Documents required to be filled with the registrar Compulsory documents Following documents must be filed with the registrar: Memorandum of association Articles of association Statutory declaration stating that all the requirements relating to registration of the company have been complied with If a managing director, whole time director or manager is proposed to be appointed, the agreement entered into by the company with such person must be filed with the registrar If a director has been named in the articles, his consent must be filed with the registrar. Also, an undertaking by the director that he will take and pay for qualification shares Optional documents Following documents may be filed with the registrar before incorporation : Address of registered office of the company
Particulars of directors, manager and secretary.
Issue of certificate of incorporation The register shall retain and register the documents filed with him, and afterwards register the company if he is satisfied that All the requirements aforesaid have been complied with The company is authorized to be registered under this act.
Effects of Incorporation On incorporation, following consequences follow : The company becomes a body corporate The company acquires a legal recognition, i.e. , it is established that the company was lawfully entitled to be registered as a company, and it has been lawfully registered as company. The company gets a name in which it shall carry on business The company comes into existence from such date as is mentioned in the certificate of incorporation. The objects of the company are laid down.
Conclusiveness of certificate of incorporation

Certificate of incorporation to be conclusive evidence: A certificate of incorporation issued by the registrar shall be conclusive evidence that All the requirements of the Companies Act have been complied with in respect of registration and matters precedent and incidental thereto The association is a company authorized to be registered The association has been duly registered under Companies Act. Meaning of Conclusive Evidence The term conclusive evidence means that no inquiry shall be allowed to be made regarding the correctness or incorrectness of any particulars contained in the certificate of incorporation In other words, once issued , the certificate of incorporation cannot be challenged in any court or tribunal on any grounds whatsoever. The certificate of incorporation shall remain valid even in the following cases : Where one person has signed on behalf of all the subscribers . Where all the signatories to memorandum are minors Where all the signatures on the memorandum are forged Where the memorandum was altered after signing by subscribers, bu before its registration. Where illegal objects are incorporated in the object clause. Jubilee Cotton Mills v Lewis On 6th January The required documents were delivered to the registrar for registration of a company On 8th January - The registrar issued the certificate of incorporation Date on certificate - The registrar dated the certificate as 6th January, instead of 8th January Date of allotment - On 6th January some shares were allotted to Lewis. Date of Court - The allotment was held to be valid since the certificate of incorporation could not be challenged
Pre-Incorporation Or Preliminary Contracts Meaning A pre incorporation contract means a contract entered into by the promoters on behalf of a proposed company, i.e., before incorporation of a company. These contracts are usually made by the promoters to acquire some property or right for the proposed company. Requirements of adoption of a pre incorporation contract : As per section 19 and 15 or Specific Relief Act, a company as well as third party is bound by a pre incorporation contract, if the following conditions are satisfied: The promoters entered into a contract before incorporation of a company The contract so entered is for the purpose of the company Such contract is warranted by the terms of incorporation of the company ( i.e. , the contract must fall within any of the clauses contained in object clause ) The company has accepted such contract after incorporation of the company The company has communicated such acceptance to the other party. Position where a company adopts a pre-incorporation contract The contract can be enforced by the company The contract becomes binding on the company The promoters are not personally liable on such a contract Position where a company does not adopt a pre-incorporation contract The pre-incorporation contract shall not bind the company Even if the contract stipulates the company , after incorporation, shall be bound by it, the company shall not be bound by such contract Even if the company takes the benefit of pre-incorporation contract, it is not bound by it [re, English & Colonial Produce Co. Ltd.] A company cannot ratify a pre-incorporation contract A company, after incorporation, cannot enforce a pre-incorporation contract [ Natal Land & Colonisation Co. Ltd. V Pauline Colliery & Development Syndicate Ltd. ] The promoters are personally liable on pre-incorporation contract [ Kelner v Baxter]
Provisional Contracts Meaning Any contract made by a company before the date at which it s entitled to commence business shall be provisional only.(Sec 149). Therefore a provisional contracts means a contract entered into by the company before or after its incorporation but before obtaining certificate of commencement of business. Effects of Provisional Contracts A provisional contract is a valid contract A provisional contract does not bind the company unless the company has obtained certificate of commencement Non applicability Only public company having a share capital is required to obtain a certificate of commencement therefore in case of company having no share capital, no contract entered into by the company shall be provisional in nature.
Memorandum of Association
Definition Memorandum means the memorandum of association of a company As originally formed; or As altered from time to time in pursuance of any previous company law or of this Act. Requirements of memorandum (sec.15) The memorandum shall Be printed, Be dividend into paragraphs numbered consecutively, and Be signed by each subscriber to memorandum. Include the name of at least 1 witness who shall attest the signature of signatories to memorandum. Form of memorandum: Memorandum should be in any of the forms prescribed in schedule 1 to the Act. Clauses of memorandum (Sec.13) Name clause Situation clause Object clause Liability clause Capital clause Association clause 1. Name clause: [name of the company sec.13 (1) (a)] Name should not be undesirable No company shall be registered by a name which, in the opinion of CG, is undesirable. When the name is considered undesirable Without prejudicial to the generality of the foregoing power, a name may be deemed to be undesirable if it is identical with, or too nearly resembles_ The name by which a company in existence has been previously registered; or A registered trade mark or a trade mark which is subject of an application for registration. Ewing v Buttercup Margarine Company Ltd. The plaintiff was carrying on the business of selling margarine and tea as a sole trader in the name and style of Buttercup Dairy Company. The defendant company was registered in the name of Buttercup Margarine Company Ltd. The business of both the plaintiff and the defendant were same. The court granted an injunction restraining the defendant company from using that name, as it was likely to deceive the public or cause confusion to the public thereby causing injure to the other person. The first clause of the Moa requires a co. to state its name. It should not be identical with or which too nearly resembles the name of an existing co.
The name should not be violating the provisions of the emblems and names ( prevention of improper case) Act,1950. Eg: emblems of UN, WHO, Indian National Flag etc. Every public co . must write the word limited after its name and every pvt limited to must write the word Private limited after its name. The use of the word unlimited can be for co. whose liabilities are not limited. Word limited may be dropped in case of charitable companies or if the co. formed to promote Art, Science, Religion, which do not pay dividends but intend to apply profits for working of the company. Publication of name: Every co. is required to publish its name in the following places Outside registered office Engraved in seal All business letters Notice Official publications Bill heads etc... If not done Fine of Rs.500 for each day in case of outside office Fine of Rs.5000 if not mentioned in seal, notice, bills etc... Steps or sectional procedure to change name clause The secretary has to ascertain from ROC whether the proposed name is desirable. If ROC informs that if name is not undesirable the secretary obtains written consent from central government for the change of name. Secretary has to pass a special resolution passed with regard to the changed name in board meeting. The secretary has to file a copy of the resolution passed with ROC within 30 days The secretary has to arrange for changing of the name on all the documents & for getting new seal approved by the board & inform all the related parties about the change.
2. Registered Office clause or Domicile or situation clause [Sec 13(1)(b)] This clause states the name of the state where the registered office of the company is situated. Important for two reasons (a) Ascertains the nationality of the company, (b) Place where various registers relating to the company must be kept and to which all communications and notices must be sent. There is no bar to having a registered office in one state and carrying business in different states or in overseas countries. Alterations of Domicile Within city limits (change from one locality to another in the same city): Resolution has to be passed in BOD & intimated to ROC within 30 days of shifting. Within the same state (within same state under same register) Special resolution should be passed at general meeting & to be filed with ROC within 30 days. Interstate change of registered office Pass special resolution in extra ordinary GM Filing of copy of resolution with ROC in 30 days
Sec 17 of companys (2nd Amendment) Act 2002, stipulates the following regarding the interstate change of registered office. Sec 17(1) states a company may by special resolution alter the provisions of its MA so as to change the place of its registered office from one state to another, or with respect to the objects of the company so far as may be required to enable it for the reasons stated in Sec 17(1) (A to G). Sec (17)2 stipulate that the alteration of the provisions of MA relating to the change of the place shall not take place unless it is confirmed by the central government on petition. Once central government issues confirmation order the company within 3 months must file with registrar (confirmation order+ altered MOA). Once Registrar confirms change within 30 days company must give notice of new location to registrar & change. 3. Object Clause [sec 13(1)(c & d)] It not only shows the object for which the company is formed but also determines the extent of the powers which the company can exercise in order to achieve the objects. It is essential that the public who purchases its shares should know clearly what the objects are for which they are paying for. To give this information, the statement of objects should be: Clear Must not be too vague, too general or too wide. Objects must not be illegal They must not be against the provisions of the companies Act. Must not be against public policy. Every company must have an object clause in the memorandum. In case of a company which was in existence as on the commencement of the Companies (Amendment) Act, 1965, the Act requires that the memorandum should incorporate the object clause. In case of a company which was formed after the commencement of the Companies (Amendment) Act 1965, the Act requires that the object clause should be divided intoa) Main objects, and other incidental and ancillary objects; and b) Other objects. Alteration In Object Clause Of Memorandum Procedure (Sec 17) The company is required to pass a special resolution. An alteration of objects shall be valid only if it is made for some specified purpose. The company shall file a copy of special resolution with the registrar along with the memorandum as altered. The registrar shall register the alteration within one month. The alteration shall not be effective until it has been duly registered with the registrar. The approval of CG, CLB or any other authority is not required. In case of Sec 25 companies, approval of CG is compulsory of alleviation of object clause. 4. Liability clause This clause states the nature of liability that the members incur. Incase of a company limited by shares, the members are liable only to the amount unpaid on the shares taken by them. If the shares are fully paid up, his liability is nil. The liability clause is fully omitted from the memorandum of association of unlimited Companies Not mandatory: Liability clause is not mandatory for every company. Only a company in which the liability of members is limited, (i.e., limited company) must have a liability clause.
Books Refered: A K Majundar , K C Garg & Vijay Gupta, Reddy & Appaniah & Yeshas Notes 10 Page
Nature of limitation of liability: In case of a limited company, the liability of members may be limited by shares or guarantee or both. In case of a company limited by shares, the memorandum must state the fact that the liability of the members is limited by shares In case of a company limited by guarantee, the memorandum must state the amount of guarantee that each member has given. In case of a company limited by guarantee and having share capital, the memorandum must state1. The fact that the liability of each member is limited by shares, and 2. The amount that each member shall be liable to pay in the event of winding up of the company. Alteration In Liability Clause Of The Memorandum (Sec 38) General Rule-the liability of a member cannot be increased. The liability of a member is determined at the time when he is admitted to membership. Afterwards, no alteration in memorandum and articles can increase the liability of any member, i.e., no member can be compelled to pay what was payable by him at the time of admission and to membership. In other words, the liability of a member cannot be increased byRequiring him to subscribe for additional shares, or Requiring him to contribute more than what he has guaranteed (in case of a company limited by guarantee), or Requiring him to pay any money to the company, or In any other manner whatsoever. Exceptions-the liability may be increased in certain cases The increase in liability of a member shall be valid and effective in the following cases: Where the company increases the liability of a member and the member gives his consent to the company in respect of such increase. Such consent is valid only if it is given in writing. A company may increase the liability of members even if the members have not given their consent to the company in respect of such increase if the following conditions are satisfied: o The company is a club, or any other similar association. o The members are required to pay periodical or recessing subscriptions or charges to the company. o The liability of the members is increased so that they are required to pay such periodical or recurring subscriptions or charges at a higher rate. 5. Capital Clause Company limited by shares must state the authorized or nominal share capital, the different kinds of shares, and the nominal value of each share. Provisions as to the nature of these shares are more properly to be made in the articles The capital clause states the number of shares, the nominal value of each share and the total capital with which the company is to be registered. Not mandatory: Capital clause is not mandatory for every company. In other words, following companies are not required to have capital clause in the memorandum: A company limited by guarantee having no share capital An unlimited company having no share capital An unlimited company having share capital.
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Books Refered: A K Majundar , K C Garg & Vijay Gupta, Reddy & Appaniah & Yeshas Notes 11
Alteration Of Capital The name of the company can be altered by passing a special resolution with the approval of the central government. However, if through in advertence a company is registered under a similar name to or identical with that of an existing company the alteration can be affected by passing an ordinary resolution & the previous content of the central government. When the company changes the name, the secretary is required to communicate the change to the ROC, there upon registrar enters the new name on the register in the place of former, & issues he fresh certificate of incorporation in place of the changed name. Nature of alterations in the capital clause A company may alter the memorandum as follows: The company nay increase its authorized share capital by such amount as it think expedient by issuing new shares. The company may consolidate and divide its share capital into shares of larger amount than its existing shares. The company may convert its fully paid up shares into stock and reconvert that stock into fully paid up shares. The company may sub divide its shares into shares of smaller amount than is fixed by the memorandum. The company may cancel shares which have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the shares so cancelled. 6. Association / Subscription Clause This clause contains a declaration by the subscribers to the memorandum that they desire to form a company and agree to the purchase of qualification shares, if any. The subscribers usually act as the first directors of the company. ( at least 7 for public and 2 for private companies) The memorandum has to be signed by each subscriber in the presence of at least one witness who must attest the signatures In case of unlimited liability and limited by guarantee which has no share capital, the provision regarding the purchase of at least one share by the subscriber does not apply.
Doctrine of Ultra vires

ULTRA means beyond, VIRES means powers. An action outside the memorandum is ultra vires. An act is said to be ultravires when it is performed which, though legal in itself, is not authorized by the objects clause in the MOA. Such an act is void and cannot be ratified even by resolution of all the shareholders. The doctrine serves two purposes Protects the shareholders assured that their investment is not spent on activities which they did not have in mind Safeguards the interest of creditors - as the property of co. cannot be diverted to unauthorized objects.
Ashbury Railway Carriage & Iron Company Ltd. V Richie Objects of the company as contained in object clause The object clause of an industrial company contained the following objects besides some other objects;
To make, sell or lend on hire, railway carriages and wagons. To carry on the business of mechanical engineers and general contractors. To purchase, lease, work and sell mine, minerals, land and buildings.
Nature of contract made by company The company entered into a contract with Richie, for the financing of a construction of a railway line in Belgium. Decision of the court The court held that the work general contractors had to be given a restricted meaning. Only such contracts could be covered in the term general contractors as are in some way related or connected with mechanical engineering. Therefore, the company could not finance the contruction of a railway line by alleging that such a business falls under the business of general contractors. Rights of third parties in respect of ultra vires transactions Sue the directors The lender may sue the directors for breach of warranty of authority Injunction If the money is in specie (i.e., in the same form), the lender can obtain a tracing order from the court and the company shall be liable to repay such money. Subrogation If the company pays any debt by using such money, the lender shall have a right to recover such money from the company. Charge on assets purchased If the company purchases an asset out of such money, the lender shall have a first charge on such asset.
Articles Of Association
Articles are the rules and regulations framed by a company for its own governance. Articles are also called as regulations or by-laws of the company. Articles means the articles of association of a company as originally frame or as altered from time to time in pursuance of any previous companies law or of this Act. The articles must be signed by the persons who have signed the memorandum. The articles are subordinate to memorandum which also means that if incase of any contradiction with the memorandum, the memorandum shall prevail over the articles. Every company is required to have its own articles. However, a public company limited by shares need not have its own articles. In such a case Table A shall apply to it. Table A shall apply to every company limited by shares in so fas as the articles of such a company do not exclude or modify the provisions contained in Table A. Articles may be amended by passing a special resolution under Section 31, The company cannot waive off the right to alter its articles.
Contents of Articles Different clauses of shares and their rights Procedure of making an issue of share capital and allotment Procedure of issuing Share Certificate Forfeiture of shares and procedure of this re-issue Procedure of transfer of shares The time lag in between calls on shares
Payment of commission to different parties Rules of adaptation of preliminary contracts Re-organization and adaptation of Share Capital Alteration of share Capital Borrowing powers or directors Procedure for conducting different types of meetings Voting rights of members and proxies Payment of dividends and Creation of resources MOs, Secretarys, Directors (Their appointment ,duties, qualifications and remuneration) Use of common seal of the company Keeping the books of accounts and their audit Capitalization of profits Winding up Articles generally define as well as restrict the powers of directors, manager and other officers and employees of the company. Also, the articles grant certain rights to the members. In case, of an unlimited company the articles must state1) The number of members with such a company is to be registered; 2) The amount of share capital with which it is to be registered, where it has a share capital In case of a company limited by guarantee the articles must state the number of members with which such a company is to be registered In case of a private company the articles must contain the restrictions specified under Section 3(1)
Form of Articles Table A- Articles of a company limited by shares Table C - Articles of a company limited by guarantee and not having a share capital Table D- Articles of a company limited by guarantee and having share capital Table E- Articles of an unlimited company Articles must be printed, divided into paragraphs and numbered and signed by each subscriber of the Memorandum of Association and filed with the registrar. Articles prescribe the rules and bye laws for the attainment of those objectives mentioned in the Memorandum of Association. Articles also prescribe the rules for the conduct of the day to day administration of the company. They regulate the between the company and its members and employees. Obligation to register Articles Section 26 states that public Limited Company by shares may register articles where Company Limited by Company shares (Pvt.) unlimited Company Ltd by guarantee must register articles along with memorandum at the time of registration. Table A gives a model for of Articles of Association of a Company Ltd. By shares If the Companys own articles are silent on any point the relevant provisions of Table A will apply. *Companies must have their own articles. Alteration of Articles
A company can at any time alter the AOA by a special resolution but it is restricted to within the scope of companys powers as laid down by its memorandum. Limitations of AOA Must not be inconsistent with the provisions of Companys Act or any other statute. Must not be inconsistent with the conditions contained in the memorandum Must not inconsistent with the Company law board Approval of central govt. must be obtained in certain types Must not deprive any person of his rights under a contract Must not constitute a fraud on minority The alteration must be a benefit for the company as a whole Articles cannot be made unalterable Constructive Notice Of MOA & AOA MOA & AOA are open for public inspection of from registrars office which is a public office. Every one dealing with the company (shareholder, creditors) presumed to have read the two documents. This knowledge of the two documents and their contents is known as the constructive notice of MOA & AOA.or the doctrine of constructive notice. The legal effect of this doctrine is that if a person deals with a co., in a manner which is in consistent with the provisions or enters into a transaction which is beyond the scope of the powers of the com., he must take the consequences in respect of such dealings. Applicability of Doctrine This doctrine operates in favour of the company, i.e. it creates a presumption, in favour of the company.
Kotla Venkataswamy v C Ramamurthy The articles of a company required that all the documents and deeds of the company shall be signed by MD, the Secretary and a working director of the company. A mortgage deed was signed by the secretary and a working director only. It was held that the mortgage deed was invalid even though the plaintiff had acted in good faith and money as utilized for the benefit of the company.
Doctrine Of Indoor Management

Exception to the doctrine of constructive notices is that persons dealing with the com., are not bound to enquire in regularity of the internal proceedings. They need not enquire to whether the general meeting of the share holders or the meeting of BOD was conducted on proper notice, whether the members were present at the meeting or whether the necessary resolutions was properly passed or not. The doctrine of indoor management is based on all things are presumed to have been done rightly. They are entitled to assume that what has been done by the co., are done rightly and csn hold the com., liable even if the internal formalities are found not to have been completed this rule is known as Doctrine of indoor management. (Case: Royal British bank vs turquand (1856) Purpose of Doctrine The doctrine of indoor management operates in favour of the outsiders, i.e. this doctrine creates a presumption in favour of the outsiders.
Meaning of the doctrine As per this doctrine, outsiders dealing with the company are not required to enquire into the internal management of the company Outsiders dealing with the company are entitled to assume that as far as internal proceeding of the company are concerned, everything has been done regularly. It is a presumption and therefore rebuttable. Thus, the doctrine protects the innocent outsiders from any irregularity present in the working of the company Example Borrowing by a company is valid notwithstanding absence of authorization from shareholders
Royal British Bank v Turquand The articles of a company stated that the directors could borrow money on behalf of the company, if they are so authorized by a resolution passed by the shareholders in GM The directors borrowed money from T without obtaining any authorization from shareholders T had lent the money to the company assuming that the shareholders had authorized the directors to borrow money as per the requirement of the articles It was held that borrowing of money by the directors without any authorization from the shareholders amounted to a mere internal irregularity, and since T had no knowledge of such internal irregularity, he would not be prejudiced by such internal irregularity. Exception to the rule - The protection under the doctrine of indoor management (turquands case) cannot be claimed in the following circumstances: Where the outsider had actual knowledge or constructive notice of the internal irregularity. Where the outsider had not made proper enquiries which would have revealed the irregularities , despite to suspicious circumstances as to invite further enquiry.(Negligence) Where the outsider is found to have relied upon a document which the person seeks to rely is a forgery. If the act of an officer of a com., is one which would be beyond the powers of such an officer. No knowledge of the contents of articles. Exceptions to the Doctrine of Indoor Management Howard v Patent Ivory Manufacturing Company The directors of a company could borrow upto 1,000 pound without the sanction of members in GM The consent of the shareholders was required to borrow in excess of 1,000 pound The directors themselves lent 3,500 pound to the company It was held that the directors had the notice of the internal irregularity and therefore the company was liable to them only for 1,000 pound
Prospectus
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Section 2(36) of the Companys Act of 1956 defines a prospectus as any document described or issued as a prospectus notice, circular, advertisements or other documents inviting deposits or offers from the public for the subscription or purchase of any shares in or debentures of a body corporate Offer to the Public: (Section 67) Includes invitation to any section of the Public, whether selected as a) Members of debenture holders of the company; or b) Clients of the person issuing the prospectus ; or c) In any other manner.
When is Prospectus not required to be issued? (Section 56(5)) Where offer is made to existing members or the debenture holders of the company Where invitation is made to subscribe for shares or debentures which are in all respect inform with shares or debentures previously issued and for the time being dealt in or quoted on a recognized stock exchange.
Legal rules as to Prospectus: Registration of Prospectus: The Prospectus shall be filed with the Registrar. The time limit for registration: Before the Prospectus is issued to the public. Signing of the Prospectus: It should be signed by every Director and proposed director in the prospectus. Issue of Prospectus: The time limit for the issue is within 90 days of registration of prospectus with the Registrar. Disclosure on the prospectus issued: The Prospectus must state that a copy has been filed with the registrar. Date of Issue of Prospectus: The date of issue of Prospectus is the date on which the Prospectus first appears as an advertisement. Opening of Subscription List: Where a Prospectus has been issued no allotment can be made until: The beginning of the fifth day after the Prospectus is first issued. Such later time as specified in the Prospectus Fifth day after Public notice is given under section 62
Such day is called as the opening of the subscription list.
Types of Prospectus
Abridged Prospectus: (Section 56(5)) Abridged prospectus means a memorandum containing such salient features of a prospectus as may be prescribed by CG section 2(1). A company cannot submit application forms for shares and debentures unless the form is accompanied by abridged prospectus. A copy of the prospectus shall be furnished to any
person who makes a request for the prospectus. Where a bona fide invitation is made to a person to enter into an underwriting agreement with respect to the shares or debentures or if shares or debentures are not offered to the public, a abridged prospectus is not required. Deemed Prospectus: (Section 64) Where a company allots or agrees to allot any shares in or debentures of the company with a view to all or any of those shares or debentures being offered for sale to the public any document by which the offer for sale to the public is made shall be deemed to be a Prospectus issued by the company. Conditions for deemed prospectus: That an offer of the shares or debentures or of any of them for sale to the Public was made within six months after the allotment or agreement to allot; or That at the date when the offer was made the whole consideration to be received by the company in respect of the shares or debentures. When a company agrees to allot any shares or debentures to a person or concern and those shares or debentures are offered for sale by that person or concern* then any document other than a prospectus such as a letter, notice or circular etc. by which such as offer of sale of the shares or debentures is made by that person or the concern to the public shall be deemed to be a prospectus issued by the company. Such a prospectus is called Prospectus by implication or deemed Prospectus. *issuing house-intermediary to sell public shares and debentures. Statement in Lieu of Prospectus (Section 70) A public company need not approach the public for money. The promoters may tap their public resources or contacts for raising the requisite capital. In such a case, no prospectus needs to be issued to the public, but promoters must prepare a document similar to prospectus known as statement in lieu of prospectus. This document must be in the form of Schedule 3 of the Act and must contain almost the same information as of a prospectus. The document shall be delivered to the Registrar for registration at least 3 days before the first allotment of shares. It must be signed by all the directors. When a public company converts into a public company it must either issue a prospectus or statement in lieu of prospectus. It is called statement in lieu of prospectus as it is filed in lieu (i.e in place of) prospectus.
Shelf Prospectus: (Section 60 A) A prospectus issued by any financial institution or bank for one or more issues of the securities specified in that prospectus. Applicability Nature of Organization a) A public financial institution
b) A public sector bank c) A scheduled bank Main Object Financing i.e. making loans to subscribing in the capital of a) A private industrial enterprise engaged in infrastructural financing b) Such other company as CG may notify in this behalf Procedure for filing Shelf Prospectus An information memorandum shall be issued to the public along with shelf prospectus. An update of information memorandum is filed every time an offer of securities is made. The updated information memorandum together with the shelf prospectus shall constitute the prospectus The shelf prospectus shall be valid for 1 year from the date of opening of the first issue of securities under that prospectus A company filing a shelf prospectus with the registrar shall not be required to file prospectus afresh by it within the period of validity of such shelf prospectus (i.e., 1 year) It shall file an information memorandum on all material facts relating to a) New charges created; b) Changes in the financial position as have occurred between the first offer of securities, previous offer of securities and the succeeding offer of securities.
Book building and Red Herring Prospectus: (Section 60B) Book building is an international practice which refers to collecting orders from investment bankers and larger investors based on an indicative price (floor price) to ascertain the demand and final price of an IPO. In order to explore the demand for securities and price at which securities may be offered to the public, a public company before issuing prospectus circulates information memorandum and red herring prospectus to the public. Red herring prospectus means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered. Instead it has a price band along the range within which the bids can move. The applicants bid for the share quoting price and quantity that they would like to bid at. Information Memorandum: (Section 60 B) Applicability- Section 60 B is optional to a public company Meaning A process undertaken prior to the filing of a prospectus by which a) Demand for the securities proposed to be issued by a company is elicited; and b) The price and terms for issue of such securities is assessed Circulation The Company may circulate information memorandum to the public prior to filing of the prospectus.
Contents of a prospectus: (Section 56) Matters contained in part I of schedule II 1. General Information : Company : Name and Address of Registered Office CG: Consent for present issue Stock Exchange : Application has been made for listing of present issue Section 68 A: Any person that makes a fictitious application for the purchase of companys shares shall be punishable with imprisonment up to 5 years. Minimum Subscription: If not received within 90 days from closure of issue, money received from applicant shall be refunded. Refund Orders: To be issued within a period of 10 weeks. Dates : The date of opening, earliest closing of issue and closing of the issue Name and Addresses : Auditors, Lead managers, Debenture Trustee , Underwriters Underwriting: Amount underwritten ,declaration that underwriters have sufficient resources to discharge their obligations Deposit of Money: A statement that all monies shall be transferred to a separate bank account. Credit Rating: Rating obtained from CRISIL or any other agency should be indicated. 2. Capital Structure of the Company a) Capital : Authorized , Issued, Subscribed and Paid up b) Size : Size of present issue c) Impact of issue : Paid-up capital after present issue/ conversion of debentures 3. Terms of the present Issue The terms of payment The rights of the holder How to apply ,availability of forms , prospectus and modes of payment Any special tax benefit for company and its shareholders. 4. Particulars of the Issue The objects of the issue The projected cost of the issue The means of financing the issue 5. Company, management and project History of the company , main objective ,present business The subsidiaries of the company The promoters and their background Manager, MD and other Directors Names , Address and their Occupations The location of project, information about plant and machinery, technology, etc. The infrastructure facilities. The nature of project, marketing setup. The future prospects of the company, expected capacity utilization during the first 3 years and expected year when the company would be able to earn profits. 6. Stock Market Data The high/low price of shares and debentures in each of the last 3 years.
The monthly high/low price of shares and debentures during the last 6 months.
7. Particulars about Companies listed in the same management The name of the Company The amount of issue , year of issue and type of issue The date of completion of delivery of shares and debentures certificate The date of completion of project 8. Outstanding Litigation The litigation likely to affect the operation and finance of the company The criminal prosecution launched against the company and the directors 9. Management Perception of risk factors The sensitivity to foreign exchange rate fluctuation The difficulty in availability of raw materials or in marketing of the products , etc. Matters contained in part II of schedule II 1. General Information Directors, auditors, solicitors, experts, managers, bankers , registrar to issue Names and address and their consents. The expert opinion obtained if any The change if any in the directors, auditors during the last three years The authority for issue of shares and debentures and details of resolution passed for issue The procedure for time schedule for allotment and issue of certificates 2. Financial Information Auditors report , profits and losses ,assets and liabilities rates of dividend paid by the company 3. Statutory and other information The amount of minimum subscription The expenses of the issue The amount of underwriting commission and brokerage The particulars of the previous issues during the last 5 years The debentures and redeemable preference shares outstanding on the date of prospectus The option to subscribe for the shares or debentures of the company The details of option to subscribe for securities to be dealt with in a depository The particulars of the property to be purchased by the company The particulars about managerial personnel The rights of members regarding voting, dividend, lien on shares etc. The restrictions on the transfer or transmission or splitting of shares or debentures A declaration that all the relevant provisions of the Companies Act, 1956 and the guidelines issue by the government have been complied with and no statement made in the prospectus is contrary to the provisions of the Companies Act, 1956 and rules there under. Golden rule for framing the prospectus The prospectus must present the whole picture of the company The prospectus must disclose all material facts truly, honestly and accurately.
All facts which are likely to influence the decision regarding applying for shares must be disclosed It must not contain any untrue or misleading statement No fact should be omitted , the existence of which might in any degree affect the nature or quality of privileges and advantages disclosed by the prospectus
Liability for Misstatements or omission in a prospectus Where an untrue or fraudulent statement occurs in the prospectus there may be Civil Liability Criminal Liability
Civil Liability A person who has been induced to subscribe for shares in a company on the strength of mis-statement or omission in the prospectus may have a remedy either against the company or against the directors, promoters or experts. Remedies against the company: A person who has been induced to subscribe for shares may (a) rescind the contract to take the shares (b) claim damages. (a) Rescission of the Contract : He can seek rescission of the contract i.e. return the shares allotted to him get back his purchase money with interest and get his name removed from the register of members. The remedy however is available only to those members who have subscribe for shares on the faith of the prospectus (b) Damages: Any person induced by fraud to take up shares is entitled to sue the company for damages provided he has rescinded his contract in time. He cannot both retain the shares and get damages against the company. The company is liable in damages where the misinterpretation is an innocent one unless it proves that it has reasonable grounds to believe. Remedies against the directors, promoters and experts: Any person who has purchased shares or debentures on the faith of the prospectus containing the untrue statement may sue (a) every director (b) Every person whose name appeared in the prospectus as a proposed director (c) Every promoter (d) Every person who authorized the issue of the prospectus. The aggrieved person may claim (1) compensation under Section 62; (2) Damages for non compliance with the requirements of Section 56; (3) Damages under the general law. Defenses available to a director : A director may escape liability of her proves (i) that the prospectus was issued without his knowledge or consent and that on becoming aware of its issue , he gave reasonable public notice to that effect; (ii) that after the issue of prospectus and before allotment , he on becoming aware of the untrue statement in it withdrew his consent and gave reasonable public notice of the withdrawal and the reasons for it; (iii) that he had reasonable grounds to believe and did believe up to the time of allotment of shares or debentures that the statement was true (iv) that he made the statement upon the authority of an expert whom he had reasonable ground to believe (v) that the statement was a correct and true copy of an official document.
Criminal Liability of directors : Every person who authorized the issue of a prospectus containing an untrue statement shall be punishable with imprisonment which may extend to two years or with a fine which may extend to Rs 5000/- or with both. The accused person however may not be liable if he proves (a) that the statement was immaterial (c) he had reasonable ground to believe and did believe up to the time of issue of the prospectus that the statement was true. (Section 63). The punishment for issuing an application for shares or debentures which is not accompanied by a prospectus is a fine up to Rs 5000.
Certificate Of Commencement Even after the raining of the required share capital a public company cannot commence business as it has to obtain business commencement certificate Following steps to be taken: 1) Making of an application to the registrar 2) Following document to be filed by the company: Declaration that the company has received from the public subscription for an amount not less than minimum subscription mentioned in the prospectus Declaration that the directors have taken up their qualification share and paid up in cash. Declaration that no money is refundable to the applicants by reason of the companys failure to apply for or to obtain the permission for the shares or debentures to be dealt in any RSE Statutory declaration (called the declaration of compliance) signed by the secretary that all the requirements of the companys Act in respect of the commencement of business have been complied with Payment of required registration fees Obtainment of business commencement certificate
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