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Legal Persons. – Law regulates the rights and obligations of persons, and divides
them into two classes – (i) natural persons, or (ii) artificial persons. Natural persons are
human beings of different degrees of capacity with whom we have been dealing so far.
Artificial persons are such as are created and devised by human laws for the purposes of
society and government, which are called Corporations or Companies. We shall, in the
present Chapter, deal with this legal person – the Corporation or Company.
common seal, and created by law for the purpose of preserving in perpetual succession
rights which would fail if vested in a natural person. Corporations are either “Corporations
Company and its Meaning. – In the ordinary common parlance, a company means
a group of persons associated to achieve some common objective. Our object is to deal with
a company which is formed for carrying on some business and providing for limited liability of
its members. Keeping this type in mind we may define a company as a voluntary association
for profit with capital divisible into transferable shares with limited liability, having a corporate
body and common seal. The company is an artificial legal person created by law and
endowed with certain powers. It exists in the eyes or contemplation of law as thought it were
a natural person, separate and distinct from the persons who are its members. As the
company is created by law and is not itself a human being and so has no physical existence,
it is called artificial; and since it is clothed with many or the rights of a real person, it is called
understanding the rights and duties that arise in connection with companies. It means that
property of the company is not owned by the members who own shares but by the company.
Debts of the company are debts of this artificial legal person and not of the people running
the company or owning shares in it. The company has a right to sue and can be sued, can
own property and have banking account in its own name, own money and be a creditor but
In consequence of the company being an entity separate and distinct from its
shareholders, the life a company is not measured by the life of any member. Accordingly, a
company has independent life in the sense that it continues to exist without regard to the
death of the individuals involved in its corporate affairs or the transfer by them of their
interests in the company; even the death of all its members does not end the company. On
account of this separateness between the company and its members, a shareholder can be
its creditor, too. Also, a shareholder cannot be held liable for the acts of the company, even
though he holds virtually the entire share capital, as may happen in what is known as a
“One-man Company.” Similarly, the shareholders cannot bind the company by their acts;
they are not its agents. These points are brought out by the House of Lords in the celebrated
In this case, one Saloman, who carried on a prosperous leather business, sold it in
solvent condition for the sum of £30,000 to a company which he formed consisting of
himself, his wife and a daughter and his four sons as shareholders. His wife, daughter and
four sons took one £1 share each. Salomon took 20,000 £1 shares and debentures of the
amount of £10,000 secured by a floating charge on the company’s assets as the price of the
business transferred to the company. The company ran into difficulties and had to be wound
up. The total assets amounted £6,050; its liabilities were the £10,000 secured debentures
and £8,000 owing to unsecured creditors who claimed the entire assets of £6,050, on the
ground that the company and Salomon were one and the same person and that the
company was mere “alias” or agent for Saloman, and hence they should be paid in priority to
Salomon. The House of Lords rejected this contention of the creditor and held that as soon
as the company was duly incorporated, it became in the eyes of the law a separate and
distinct, as well as independent person from Salomon and was not his agent or trustee for
him. Salomon, though holding almost all the shares in the company, was also a secured
creditor, and so must be paid his debt out of the assets of the company in priority to
unsecured creditors.
The legal personality and limited liability are the two important features of a company.
A person by buying shares, becomes entitled to participate in the profits when the company
decides to divide them, and is at liberty to dispose of them whenever he likes; and it
anything goes wrong with the company, his liability is limited by the nominal amount of the
the company has perpetual succession. This means the life of the company is independent
of the lives of its members, giving immortality to the company. Hence members may come
and members may go, but the company goes on (until dissolved).
1. A company has a separate and distinct personality from its members which
constitute it.
5. The shares in the share capital of the company are generally freely
transferable. This makes the life of the company independent of the lives of its members.
6. The liability of its shareholders is limited to the unpaid value of the shares
held by them.
It cannot therefore exercise the right of franchise, nor can it be punished, in its own person,
by imprisonment for criminal offences, although it can be fined for the contravention of the
8. As the company is not a citizen and can act only through natural persons, it
explained in the previous section, particularly the concept of separate and distinct entity, are
allowed to be enjoyed only by those who do not make a fraudulent and dishonest use of the
company-the artificial legal person. For instance, the Court may not recognise the separate
existence of a company where the only purpose for which it appears to have been formed is
The Court may also find it just to break through the corporate shell and apply the
principle of what is known as lifting or piercing the corporate veil, where it may become
necessary in public interest to examine the character of persons in real control of the
corporate affairs. In Daimler & Co. Ltd. v. Continent Tyre & Rubber CO. (1916) 2 A.C.
307, the company was registered in England, but on the declaration of war between England
and Germany, the persons in control of the company and resident in Germany became alien
enemies. The Court disregarded the corporate fiction of separate entity of the company and
If the number of members falls below the statutory minimum, and the company
carries on business for money an 6 months, while the number is so reduced, every
shareholder who is aware of these facts shall be directly and severally liable to the creditors
for the debts of the company contracted during that time, the creditors being permitted to
look behind the company to the owners of the shares for their satisfaction. Thus, the
which are created by Charter granted by the King or Queen in exercise of an ancient
Company Act does not apply to it. Such companies have no place in India since
Independence.
2. Statutory Companies, like the Reserve Bank of India or the State Bank of India,
which are created by Special Acts of Parliament or State Legislature. A statutory company is
governed by the provisions of the special Act creating it. The Companies Act does not apply
to such companies.
3. Registered Companies, which are incorporated under the Companies Act, 1956
or were registered under the previous Companies Acts therein consolidated and recognised.
its members would be unlimited so that they can be called upon to pay to the full extent of
their fortunes in order to meet the obligations of the company. Such companies are now
almost extinct, as a vast majority of them have registered themselves as limited companies.
limited by guarantee so that each member undertakes to be liable to pay the debts, of the
company up to a certain amount in case of winding up. Clubs, trade associations and
societies for promoting social objects are examples of this type; and in the case of these
The largest in number and most important in function are Limited Liability Companies
registered with a share capital divided into shares held by shareholders whose liability is
limited to the face value of the shares held by them. This class of company will be almost
of association, (i) restricts the right to transfer its shares, (ii) limits the number of its members
(excluding employees who are members or ex-employees who were and continue to be
members) to 50, and (iii) prohibits any invitation to the public to subscribe for any of its
shares and debentures. If two or more persons hold one or more shares jointly, they shall be
treated as a single member. The name of every private company must end with the words
“Private Limited”. Since the membership of private company is confined more or less to
and exemptions:-
1. Only two signatories to the memorandum are sufficient to form a private company.
subscribed or paid.
6. It is not required to hold the statutory meeting and file the statutory report.
7. It may issue any kinds of shares and allow disproportionate voting right.
Loss of Privileges. – A private company will lose its privileges and will be treated as
a public company, if it fails to comply with the essential requirements of a private company,
viz., restrictions on transfer of shares; limitation of its members to fifty; and prohibition of
whose membership is open to the public under the provisions of its articles. The minimum
number required to form such a company is seven, but there is no limitation to the maximum
number of members. It can offer shares and debentures to the public by advertising such
offer in a prospectus. Almost all the provisions of the Act apply to it.
Distinction between Public and Private Company – The two types of companies
1. The minimum number with which a public company can be formed is seven and in
the case of a private company, the number of members must not exceed fifty.
4. The directors of a public company have to file with the Registrar consent to act as
5. A public company may, and usually does, invite by the issue of prospectus the
general public to subscribe to its share capital or but its debentures, but a private company
company, the transfer of shares can be made subject to certain restrictions as provided in its
articles.
the net profits, but a private company which is not a subsidiary of a public company may pay
any remuneration.
8. A public company can issue only two kinds of shares – preference and equity, but
a private company may issue any kinds of shares and even with disproportionate voting
rights.
4.Foreign Companies – A company incorporated in a country outside India and
under the law of that other country is a foreign company. Every foreign company having a
place of business in India is required to file which the Registrar at New Delhi and also the
Registrar of the State in which such place of business is situated a certified copy of its
charter, statute or memorandum and articles defining the constitution of the company in
English language, the full address of the registered or principal office of the company and a
list of its directors and its secretary, as well as the address of the principal place of business
in India. Every foreign company must conspicuously exhibit on the outside of every office or
place of business in India the name of the company, indicating whether Private Limited or
The provisions regarding books of accounts are the same as per the Indian
are also almost the same as for an Indian company. A foreign company, which has been
carrying on business in India and stops its business here, may be wound up as an
unregistered company, even if it has been dissolved or has ceased to exist under the laws of
not less than 51 per cent of the paid up share capital is held by the Central Government or
by any State Government or Governments, or partly by the Central Government and partly
Government company. Government companies are also subject to the provisions of the
Companies Act as any other company, except if the Central Government by notification
exempts any Government company from the application of any of the provisions of the Act.
It provides for a special procedure for audit of Government companies and lays down
that the auditor of a Government company shall be appointed or re-appointed by the Central
Government on the advice of the Comptroller and Auditor General of India. The C. & A. G.
can direct the manner in which the accounts are to be audited, and may even conduct a
supplementary audit. His report, if any, must be placed before the annual general meeting
along with the auditor’s report. In addition to the annual report on the working of the
company, the Central Government must place before both Houses of Parliament an annual
report on the working and affairs of each Government company, together with the audit
FORMATION OF COMPANY
The promoters (persons wishing to form a company) must file with the Registrar of
4. The agreement, if any, which the company proposes to enter into with the
engaged in the formation of the company, that all requirements of the Act and Rules
The above documents are all that a private company has to file. A public company,
having share capital, must file, in addition to the above, the following documents :-
8. An undertaking in writing signed by each such director to take and pay for their
Ordinarily, both the private and public companies will file the notice of their addresses
When the necessary stamp duty and the registration fee have been paid and the
Registrar is satisfied that everything is in order, he will enter the name of the company in the
evidence that everything is in order as regards registration and that the company has come
into being with rights and obligations of a natural person, competent to enter into contracts.
PROMOTER
who assumes primary responsibility with regard to matters relating to promotion, or any of
them, may be held to be a “promoter”. “The term ‘promoter,’ “ said Boden L. J. “is a term not
operations familiar to the commercial world by which a company is generally brought into
existence.” The word promoter is used in common parlance to denote any individual,
syndicate, association, partnership, or company, which takes all necessary steps to create
persons whom he induces to become shareholders in it. Although a promoter is not an agent
or trustee of the company before its formation, yet the responsibility of an agent and trustee
is placed upon him to account for all moneys secretly obtained by him. Consequently, a
promoter must act honestly, and must not make, directly or indirectly, any profit at the
expense of the company he is promoting, although he may receive some remuneration for
his work. The usual ways of receiving remuneration by the promoter are: (1) by selling to the
company at a profit some property purchased by the promoter before he became one; (2) by
taking a commission on the shares sold; (3) by taking a grant of some shares of the
company; (4) by taking a grant of a lump sum of money from the company.
MEMORANDUM OF ASSOCIATION
determining its powers and, in this respect, it is the charter of the company, which contains
the fundamental conditions upon which alone the company can be incorporated. It defines
as well as confines, the powers of the company, so that it not only shows the object of its
formation, but also the utmost scope of its operation beyond which its action cannot go. It, in
a way, regulates the external affairs of the company in relation to outsiders. Its purpose is to
enable shareholders, creditors and all those who deal with the company to know what its
and signed by seven subscribers (two in the case of a private company), in the presence of
a witness who shall attest the signature of each subscriber. Each subscriber must add his
(1) The name of the company, with “limited” or “private limited” as the last words;
(2) The State in which the registered office of the company is to be situate;
(5) The proposed amount of the capital, and its division into shares of a fixed amount;
and
registered by a name which, in the opinion of the Central Government, is undersirable. This
enables the Government to reject a name without giving any reason. The Registrar will
continue, as before, to refuse names identical with, or too closely resembling names already
on the register as undesirable names. The company must not give an impression that the
company is carrying on the business of some other well established company. Under the
Emblem and Names (Prevention of Improper Use) Act, 1950, the Government may declare
what names and emblems are not to be used by companies in trade marks and patents. The
use of the following has been prohibited under the above Act, viz. name and emblem of the
U.N.O. and the W.H.O., the Indian National Flag, the Official Seal and Emblems of the
Central and State Governments. Subject to the above restrictions a company may adopt any
Once the name is registered, it must be painted 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. It must be engraved on the seal, and mentioned in all notices,
advertisements, other official publications, negotiable instruments and orders for money or
2. Registered Office. – Every company must have a registered office as from the
date on which it commences business or the 30th day after incorporation date whichever is
3. Objects Clause – The objects clause indicates the extent of company powers and
sphere of its activities. It defines and confines the scope of company’s powers, and once
registered, it can only be altered as provided by the Act. The purpose of the memorandum is
two fold: One, to inform the members in what kind of business their capital may be used;
secondly, to inform persons dealing with the company what its powers, are. A company
cannot do anything beyond its powers, and any act beyond such powers is ultra vires and
void and cannot be ratified even by the assent of the whole body of shareholders. The
objects should, therefore, be clearly set forth in the memorandum. Ambiguous and general
provision will not be of any use. Although express powers are necessary a company may do
anything which is incidental to and consequential upon the powers specified, and the act will
not be ultra vires. Thus a trading company has an implied power to borrow, draw and accept
bills in the ordinary form, but a railway company cannot issue bills, although it may borrow
money.
As the procedure laid down in Section 17 of the alteration of the objects clause when
some new venture is contemplated is rather cumbersome and the sanction of the Court is
essential, the promoters companies have been making the objects and purposes as wide as
possible. This practice often enabled directors to participate in activities which were neither
the main activities nor were they ancillary thereto, but were remote in character and far
removed from the main purpose. Very often, the members of the company knew nothing or
where they did know, they could not do anything. In order to enable the shareholders to
have a say in the matter, and also to let the doctrine of ultra vires have some play, Section
13 of the Act was amended on 1965 so as to make it compulsory in future for the promoters
to specify in clear terms the Main and Subsidiary objects of the company.
(c) in the case of a company in existence immediately before October 15, 1965, the
(d) in the case of a company formed after October 14, 1965, the memorandum must
state –
(i) the main objects of the company to be pursued by the company on its
incorporation and objects incidental and ancillary to the attainment of the main objects;
business (as stated under other objects) without obtaining the prior approval of the
shareholders by a special resolution passed in a general meeting. In some special cases the
ordinary resolution.
4.LIMITATION OF LIABILITY
A declaration that the liability of the members of the company is limited to the
amounts unpaid on their shares, must be made in the memorandum. If a shareholder has
paid Rs.50 on a Rs.100 share, he be called upon to pay the balance of Rs.50, and if another
has paid Rs.100, he holds a full-paid share and cannot be called upon to pay anything. But
there is one exception to this rule, viz., that if a company continues to carry on business for
more than 6 months after the membership has fallen below 7 in the case of public company,
and 2 in the case of a private company, then all members aware of the fact are fully and
severally liable for all debts contracted after the 6 months, i.e., their liability becomes
unlimited.
share capital, states the amount of capital with which it is registered, divided into
“authorised” capital. The effect of this caluse is that the company cannot issue more
shares than are authorised by the memorandum for the time being. A public
company can issue only two kinds of shares – Preference and Equity and the shares
must not give disproportionate voting rights. A private company may however, issue
any kinds of shares and with disproportional voting rights (Sections 85, 88, 90).
clause which reads something like this: “We, the several persons whose names and
addresses and occupations are subscribed, are desirous of being formed into a company in
pursuance of this memorandum of association and respectively agree to take the number of
shares in the capital of the company set opposite our respective names”. Then follow the
names, addresses, occupations, the number of shares of each person has taken and his
signature attested by a witness. At least 7 subscribers must sign the memorandum in the
case of a public company although 2 are sufficient in the case of private company.
ALTERATION OF MEMORANDUM
For the purposes of alteration, the provisions contained in the memorandum are
classified into two heads. Conditions and other provisions. The “conditions” are those
provisions which are compulsory clauses, namely, the name, the place of registered office
(situation) objects, limited liability and share capital. The conditions can be altered only as
expressly provided by Sections 17, 21, 94, 99, 100 and 106.
manager contained in the memorandum can be altered by a special resolution with the
approval of the Central Government, or a clause in the memorandum fixing limit of dividends
ALTERATION OF CONDITIONS
1 Change of name – The name of the company can be changed any time by a special
resolution and with the written approval of the Central Government. If the change merely
involves the addition or deletion of the word “Private” on the conversion of a public company
into a private company or vice versa, no approval of the Central Government is necessary.
The change must be communicated to the Registrar by filing a printed or type written copy of
the special resolution within 30 days of the passing thereof. The Registrar will then issue a
fresh certificate of incorporation, and the change of name will be effective only there after.
The changed name should be noted in each copy of the memorandum and articles.
2 Change in Registered Office – The registered office may be changed any time from
one place to another within the local limits of the city, town or village where it is situated and
a notice of the change be given to the Registrar within 30 days of such change.
If the office is to be removed from one city, town or village to another city, town or
village within the same State, a special resolution should be passed, and a printed or type
written copy thereof filed within 30 days. The within 30 days of the removal of the office, a
notice to the Registrar should be given of the location of the new office.
The Registered office from one State to another State, or the objects of the company, can be
necessary –
The Court being satisfied that the notice of the resolution was given to all persons
whose interests are likely to be affected by the alteration, including the Registrar, and having
heard him and the creditors’ objections, if any, may confirm the alteration wholly or in part. A
certified copy of the Court’s order together with a printed copy of the altered memorandum
must be filed within 3 months of the date of the order with the Registrar, who will register
them and issue a certificate which will be conclusive evidence that everything has been
done properly (Section 17-19). The alteration of the objects clause must leave the business
of the company substantially what it was before with only such changes in the mode of
Where the alteration involves a transfer of the registered office from one State to
another, the certified copy of the Court’s order confirming the change must be filed with the
Registrars of both the States who will register the same. All the records of the company will
then be transferred to the Registrar of the State to which the registered office of the
capital may, if so authorised by its articles, alter the conditions of its memorandum relating to
Articles of Association lay down the rules and the regulations of the Company. A public
company may frame its own articles or may adopt Table A of the Schedule I of the Act or it
may adopt partly its own regulations and partly from Table A.
Articles of Association of the Company are the rules and regulations for the management of
the internal affairs of the Company. They lay down the rules by which the objects of the
Company are to be carried out. They regulate the conduct of the shareholders, the officers
memorandum of association.
Articles of Association of the Company bind the Company and the shareholders as if they
had been signed by each one of them. They bind them existing and the future shareholders
of the Company.
Articles of Association must be printed and signed by each subscriber to the Memorandum
The Articles of Association should be paragraphed ,consecutively numbered and lay down
3] Regarding appointment, remuneration, powers, duties etc. Of the directors and officers of
the Company
8] Regarding the notices of the meeting, voting rights, quorum, proxy etc.,
9] Regarding the borrowing powers of the Company and the mode of the borrowing,
The objects with which a Company is established and the rules and regulations by which
these objects are carried out are stated in the memorandum and articles of association of
the Company not only for the benefit of the members to know the powers of the Company
and the limitations placed on them but also for the information to the outsiders who may deal
with the Company. These documents are registered with the Registrar of the Companies.
They are public documents and hence outsider can get a copy of these documents from the
office of the Registrar by paying a certain fee and thus is expected to know the powers of the
Thus it will be observed that any person dealing with the Company is supposed to know the
powers and limitations of the Company and its officers. Hence if a Company goes beyond
them powers conferred on it by the memorandum of association and an outsider enters into
contract or the act is beyond the powers of the director, he has no right to sue the Company.
This rule was laid down inn the case of Royal British Bank vs. Turquand [1836].
In this case the directors of the Bank gave a bond to Turquand which they had power to do
passed. In fact no resolution authorizing the directors to issue the bond to Turquand had
been passed. Turquand sued the Bank on the bond. It was argued by the Bank that since no
resolution authorizing the directors to issue the bond as required by the articles had been
passed by it, the suit by Turquand was not maintainable. It was held by the Court that
Turquand could sue the Bank notwithstanding the fact that no such resolution had been
passed by the Bank. The Court further observed that an outsider was expected to know the
powers of the Bank and not to see whether all the formalities ( in this case passing of the
resolution by the Bank)had been gone through or not. Such formalities are matters of
make such enquiries , it would be difficult to conduct business. The stranger should know
whether the act committed by the person on behalf of the Company is normally expected to
perform such act and whether the act is not ultra vires the Company. If the answer is yes, it
would be quite safe to enter into such a contract. He need not inquire whether a few
formalities which are necessary to be gone through before the director etc. enter into
contract had been gone through or not. This rule is known as Doctrine of Indoor
Management.
It means “beyond the powers”. The powers of the Company beyond which it can not act are
laid down in the object clause of the memorandum of association. If the Company goes
beyond the powers conferred on it the contract or the act will be void and neither the
Company nor the outsiders will be entitled to enforce such a contract. Thus those who deal
with a Company are deemed to have constructive notice of the Company’s powers. If they
do not do so it is their fault. If even after knowing that the act is not within the powers of the
Company, they enter into a contract with the Company, they must suffer the consequences.
It may be stated here that an ultra vires act committed by a Company can not be ratified
even if all the shareholders pass a resolution to that effect. The object of the doctrine of ultra
vires is to assure the shareholders as well as creditors of the Company that the funds and
the assets of the Company will not be utilized for any purpose except those stated in the
memorandum. For example, a Company formed for the purpose of trading in electric goods
cannot manufacture electric appliances because that act will be ultra vires the Company.
Doctrine of Constructive Notice-
Companies. A Company is registered on the basis of these documents. It is only then that it
can be formed. After the registration of these documents ,they become public documents
because any member of the public can inspect them at the office of the Registrar of
Companies after paying nominal fees. Any person, therefore, dealing with the Company is
supposed to have seen them or to have notice of their contents. He is deemed to know the
powers of the Company or the directors. For example, if the Articles provide that a bill of
exchange must be signed by two directors whereas the bill was signed by only one director,
the holder can not claim the payment under such a bill. He can not plead that he did not
know the powers the directors. He is deemed by law to have a constructive notice of the
Prospectus-
It means any document described or issued as a prospectus and includes any notice,
circular, advertisement or other document inviting offers from them public for the subscription
Thus it is important that prospectus must invite offers from the members of the public to
purchase its shares. If a promoter issues the prospectus to a few friends or relatives, it is not
conferred as an invitation to the members of public. Before it is issued to the public, it must
The object of issuing the prospectus is to let the public know of the establishment of the
Company, its objects, its prospects etc. to induce the members of the public to purchase its
shares or debentures. It is a kind of invitation to the public to make an offer to the Company
for the purchase of its shares and debentures. If the invitation to purchase its shares has
been sent to the existing shareholders, it will not amount to a prospectus. The invitation to
purchase its shares or debentures to the public or any class of public is called a prospectus.
Every public Company must issue prospectus though a private Company should not do so.It
A public Company issues the prospectus so that its shares may be sold and minimum
subscription may be applied for. If the minimum subscription is not applied for, the
application money has to be returned to the applicants. If it is not returned, the directors are
personally liable to refund the application money and pay interest on the money so
refundable.
2] names, occupations and addresses of the promoters and no. shares taken by them
3] main classes of shares into which the share capital is divided, and the no. of shares
Misleading Prospectus-
In order to sale the shares of the Company and to collect minimum subscription the
promoter may issue a very attractive prospectus to induce the public to purchase the shares
of the Company. It is possible that in their enthusiasm they may make untrue statements in
A prospectus is the basis on which the contract for sale and purchase of the shares is
entered into between the Company and the shareholders. If there is any misrepresentation
in the prospectus a share holder has a right to legal action against the company and the
promoters. Hence it must seen that there is no untrue statements in it or no material fact has
been omitted. It is said that prospectus must tell the truth , the whole truth and nothing but
truth.
The liability of the promoter or director who has authorized the issue of a misleading
prospectus is two-fold, i,e.civil and criminal. Under civil liability, a person who has purchased
the shares on the basis of misleading prospectus can sue to rescind the contract and return
the share to the Company and get back the money together with interest paid for the
purchase the shares from the Company. Under criminal liability, promoter or director are
It may be stated here that the original purchaser only who has the right to rescind the
contract provided he had purchased the share4s on the faith of misleading prospectus. A
person who has purchased the shares in the open market or the subscriber to the