THE COMPANIES ACT, 1956

Definition of a Company


Sec. 3 defines company as a company formed and registered under the Act or an existing company formed and registered under any of the previous company laws.

Company - Definition
 

Lord Lindley has described the company as an association of many persons who contribute money or moneys worth to a common stock and employ it in some trade or business, and who share the profit and loss (as the case may be) arising therefrom.

Effect of Registration and the features it acquires on registration:



From the date of incorporation, such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in the Act.

Features of the company:



1. Incorporated association: An association of more than 10 persons in the case of a Banking Company and more than 20 persons in the case of any other business, is illegal if not registered as a company under the Companies Act. For incorporation or registration as a company, the minimum members required is 2 in the case of a private limited company (max. 50), and 7 in the case of a public limited company.

Features of the company:



2. Artificial Person: A company is created by law and is not a human being. But it has certain rights and obligations. So it is an artificial person.

Features of the company:



3. Separate Legal Entity: Company is distinct from the persons who constitute it. On registration, the association of persons becomes a body corporate by the name contained in the memorandum. Lord Macnaughtam in the case of Salomon v. Salomon & Co. Ltd. observed: A company is at law a different person altogether from the subscribers..; and though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is at law not the agent of the subscribers or trustee for them. Nor are the subscribers liable in any shape or form, except to the extent and in the manner provided in the Act.

Features of the company: Separate Legal Entity

 

Salomon v. Salomon & Co. Ltd. Salamon was a leather merchant. He sold his business to a company formed by him, his wife, daughter and four sons, for a sum of 30000 pounds. The purchase consideration was satisfied by allotment of 20,000 shares of pound 1 each and debentures of 10000 pounds secured by a floating charge on the companys assets in favour of Mr. Salomon. All other shareholders subscribed for 1 pound each. Salomon was also the Managing Director of the Company.

Salomon v. Salomon & Co. Ltdcontd.



The company almost immediately ran into difficulties and became insolvent and winding up proceedings commenced. At the time of winding up. Total assets of the company amounted to 6050 pounds; its liabilities were 10,000 pounds secured debentures issued to Mr. Salomon, and 8000 pounds owing to unsecured trade creditors. The unsecured creditors claimed the whole of the companys assets i.e.6050 pounds on the ground that the company was a mere alias or agent for Mr. Salomon.

Salomon v Salomon & Co. Ltd (contd.)



Held: The contention of the trade creditors could not be maintained, because the company being in law a person quite distinct from its members, could not be regarded as an alias or agent or trustee for Salomon. Also the companys assets must be applied in payment of the debentures as a secured creditor is entitled to payment out of the assets on which his debt is secured in priority to unsecured creditors.

Features of the company: Separate Legal Entity



In Lee v. Lee Air Farming Ltd., Lee, a qualified pilot, held all but one of the shares of the Company. By articles of the company, Lee was appointed Governing Director and Chief Pilot. Lee was killed while piloting the plane on duty. Mrs. Lee claimed compensation under the Workmen Compensation Act. The company opposed the claim on the ground that Lee was not a worker as the same person could not be employer and employee.

Lee vs Lee Air Farming Ltd. (contd.)



Held: There was a valid contract of service between Lee and the company and Lee was a worker and Mrs. Lee is entitled to compensation.

Bachha F. Guzder v. The Commissioner of Incometax, Bombay. Separate Legal Entity

Mrs. Guzder received received dividend in respect of shares held by her in a tea company. Under Indian I.T.Act, agricultural income is exempt from I.Tax. 60% Income of the tea company is treated as agricultural and 40% from manufacture and sale. The plaintiff Mrs. Guzder claimed 60% of dividend as exempt from tax representing agricultural income, as in the case of the tea company, because dividends received by shareholders represented the income of the company.

Judgment:
Supreme court held, that the income in the hands of the company was partly agricultural, yet the same income when received by Mrs. Guzder as dividend could not be regarded as agricultural income.

Features of the company:



4. Limited liability: In the case of a company limited by shares, the liability of members is limited to the nominal value of shares held by them. If shares are fully paid up, then the liability is nil.

Features of the company:

 

Exceptions to limited liability: 1)unlimited liability company : members liable till each paise of liability is paid off; 2)Company limited by guarantee : liability of each member shall be determined by the guaranteed amount.

Exceptions to limited liability:



3)Where number of members is reduced to less than 7 for public limited company and less than 2 for pvt. Ltd. company and the company carries on business for more than 6 months, every person who is a member and is aware of the fact that the company is so carrying on the business with fewer than the statutory minimum members, shall be liable for the whole of the debts contracted during that time.

Exceptions to limited liability:



4)Fraud: If during the course of winding up, if any business is carried on with intent to defraud the creditors, the court may declare all the persons who are party to the transactions, personally liable without any limitation of liability for all or any of the debts or other liabilities of the company.

Features of the company:

 

5. Separate Property: Companys property is companys separate property and in the eyes of law, shareholders are not part owners of the undertaking. In Bacha F. Guzder v. The Commissioner of Incometax, Bombay, the supreme court held that a shareholder is not the part owner of the company or its property; he is only given certain rights by law e.g. to vote or attend meetings, to receive dividends.

Reference case: Macaure Vs. Northern Assurance Co.Ltd

(Separate property shareholders not part-owners) Also for insurable interest.

Macaure held all except one share of a timber company. He advanced substantial amount to the company and also insured the companys timber in his personal name. The timber was destroyed by fire. He claimed the loss from the insurance company against his policy. But the claim was rejected by the insurance company.

Judgment:
The court applying the principle of separate legal entity held that Macaure being only a shareholder, was not the owner of property of the company. Hence, he has no insurable interest. The insurance company was, therefore, not liable to pay the claim.

Features of the company:



6. Transferability of shares: In a company form of organization, the business is separate from its members, it facilitates the transfer of members interests. Shares of a company are transferable in the manner provided in the Articles of the company. In the case of a private company, there are some restrictions placed on such transfer.

Features of the company:

 

7. Perpetual existence: A company is an artificial legal person, and does not have an allotted span of life. Death, insolvency or retirement of its members, leaves the company unaffected. Members may come and go but the company goes on for ever. The saying King is dead, long live the king aptly applies to the company form of organization.

Features of the company:

 

8. Common Seal: A company being an artificial person has to work through its directors, officers and other employees. But it can be held bound by only those documents which bear its signatures. Company seal is the official signature of a company.

Features of the company:

 

9. Company may sue and be sued in its own name: Another fall out of the separate legal entity is that the company, if aggrieved by some wrong done to it may sue or be sued in its own name.

(Company may sue and be sued in its own name

RAJENDRANATH DUTTA VS. SHIBENDRANATH MUKHERJEE (1982) A leasedeed was executed by the directors of the company without the seal of the company and later a suit was filed by the directors and not the company to avoid the lease on the ground that a new term had been fraudulently included in the leasedeed by the defendants.

RAJENDRANATH DUTTA VS. SHIBENDRANATH MUKHERJEE (1982)..(contd.)



Held that a director or managing director in their personal capacity could not file a suit, unless it was by the company in order to avoid any deed, which admittedly was executed by one of the directors and the company also accepted the rent. The case was not made out by the company and in the case made out,the company is not even the plaintiff. If the aggrieved party was the company, it was for the company, and not the directors, to file the suit. The suit is therefore, not maintainable.

Lifting of the Corporate veil:



The advantages of incorporation are allowed to be enjoyed only by those who want to make an honest use of the company. In case of a dishonest and fraudulent use of the facility of incorporation, the law lifts the corporate veil and identifies the persons (members) who are behind the scene and are responsible for the perpetration of the fraud.

Company formed for fraudulent purpose or is a sham Delhi Development Authority Vs. Skipper Construction Co, Private Ltd.
Skipper construction company failed to pay the full purchase price of the plot to DDA. The company started construction and sold flats to various persons. The two sons of the directors who had business in their own names claimed that they had separated from the father and the companies they were running had nothing to do with the properties of the parents. But no satisfactory proof could be produced to substantiate this.

Judgment:
Held: that the transfer of shareholding between father and the sons must also be treated as a sham. The fact that the director and members of his family had created several corporate bodies, did not prevent the court from treating all of them as one entity belonging to and controlled by the director and his family.

Lifting of the Corporate Weil (Examples)

For the protection of revenue : only purpose of forming the company is for evasion of tax. ii) Company acting as agent of shareholders. iii) Company formed for avoiding their own contractual obligations. iv) Company formed for fraudulent purpose or is a sham. v) Company formed against public interest or policy. (London company: tyres made in Germany: During World War: Company filed a suit for recovery of debt from Daimler & Co). There are various other cases of similar nature.
i)

Illegal Association:


Sec.11 of the Companies Act provides that no company, association or partnership consisting of more than 10 persons for the purpose of carrying on the business of banking and more than 20 persons for the purpose of carrying on any other business can be formed unless it is registered under the companies Act or is formed in pursuance of some other Indian Law. If such an association is formed and not registered under the Companies Act, it will be regarded as an illegal association although none of the objects for which it may have been formed is illegal.

Classification of Companies:

1. If a company is incorporated by a charter granted by the monarch, it is called a Chartered Company.

Classification of Companies:

2. A company which is created by a special Act of the Legislature is called a Statutory Company.

Classification of Companies:

3. A company brought into existence by registration of certain documents under the Companies Act 1956, is called a Registered Company.

Classification of Companies:

4. A company limited by shares or Share Company is a registered company having the liability of its members limited to the amount if any, unpaid on the shares respectively held by them

Classification of Companies:


5. A company limited by guarantee or guarantee company is one having the liability of its members limited to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up.The guaranteed amount can be called upon only at the time of winding up. A pure guarantee company does not have a share capital. The working funds, if required, are raised from sources like fees, donations, subsidy, endowments, grants, subscriptions and the like. Such a company is generally formed for the purpose of promotion of arts, science, culture, charity. Sports, or for some similar purpose.

Classification of Companies:


6. A company limited by shares as well as by guarantee is a hybrid form of company which combines the elements of a guarantee and a share company. Initial capital of such a company is raised from its shareholders, while the normal working funds are provided from other sources, such as fees, charges, subscription etc. Every member has a twofold liability the guarantee amount payable on winding up and the nominal amount unpaid on the shares which is payable either during the lifetime of the company or on winding up.

Classification of Companies:

7. An unlimited company is a company not having any limit on the liability of its members. The members are liable, in the event of its being wound up, to the full extent of their fortunes to meet the obligations of the company.

Classification of Companies:

8. Both the limited liability company and an unlimited liability company can be private or public.

Private Company:
    

A private company can be formed by merely two persons by subscribing their names to the Memorandum of Association. Such a company must have a minimum capital of Rs.1 lakh and by its articles must (i) prohibit an invitation to the public to subscribe to its shares and debentures; (ii) restrict the rights of its members to transfer shares and (iii)limit the number of its members to fifty, excluding its employee members or past employee-members; (two or more persons holding shares jointly shall be deemed as one person) (iv)prohibit any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

Public Company:
     

Companies Act 1956 defines a public company to mean a company which (a) is not a private company (b) has a minimum paid up capital of five lakh rupees or such higher paid up capital, as may be prescribed; (c) is a private company, which is a subsidiary of a company, which is not a private company. (d) where a private company accepts deposits from the public and/or whose number of members exceed 50. (e) Minimum paid up capital requirement is not applicable to Sec. 25 companies.

Distinction between Private and Public Company

Private Company
1. 2. 3. 4. 5. 6. 7. 8. 9.

Minimum members 2. Minimum capital is Rs.1 lakh Maximum number is 50. Restriction on transfer of shares. Cannot invite general public to subscribe to shares and debentures. Cannot accept deposits from public Can commence business immediately on incorporation. Need not hold statutory meeting. Written consent to act as director, sign memorandum or contract for qualification shares. Directors may be appointed by a single resolution. Directors need not retire by rotation. Number of directors can be increased to any extent without permission. Quorum is two members present. No restrictions on managerial remuneration. Special privileges are enjoyed. Cannot issue share warrants.

10. 11. 12. 13. 14. 15. 16.

Public Company 1. Minimum members is 7. 2. Minimum capital is Rs.5 lakhs. 3. No maximum limit to number of members. 4. No restriction on transfer of shares. 5. Through prospectus, can invite general public to subscribe to its shares and debentures. 6. Can accept deposits from public subject to the provisions of the Act. 7. Can commence business only after receipt of certificate of commencement of business. 8. Must hold statutory meeting & file statutory report. 9. Directors must file written consent to act as Directors, must sign Memorandum, and must contract for qualification shares. 10. Directors are elected by separate resolutions. 11. Two thrids of Directors must retire by rotation. 12. If number of directors be more than 12, approval of C.Govt. is necessary. 13. Five members present form the quorum. 14. Act has placed restrictions on the quantum of managerial remuneration. 15. A public company enjoys no special privileges. 16. Can issue share warrants.

Special Privileges enjoyed by a Private Company

     

1. A private company can be formed with only two members. 2. As a private company does not offer shares to the public, it can proceed to allot shares without waiting for minimum subscription. 3. A private company is not required to issue a prospectus or deliver to the Registrar a statement in lieu of prospectus. 4. A private company is free to allot new issue to outsiders. 5. A private company can issue different kinds of shares with disproportionate voting rights. 6. A private company can commence business immediately after its incorporation.

Special Privileges enjoyed by a Private Company

   

7. It need not have an index of members. 8. A private company need not hold any statutory meeting or to file statutory report with the Registrar. 9. Only two members present constitute the quorum unless a larger number is provided in the articles. 10.If less than 7 persons are present, poll can be demanded by any one person or proxy; if more than 7 are present, then any two can demand poll. 11. A private company need have a minimum of two directors.

Special Privileges enjoyed by a Private Company

    

12. All directors of a private company can be appointed by a single resolution. 13. The directors of a private co. need not file their written consent or take up qualification shares. 14. The directors of a private company need not retire by rotation. 15. 14 days notice for appointment of a new director is not required, unless it is a subsidiary of a Public Company. 16. Directors can vote on a contract in which they are interested.

Special Privileges enjoyed by a Private Company

    

17. A private company may provide additional disqualifications for appointment of directors, by its articles. 18. A private company may provide for special grounds for vacation of office of a director, by its articles. 19. A private company is exempted from the restrictions regarding Managerial remuneration. 20. A private company can give financial assistance directly or indirectly for purchase of its own shares. 21. Restrictions on holding more than 25% of paid up capital of a company without previous sanction of Central Govt. does not apply to private company shares.

Special Privileges enjoyed by a Private Company



  

22. There are no regulations regarding general meetings for private companies. They can have their own rules in the articles. 23. Nobody other than the members of a private company can inspect or obtain copies of profit and loss account of the company. 24. There are no restrictions on the powers of the Board of Directors contained in Sec.293. 25. There is no provision for prohibition of loan to a Director. 26. The number of companies in which a person can be Managing Director and the time limit of 5 years do not apply to private companies.

Formation of a Company:
Broadly three steps are involved : 1. Promotion 2. Registration 3. Floatation.

Formation of a Company:


1. Promotion: Promotion denotes preliminary steps taken for the purpose of registration and floatation of the company. The persons who assume the task of promotion are called promoters. The promoter may be an individual, syndicate, association, partnership or company.

Formation of a Company:


Judge Cockburns, attempted to define exactly what a promoter is : A promoter is one who undertakes to form a company with reference to a given project, and to set it going, and who takes the necessary steps to accomplish that purpose.

Formation of a Company:
 

  

2. Registration: Sec. 12 Any seven or more persons or where the company to be formed will be a private company, two or more persons, associated for any lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company, with or without limited liability. Sec.33 : The following three documents are required to be presented to the Registrar of Companies of the State in which the registered office of the company is to situate, for the purpose of registration of a company: (i) the memorandum of the company; (ii)the articles, if any; (iii)the agreement, if any, which the company proposes to enter into with any individual for appointment as its Managing Director or Wholetime Director or Manager.

Documents to be filed for Registration:

1. 2. 3. 4.

5. 6. 7.

The Memorandum of Association. The Articles of Association, if any, duly signed by the subscribers of the Memorandum. A statement of the nominal or authorised capital. A notice of address of the registered office of the company. This may be done within 30 days of registration of it cannot be filed at the time of registration. A list of directors and their consent to act as such, signed by each. An undertaking in writing signed by each such director to take and pay for their qualification shares. A declaration that all the requirements (provisions) of the Companies Act have been complied with signed by an Advocate (of High Court or Supreme Court), or a Chartered Accountant, or Director, Manager or Secretary of the Company.

Registration by the Registrar:

After the necessary documents are filed, the Registrar shall register the Memorandum and Articles of Association of the Company, provided he is satisfied that  The relevant provisions of the Act have been complied with,  The objects of the company are lawful,  The requisite number have subscribed and duly signed,  The Memorandum and Articles comply with the provisions of the Act in all respects,  The name selected is permissible and acceptable,  The statutory declaration has been properly made.

Certificate of Incorporation:

On Registration, the Registrar will issue a Certificate of Incorporation, certifying that the Company is incorporated. From the date of incorporation mentioned in the certificate, the company becomes a legal person separate from its shareholders and secures perpetual succession. Hence it is the Birth Certificate of the Company. The certificate of incorporation prevents the reopening of matter prior to registration and places the existence of the Company as a legal person beyond doubt.

Certificate of Commencement of Business (Trading Certificate)

A private company may commence business immediately after incorporation. But a public company can commence business only after obtaining a certificate for commencement of business from the Registrar.

Certificate of Commencement of Business Certificate of Commencement of Business is issued if  Minimum subscription shares have been fully paid in cash,  every director has paid for in full the shares applied for and allotted to him  no money is liable to be repaid to the applicants for any legally recognised reason,  statutory declaration that the above conditions have been complied with has been filed with the Registrar.

Memorandum of Association


The Memorandum of Association of a company is its charter which contains the fundamental conditions upon which alone the company can be incorporated. It tells us the objects of the companys formation and the utmost possible scope of its operations beyond which its actions cannot go. It defines as well as confines the powers of the company. If anything is done beyond these powers, that will be ultra vires (beyond the powers of ) the company and so void.

Contents of Memorandum
 

 

Name Clause: The last word in the name of a public company shall be limited and of a private company private limited. The name chosen should not be undesirable or identical to the name of an existing company. A company cannot have a name which violates the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950.

Contents of Memorandum (Name Clause)

 

Kothari Product Ltd. v. Registrar of Companies Parag International (KNP) Ltd. was registered infringing on the name Parag which was a registered trade mark of Kothari. Parag International name was held to be undesirable.

Contents of Memorandum Registered Office Clause:

This clause states the name of the State in which the Registered Office will be situated. The exact address should be communicated within 30 days of incorporation. Every company must have its Registered Office which establishes its domicile. This is the address to which notices and all other communications can be sent.

Contents of Memorandum The Objects Clause:

This is divided into 3 parts: (a) Main Objects (b) Anciliary Objects (Objects incidental or anciliary to the attainments of the main objects) (c) Other objects.

Contents of Memorandum Liability Clause:

 

The liability of the members is limited If limited by shares to the extent of the amount unpaid on the shares, If limited by guarantee, to the extent of the amount undertaken to be guaranteed. In case of an unlimited company, this clause need not be given. Absence of this clause means that the liability of its members is unlimited.

Contents of Memorandum Capital Clause:

Authorised Capital  Different kinds of shares and The face value of each share.


Contents of Memorandum The Association Clause :

 

 

The Memorandum ends with the Association Clause which reads : 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 we respectively agree to take the number of shares in the capital of the company set opposite our respective names. Then follow the names, addresses and occupations and signatures attested by at least one witness for each. The total number will be at least 7 for public companies and at least 2 for private companies.

Change of Registered Office from one state to another or Alteration of Objects

Sec.17 permits change of registered office or change of objects on the following grounds:
1. 2. 3. 4.

5. 6. 7.

To carry on its business more economically and more efficiently. To attain its main purpose by new or improved means. To enlarge or change the local area of its operation To carry on some business which under existing circumstances may be conveniently or advantageously combined with the business of the company. To restrict or abandon any of the objects specified in the memorandum. To sell or dispose of the whole or any part of the undertaking. To amalgamate with any other company or body of persons.

Articles of Association

  

The Articles of Association are rules and regulations of a company framed for the purpose of internal management of its affairs. It deals with the rights of the members of the company inter-se. The articles are framed for carrying out the aims and objects of the Memorandum. The articles of association are subordinate to and are controlled by the Memorandum of Association.

Subject matter of Articles of Association

        

Subject matter of Articles of Association The articles usually deal with the following matters: 1. the business of the company; 2. the amount of capital issued classes of shares increase and reduction of share capital. 3. the rights of each class of shareholders and the procedure for variation of their rights; 4. the execution or adoptioin of a preliminary agreement, if any; 5. the allotment of shares; calls and forfeiture of shares for nonpayment of calls; 6. transfer and transmission of shares; 7. companys lien on shares;

Subject matter of Articles of Association

     

8. exercise of borrowing powers including issue of debentures; 9. general meetings, notices, quorum, proxy, poll, voting, resolution, minutes; 10.number, appointment and powers of directors; 11.dividendsinterim and finaland general reserves. 12.accounts and audit; 13.keeping of books both statutory and others.

DOCTRINE OF ULTRA-VIRES
A Company has the power to carry out the objects set out in the memorandum and also everything which is reasonably necessary to enable it to carry out those objects. Any activities not expressly or impliedly authorised by the memorandum are ultra-vires to the company. An act is said to be ultra-vires (beyond the powers) when it is performed which, though legal in itself, is not authorised by the objects clause in the memorandum of association or the statute. Such an act is void ab-initio and cannot be ratified even by an unanimous resolution of all the shareholders.

DOCTRINE OF ULTRA-VIRES


The doctrine of ultra vires was put in its modern form in the famous case of Ashbury Railway Carriage & Iron Co. Ltd. v. Riche. There may be certain acts which are ultra-vires the directors or ultravires the articles but which are intra-vires the company. If an act is ultra-vires the directors only and the shareholders have ratified it, the company would be bound by it. Where an act is ultravires the articles, it can be ratified by altering the articles by a special resolution. Further, if an act is within the powers of the company, any irregularities can be cured by the consent of all the shareholders.

Effect of Ultra-vires Acts:

 

1. A company may be restrained by an injunction to do an act if it is ultra-vires of its objects. 2. If the money borrowed has been used to pay-off debts which could have been enforced against the company, the lender may sue the company being subrogated or substituted to the rights of the creditors who were paid-off. 3. If the lender can identify his money, or other property purchased with it, he is entitled to what is known as a tracing order and can recover. 4. The lender may hold the directors personally liable for contracting an ultra-vires loan of the company. The directors are liable for damages to the lender for the breach of the implied warranty of authority.

Effect of Ultra-vires Acts:

 

  

5. If any money is unlawfully disbursed, the directors shall be personally liable to make good the amount. 6. Where the officers of the company persuade a third party to enter into a transaction which is unltra-vires the company, an action may lie against them in breach of warranty of authority. 7. An ultra-vires contract cannot become intra-vires by reason of estoppel, lapse of time, ratification or delay. 8. A company can protect its property acquired by an ultra-vires expenditure from outsiders. 9. A company will be liable for torts or crimes committed in the pursuit of its stated objects.

DOCTRINE OF INDOOR MANAGEMENT

The doctrine of constructive notice throws a burden on people entering into contracts with the company that they are presumed to have read the documents, though in fact, they might not have read them. On the other hand, the doctrine of indoor management allows all those who deal with the company to assume that the provisions of the articles have been observed by the officers of the company. In other words, they are not bound to enquire into the regularity of internal proceedings of the company. An outsider is not expected to see that the company carries out its internal regulations.

DOCTRINE OF INDOOR MANAGEMENT

 

Example: The Royal British Bank v. Turquand: The directors of a company were authorised by the articles to borrow on bond by passing a resolution in general meeting. The directors gave a bond to T without passing such a resolution. The question arose whether the company was liable. Held: The company was liable on the bond, as T was entitled to assume that the resolution of the company has been passed in a general meeting.

Exceptions to the Doctrine of Indoor Management:

1. Knowledge of irregularity : The rule does not protect any person who has actual or constructive knowledge of want of authority of the person acting on behalf of the company. 2. No knowledge of articles: The rule will not protect a person who did not consult the memorandum and articles and therefore, did not rely on them. 3. Void or Illegal transaction: The rule does not apply to transactions which are void or illegal ab-initio e.g. forgery.

DOCTRINE OF INDOOR MANAGEMENT (Exceptions)

4. Negligence: If an officer of a company does something which would not ordinarily be within his powers, it is the duty of the person dealing with him to make proper enquiries and satisfy himself as to the officers authority. He cannot rely on the rule if he fails to make such an enquiry. 5. Doctrine does not apply where question is in regard to the very existence of agency: The doctrine cannot apply where the question is not one as to the scope of power exercised by the apparent agent of the company, but is in regard to the very existence of the agency i.e. whether he was an agent of the company. 6. Preconditioin not fulfilled: The doctrine is not applicable where the company has to fulfill a precondition, before exercising its power.

PROSPECTUS


A Prospectus means 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 any shares in or debentures of a body corporate. A document shall be called a prospectus if it invites public subscriptions to shares or debentures or invites deposits from the public.

Formalities to be completed before issue of Prospectus:

  

a)Every prospectus issued on behalf of the company must be dated and that date shall be regarded as the date of publication, unless proved otherwise. b)A copy of the prospectus signed by all the directors or their agent, must be delivered to the Registrar on or before the date of publication. c)SEBIs consent or authorization. d) Evey application for shares or debentures, must be accompanied by a prospectus. e) A prospectus must contain necessary information to enable the public to decide whether or not to subscribe for its shares or debentures. f) Every prospectus must state all the particulars required under Schedule II Part I and II.

Contents of the Prospectus:

Keeping in view the requirements of Schedule II of the Companies Act 1956 and SEBI guidelines for disclosure and investor protection, the prospectus should contain the following information:-

Contents of the Prospectus: 1. General Information:

      

a) Name and address of the Registered Office of the company. b) Details of letter of intent/Industrial licence c) Disclaimer clause of SEBI about non-responsibility for financial soundness or correctness of the statements. d) Names of Stock Exchanges, where listed or where listing applicatioins have been made; e) Declaration regarding minimum subscription and refund of application money in terms of Sch. II of the Companies Act, 1956 and SEBI guidelines. f) Dates of opening, closing and earliest date of closing. g) Names and addresses of Lead Managers, Co-Managers, Trustees (if applicable), Legal advisers to the company, auditors, bankers to the issue, brokers to the issue, Secretary. h) Whether or not credit rating from any agency has been obtained for the proposed debenture issue. As per SEBI guidelines, credit rating is mandatory for debentures with maturity more than 18 months.

Contents of the Prospectus:

  

2. Capital structure and issue details: a) Authorised, issued, subscribed and paid-up capital of the company. b) Size of the issue with break-up of preferential allotment to promoters, shareholders of group companies, financial institutions, mutual funds, NRI, permanent employees, etc. Lock in period for these preferential allotments should be mentioned. Number of shares per employee and total number of permanent employees should be mentioned. c) Paid up capital after present issue and ater conversion of debentures, if applicable.

Contents of the Prospectus:

  

   

3. Details of the issue: a) Authority for the issue and details of resolutions passed for the issue. b) Terms of payment : amount payable on application, on allotment and on calls should be stated. In case of premium issues, the appropriation of application, allotment and call money towards capital and premium should be indicated. For debenture issues having several parts, the appropriate application, allotment and call money towards each part of the debenture should be stated with further split between capital and premium. c) rights of the instrument holders. d) Objects of the issue. e) Tax benefits available to the company and its shareholders. f) Justification for the premium on the issue, if any, disclosure of net asset value on the basis of the last audited results.

Contents of the Prospectus:

    

4. Details about the company management: a) History, main objects and present business of the company. b) Subsidiaries of the Company. c) Promoters and their background. d) Names, addresses and occupation of manager, managing director and other directors including nominee directors, whole time directors and their directorships in other companies.

Contents of the Prospectus: 5. Details about the Project: a) Cost of the Project and means of financing. b) Location of the project. c) Plant and Machinery for the project, technology adopted and process of manufacture. d) Collaboration, performance guarantee or assistance in marketing by the collaborators. e) Infrastructure facilities. f) Utilities like water, power, etc.

     

Contents of the Prospectus: 5. Details about the Project:(contd.)

    

g) Schedule of implementation of the project, with separate details of land acquisition, civil work, installation of plant and machinery and the progress till the date of the prospectus. h) Expected date of trial production and commercial production. i) Nature of the products, consumer/industrial and end users and approach to marketing and proposed marketing set up. j) Export prospects and export obligation. k) expected capacity utilization during the first 3 years from the date of commencement of production for each of the major groups. l) Expected year when the company would be able to earn cash profits and net profits and the expected cash profits and net profits for the next 3 years. m) High/low equity prices of the shares/debentures of the company for each of the last three years and monthly high/low for the last 6 months.

Contents of the Prospectus: 6. Any other information

  

a) Details in respect of any issue made by the company and other listed group companies. b) Declaration about the issue of allotment letter, refunds within 10 weeks and liability to pay interest in case of delay. c) Any outstanding litigation pertaining to matters likely to affect the finances of the company or any criminal prosecution against the company or its directors. d) Particulars of default in meeting statutory dues, institutional dues, dues to holders of instruments like debentures, fixed deposits and arrears of cululative preference shares pertaining to the company or other companies promoted by the same promoters. e) Any material developments after the date of the last balance sheet.

Contents of the Prospectus: 6. Any other information

  

f) Managements perception of risk factors like exchange rate fluctuations, difficulty in getting raw materials, marketing of products. Cost and time over-run etc.. g) Consent of directors, auditors, solicitors, managers to issue, registrar to the issue, bankers and brokers to the issue and experts. h) Changes in directors and auditors in the last three years and reasons for change. i) procedure for making applicatioin and availability of forms, prospectus and mode of payment. j) Procedure and time schedule for allotment and issue of share certificates.

Contents of the Prospectus: 7. Financial information:

    

Auditors Report on : Profit and Loss Account for the past 5 years, Assets and Liabilities combined as well as individually of all its subsidiaries Rates of Divident paid for the last 5 years for each class of shares. And a certificate that such accounts have been examined and found correct.

Contents of the Prospectus: 8. Statutory and other information:

        

a) Minimum subscription as laid down in the SEBI guidelines. b) Expenses of the issue fees to advisers, registrars, managers to the issue and trustees and debenture holders. c) Underwriting commission and brokerage. d) Previous issue for cash or consideration otherwise than for cash. e) Details of public or right issue during the last 5 years. f) Details of premium received in respect of any issue in the last 2 years. g) Commission or brokerage paid on previous issue. h) Debentures and redeemable preference shares and other instruments outstanding on the date of prospectus. i) Optioin to subscribe.

Contents of the Prospectus: 8. Statutory and other information:

    

  

j) Particulars of property purchased or proposed to be purchased out of the proceeds of the current issue. k) Details of directors, proposed directors, wholetime directors, their remuneration, appointment and remuneration of the Managing Director/s. l) Interests of directors, their borrowing powers and qualification shares. m) Any amount paid or benefits given within last 2 years to any of the promoters and consideration for giving the benefit. n) Dates, parties to and general nature of every contract of appointment of Managing Director or Manager and time and place where they can be inspected. o) Full particulars or the nature and extent of the interest of every director or promoter in the promotion of the company and in any property acquired by the company. p) Rights of members regarding voting, dividend, lien on shares, modification of rights and forfeiture of shares/debentures etc. q) Restrictioin on transfer and transmissioin of shares/debentures and on consolidation/splitting. r) Revaluation of assets, if any, during the last 5 years.

STATEMENT IN LIEU OF PROSPECTUS:

If a public company makes a private arrangement for raising its capital then it must file a statement in lieu of prospectus with the registrar at least 3 days before any allotment of shares or debentures. Schedule III contains a model form of a Statement in lieu of prospectus in pursuance of Sec. 70; Schedule IV contains a model form of a Statement in lieu of prospectus when a private company is converted into a public company in pursuance of Sec. 44. If allotment of shares or debentures is made without filing the Statement in lieu of prospectus, the allottee may avoid it within two months after the statutory meeting, or where no such meeting is to be held, within two months of the allotment. Contravention also renders the company and every director liable to a fine up to Rs.1000.

Liability for untrue statement in the Prospectus:

   

Remedies against the Company:Any person who, relying on mis-statements or omission of material facts from a prospectus, takes shares from the company, may (i) rescind the contract to take the shares (ii) claim damages. Rescission of contract: Where a person has purchased the shares of a company on the faith of a prospectus which contained an untrue or misleading, but not necessarily fraudulent statement, he may seek rescission of the contract, return the shares allotted to him and get back his purchase money with interest and get his name removed from the register of members. 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 also claim damages against the company.

Untrue statements in the Prospectus: Remedies against Directors or promoters:

A shareholder who had been induced to take shares may claim from the directors or promoters or from any one else responsible for untrue statement occurring in the prospectus: 1) damages for fraudulent misrepresentation; 2) compensation for untrue statement under Sec. 62; 3) damages for non-compliance with the requirements of Sec. 56 regarding contents of the prospectus.

  

Untrue statements in the Prospectus: Criminal liability of Directors:

Every person who authorised the issue of a prospectus containing an untrue statement shall be punishable with imprisonment which may extend upto two years or with fine which may extend upto Rs.5000 or with both. The accused person, however, may not be liable if he proves a) that the statement was immaterial b) he had reasonable ground to believe and did believe upto the time of the issue of the prospectus that the statement was true.

Untrue statements in the Prospectus: Remedies against the Expert:



The allottee of the shares who has been induced to take shares on the faith of an untrue statement of an expert in the prospectus is entitled to claim from the expert (i) damages (ii) compensation for untrue statement under sec. 62. An expert is liable in damages in respect of his own untrue statement, wrong report or valuation made by him and contained in the prospectus, and the same principles apply as in the case of a fraudulent or an innocent statement made by the directors.