Atul Depak

'Al-Haqqu min Rabbik' (Truth comes from God alone)

CORPORATE/COMPANY LAW I

Photo Credit: Carlos Muza, Unsplash

This Semester

  • Companies Act 2013
  • Insolvency and Bankruptcy Code 2018

Next Semester

  • SEBI Rules
  • Competition Law

Instructions-

  • Browse the MCA website for Latest Company law
  • Read the Business section of Newspapers and also the Economic Times. 

INTRODUCTION TO COMPANIES

A company is defined under S.2(20) of the Companies Act 2013

S.2(20)-Company means a company incorporated under this Act or under any previous company law; 

Incorporation involves-

  • Formation of Company (S.3)
  • Registration with Register 

Effect of registration (S.9)

A new person comes into being which is fiction of law. 

Formation of a Company

Mentioned in S.3 of the Companies Act. It also mentions the types of Companies

Public Company-

  • Any 7 or more persons can incorporate a public company. 
  • It will have right to collect money/shares from public. 
  • There will be no restriction as to no. of members from public. 
  • Min. 25% shareholding should vest with public

Private Company

  • Any 2 or more persons can constitute private company
  • The maximum number is limited at 200
  • Does not have right to offer share to public. 
  • It does not offer free transferability of share. 
  • Approval of board of director is needed. 

OPC-One person company

  • Purpose should be lawful
  • Not against the laws of the nation, public policy, morality, etc

Process involved in incorporation of a Company-

  • Making and signing of the constituent document that include-
    • MoA-Memorandum of Association 
    • AoA-Articles of Association
  • Those who sign are known as subscribers
  • Registrar will tell other requirements for formation of company. 
  • If all legal process has been complied with, the ROC will issue the certificate of incorporation.
  • Once its registered as ‘X’ company, a new person comes into being. 
  • This new person is separate, independent person. 
  • Artificial Juristic Person for the purpose of doing business
  • Legal entity
  • It works for society. 

Political relevance-lobbying 

Philosophy behind Company-Enormous Legal, social, economic, political relevance

Evolution of Companies

  • Can be traced back to England
  • During 17 and 18 centuries, lots of companies were incorporated in UK
  • Process
    • Royal Charter or Act of Parliament
    • They used the word “Body Corporate
  • This process was cumbersome and lengthy 
  • So Businesses were generally in the form of partnership
    • This led to large partnerships
    • To deal with this-concept of representatives to run the business on behalf of others.
    • So “Separation of ownership from management” emerged
    • This led to corruption and misappropriation. 
    • The process became fraudulent
    • So the need of a law to regulate all this was felt.
    • The first legislation which was passed was ‘Bubbles Act 1720
  • Bubbles Act 1720
    • Instead of prohibiting fraudulent practices, they prohibited the formation of a company to run a business.
    • As a result there was lot of setback to business
  • In 1825 the law was repealed. 
  • 1844-Joint Stock Companies 1844
    • There will stock (capital) managed jointly by people.
    • Provided that if you have large partnership, it has to be registered.
    • But still they were known as partnership. 
    • But the act still did not include limited liability. unlimited liability is personal liability. 
  • 1856-JE Stock Companies Act 1856
    • For the first time it allowed limited liability. 
    • The law was amended several times since then.
  • Indian Scenario
    • JE Stock Companies Act 1856
    • Indian Companies Act 1866 which amended in 1882. 
    • Indian Companies Act 1913
      1. Its considered to be one of the best laws on Companies
    • Indian Companies Act 1956 
      1. The act was amended every year till 2002. 
    • The New Companies Act 2013 
  • But Common Law still plays a huge role
  • Certain body corporates like ONGC that are incorporated under their own specific laws. 

Corporations-companies incorporated under their own specific Statutes

Whether there is a constitutional right to form a company?

Yes, right to form association implicit u/a 19 subject to reasonable restriction. 

Darius Rutton Kavasmanek v Gharda Chemicals Ltd 2015 Bom HC

Whether there exist a right to form association for the people who want to form a company? In this case the numerous valuable patents of the company were registered in the name of the Director (who was the controlling shareholder of the company), instead of being registered in the name of the company. The plaintiff said that patents are property rights and should be in the name of the company.  SC said that objections are invited before granting the patents, any objections should have been raised there. The controller of patents takes due diligence in granting patents, and as no objection was raised in time, the SC said the patent is valid. All those who are forming an association for lawful purposes will have the right to form association under art. 19(4) but such right will be subject to reasonable restriction

Lots of flexibility has been given to turn private company into public company into proprietorship, etc

The only way to form a company is through incorporation under the Companies Act 2013. There is no other way. Registration is merely a process. 

For the formation of a public company, at least 7 people are required who will fill the document, sign it and give it to registrar for registration and incorporation. The registrar will give a certificate of incorporation

Corporation is used for those companies that incorporated under their own special statute. 

But all of them are body corporates.

S.2(11) says that body corporate or corporation includes a company incorporated outside India but does not include the following-

  • Cooperative Societies
  • Any other body corporates not being a company which the central government may by notification specify.

The main features of body corporates and company are same but they have been brought into existence in different ways. 

S.1-Talks about applicability of companies act 2013

  • All companies under companies act 2013 and those incorporated under previous laws
  • Insurance co (inconsistent with Insurance Act 1938 or IRDA 1999)
  • Banking co (Subject to Banking regulation 1949)
  • Companies engaged in generation or supply of electricity (subject to electricity act 2003)
  • Any other company governed by special act (subject to that special act)
  • Any such body corporates by any act specified by central govt. (subject to exceptions, modifications, adaptations as specified by the central govt. by notification).

This act extends to whole of India. 

Corporate Social Responsibility (CSR)

Companies have always been authorised to make charitable contributions. Now it has been decriminalised. 

DIFFERENT FORMS OF BUSINESS ORGANISATIONS

  • Sole-Propritership
  • Traditional Partnerships
  • Limited Liability Partnerships
  • Company

SOLE PROPRITERSHIP

Sole person manages the business and earns the profit. It’s not a legal entity. There is no mutual agency because he is the single person. Liability is unlimited. There will be personal liability. When the person dies, the business dies. 

Advantages

  • Ease of doing business
  • No formalities
  • Less expensive 
  • Don’t need authorisation/sanctions
  • Don’t need to have a business space also.
  • Individual party to all contracts.
  • Receives all the income and profits.
  • Starts and ends with the intention of the person. Ends with death of the proprietor also.

Disadvantages

  • Individually liable for all kinds of debt
  • Unlimited liability 

TRADITIONAL PARTNERSHIPS

They are formed under the Partnership Act 1932 which provides that any 2 or more person can form such partnerships. Registration is not mandatory but beneficial. There is upper cap of 100 partnerships. It’s not a legal entity. There is mutual agency ie all partners are agents to each other as well agents to partnership firm. If any unlawful activity is done by any partner, all other partners will also be held liable as well as the partnership firm.

So. Liability is joint, several and unlimited. For criminal offenses, there will be several liability. There is no personal liability but joint liability.  If there is death of one partnership, the partnership will dissolve as per agreement. If the partnership is for a particular purpose, it is dissolved when the purpose has been achieved.

Advantages-

  • It’s not subject to public disclosure
  • Less expensive
  • Lesser formalities 
  • Starts with legal agreement between two or more partners. Ends with reduction (death/retirement) in number to one, dissolution. 

Disadvantages- 

  • Unlimited liability 
  • Jointly and severally liable 

LIMITED LIABILITY PARTNERSHIPS (LLP)

There are under LLP Act 2008. It’s a Hybrid between a Traditional Partnership and a Company. India was the last country to have it. 2 or more persons who are partners can register their partnership as LLP. There is no upper limit cap. It’s a legal entity. At least 2 partners have to be designated partners. There is a limited liability. Partners are agent of the firm but not of each other. They will be liable for the act of the firm and not the act of other partners. There is no personal liability.

Benefits of LLP- 

  • Mutual agency becomes half. 
  • Its considered a Legal entity. All the cases will be filed against the Partnership firm.

You get a shield of independent legal entity. Your relationship with partners is governed by the partnership agreement and relationship with the Partnership firm is governed by the LLP Act. LLP can be dissolved by agreement, voluntary winding up. It’s governed under the provision of LLP Act 2008. Can be wound up by NCLT as well. Company by passing special resolution can wind up. Board of directors may not be party to it. S.63 of the LLP Act 2008

COMPANY

As per S.3 a company can be formed by any 7 or more persons (Public Company); Any 2 or more persons (Private Company); or 1 person (One Person Company or OPC). It’s a legal entity. Companies act gives flexibility that company can have limited or unlimited liability to its members. There is no partnership agreement and no agency relationship. They cannot be agents of the company unless they are designated as such. There is no personal liability. Cannot be wind up voluntarily as per 2013 Act. Now it is done by IBC. Now it can be wound up by the NCLT, IBC. The registrar of Company can strike off the name of company from the register of companies. But it will exist for 20 more years. 

Most flexibility is in sole-proprietorship.

Compliances at 3 levels-

  • Entry Levels-
  • During the Business- 
  • Exit Level- 

Ad-Hocism-Repetitive amendments in Company Law

What is a Corporation?

Entity formed under a Law. It’s A legal entity. It gets 2 roles-

  • Enjoys or is able to acquire legally enforceable rights or interests.
  • Obtains legally enforceable obligations

Legal entity is of 2 kinds

  • Natural 
  • Artificial/Juristic

Corporation is of 2 kinds-

  • Corporation Sole-refers to the office of the person 
    • President of India
    • Mayor of a City 
  • Corporation Aggregate– 

A Company can-

  • Sue
  • Hold property
  • Can be sued
  • Can dispose off property
  • It can be a beneficiary in a trust 
  • Can commit tortuous act
  • Can be victim of tortuous act
  • Enter into contract

S.9-From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.

What differentiates a Company from natural person?

  • Perpetual succession
    • Come to an end only by dissolution.
  • Common Seal and Signature
    • Company cannot sign like Humans
    • Requirement of Common seal has been done away with

ADVANTAGES OF A COMPANY

SEPARATE LEGAL ENTITY/PERSONALITY

Solomon v Solomon and Solomon Co Ltd 1897

Solomon was a shoe manufacturing businessman acting as sole-proprietorship. He formed a company called Solomon and Solomon Co Ltd and transferred the business to the company. He valued the business at 40,000 pounds and sold his business to this newly formed company. He got 20,000 shares of 1 pound each and became a creditor to the company and got 10,000 pound worth of debentures, so he became a secured creditor as an encumbrance was created over the assets of the company. Since UK law required 7 persons to form a company, The members of the company were solomon, 4 sons, daughter and his wife, these 7 members incorporated the company. The other 6 members got 1 share of 1 pound each. The board was composed of Solomon and 2 of his sons. The business went into a loss and after 1 year they decided to wind up the company. The liquidator appointed looked into the assets and liabilities of the companies, the assets were worth 6,000 pounds and the liabilities for secured creditors were 10,000 pounds (to solomon) and 7,000 pounds to the unsecured creditors. Unsecured creditors eventually sued for the debt owed to them. They said the company is an agent in the hands of Solomon and his sons so they should be held liable for the losses. It was held that the company was liable for the debt, not the directors or the shareholders. This is despite the fact that Salomon was the only director, and that he effectively had total control. The House of Lords said that the same hands and mind might be doing the business, but a company has independent existence and is separate from the people conducting the business. There was no sham and Solomon should be paid as a secured creditor. The companies act does not say that the members must be independent or unconnected to the company and each other

Shareholders lend their money to the Company which has separate legal character. So the company will be liable and not Solomon. 

There is no requirement that they need to apply their own mind or have substantial interest in the company. 

The observation in the HoL was that Companies Act says that after incorporation, company will be a separate entity. The Act specifies areas where the Board will decide things, and certain decisions by shareholders and some requiring consensus of both. 

Kandoli Tea Company Ltd, Re (1886):

There was a tea estate belonging to certain individuals who transferred the tea estate to the company. As per the law certain entities were exempt from ‘ad valorem’ duty-a tax on real estate or personal property. When the shareholders transferred the estate to the company, they claimed exemption from this duty. Court said that shareholders cannot demand exemption as company is a separate legal entity, and shareholders are not to be considered ‘owners’ of the company. They are two different legal persons altogether.
Company cannot be ‘owned’ by anyone. 

It was the first case in India on this issue. 

NoteIf a company’s right is infringed, the right party to file a suit is the company and not its shareholders.

Rustom C Cooper v UOI 1970

F

Charanjit Lal Chowdhary v UOI 1951

If the fundamental rights of the company are infringed, the company must institute the suit in its own name, and not any of the shareholders or directors.

Bacha F Guzdar v CIT 1955 SC

Mrs. Guzdar had certain shares in a tea company. As 60% of agricultural income is exempt from taxation, she argued that the dividend she received was the income of the company. The Court stated that once dividend has been distributed to the shareholders, it is no longer the property of the company. Ratio: A Company is a separate legal person in the eyes of the law, and can hold separate property.

  • Limited Liability
  • Transferability of shares
  • Perpetual succession

Lee v Lee’s Air Farming Ltd. : (IMP-must mention in all lifting of the corporate veil questions)

Lee incorporated a company and he was the sole managing and governing director. He also appointed himself pilot of the company. During one of the flight, crash occurred and Mr. Lee died. His wife claimed compensation which workers of the company were to be paid under workmen compensation Act. Is director the worker of the company? 

No, Director is an officer and not worker of the company. But that does not stop him from providing other services to the company as a worker. He was given compensation because when he died he was working as worker/pilot

Lee was the MD of the airline company, and was a pilot of it as well. On one of his assignments, there was an accident, and he died. His wife wanted compensation on the grounds that Lee was a workman of the company. It was given, as Lee was both master and servant at the same time. This is the advantage of corporate form of existence, allowing people to perform such dual roles. 

However, we cannot stretch this to go against public interest. When it does, the court has to lift the veil, and court has to expose the human beneficiaries behind the corporate veil. 

LIMITED LIABILITY

Shareholders of a company are liable in proportion of their share

  • Liabilities limited by shares
    • Has share capital and shareholders
  • Liabilities limited by guarantees
    • It does not issue shares. It has members. The members undertake/give guarantee to pay the amount which they guaranteed to pay if the company goes into liquidation. 
    • Shareholders and Members are different. 
    • All shareholders are members but vice versa is not true.  
  • Liabilities limited by both

The company makes call so that shareholders pay on demand.

Macaura v Northern Assurance Company (1925 HoL)
M created a company and sold his property (timber) to this company. He was the sole-shareholder. Then he filed for insurance of the timber in his own name and not in the name of the company. After some time, the timber was destroyed in a fire and he claimed the insured the money.  The insurance company said that the timber belonged to the company, and not to him-the shareholder, and therefore, he has no insurable interest. On this basis, the claim was rejected. 

Dhulia Amalner Moto Transport Company v R. R. Dharamsi (1953)

A group of partners were running a traditional partnership firm plying buses. After some time some partners formed a company and transferred their buses to the company, and the company started plying buses. The company earned profit. The minority partners who had earlier not agreed for the making of company objected to the dividend or profit receivedThey filed a case against other partners, saying that the buses belonged to partnership, and the they should also get cut of profits. 

Court held that they should have sued the company and not the members as the right party to be sued was the company. Partnership agreement didn’t have any restriction on moving out, so now the buses belonged to the company, as did the profits amounting from that. The Company is a separate entity from partnership, and the partners are merely shareholders of company and not ‘owners’. 

PERPETUAL SUCCESSION

The company will continue its existence in perpetuity until it is dissolved as per the provisions of the Company’s Act by following proper winding up procedure. Winding up precedes dissolution. Only in case ‘Corporate restructuring’ it can be directly dissolved by the order of tribunal.

Underlying PrincipleThe king is dead. Long live the King

COMMON SEAL

Earlier, there used to be a requirement of a common seal, but it has been done away with post 2015, and deleted from Section. 

South London Greyhound Racecourse limited vs. Wake (1931)-In case the seal of the company is affixed without the approval of the shareholders through a resolution, even if the director has attested the document, it will not be valid if the AoA requires that the shareholders should approve it in a GM. 

SEPARATE PROPERTY

It’s an extension of the separate legal personality. The property of the company is only the property of the company and not its shareholders, members, guarantors. 

Macaura v Northern Assurance Company (1925 HoL)
M created a company and sold his property (timber) to this company. He was the sole-shareholder. Then he filed for insurance of the timber in his own name and not in the name of the company. After some time, the timber was destroyed in a fire and he claimed the insured the money.  The insurance company said that the timber belonged to the company, and not to him – the shareholder, and therefore, he has no insurable interest. On this basis, the claim was rejected. 

Bacha F. Guzdar v CIT (1955) 

Ms. Guzdar was a member of a tea company. Earning of tea estate was by law considered agricultural income and only 40% percent income was taxable. Owner was getting dividend, which she considered as income, so she said she must get 60 percent tax exemption on that as well. But this was not considered, as company not equal to shareholder. Company cannot get that exemption as she claimed.

TRANSFERABILITY OF SHARE

It has lots of benefits. It provides liquidity and stability to the company. 

S.44 of the Company Act provides that the share or debentures in a company shall be a movable property.

S.44-Nature of shares or debentures-The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.

CAPACITY TO SUE AND BE SUED

It’s also an extension of the separate legal personality. It can file a criminal case against anyone provided it is represented by someone. It can file a case of defamation as well. It also a right to seek damages. If a criminal case is filed against the company, generally the corporate veil is lifted and the person responsible is punished. 

PROFESSIONAL MANAGEMENT

The company can engage professional managers on its own. It delegates responsibilities to them. It has board of directors. 

FINANCIAL MANAGEMENT

In public companies, the sources of collecting funds and raising capital from public gets widened. It can issue shares, seek loans, preferential allotments, etc. This is not open for private company and partnerships, etc. 

LIFTING OF THE CORPORATE VEIL (CV)

That a Company is a separate legal personality is a Fiction created by Law. A person has its own privacy and so has the company. Only insiders can look inside the veil and not the outsiders. Normally lifting of this veil is not allowed by courts. But there are situations, where some fraud or irregularity is committed behind this veil. In those circumstances it becomes inevitable to lift the veil to hold responsible the guilty person. 

The general rule is that the corporate veil should not be lifted. Only two exceptional circumstances can affect this rule-

  • Statutory Provisions
  • Judicial pronouncement

R v McDonnell 1996

When the need to lift corporate veil arise?

If the defendant is the sole responsible person in the company then it can be presumed that he is behind the irregularity

Eg-A company has 5 directors. 3 our abroad. 2 are here and out of those 2 one is dominant decision maker. If this can be established, then corporate veil can be lifted. 

LIFTING OF CV UNDER JUDICIAL PRONOUNCEMENT

  • Determination of Character
    • Whether the company is working against the country’s interest. 
    • Dainler Co. Ltd v Continental Tyres and Rubber Co. Ltd 1916
      1. A UK company incorporated under UK company’s Act used to sell German Tyres in UK. All directors of the company were also Germans. The issue was whether the company was an enemy company or friend of UK. Its activities were found to be anti-UK and has assumed enemy character. 
    • People’s Pleasure Park Co. v Rohlder 1908
      1. Certain lands were transferred to one person one the condition that he will not furthered transfer it coloured person. After some year the buyer transferred it to a company whose members were Negros. Court said that corporate veil needs to be lifted to find the character of the company. And that transfer to company does not mean transfer to coloured people.
  • For the Benefit of Revenue
    • When the person does an act to gain undue benefit in the name of company, then CV can be lifted to ascertain whether the company has done that or some person.
    • Dinshaw Maneckjee Petit 1927
      • The defendant formed 4 private companies and with each of them he agreed to hold a block of investment into each one of them. And whatever income earned used to be credited to account of these 4 companies. He then handled those income by getting it in the form of loans. 
      • This Person was getting a lot of money, so he incorporated 4 companies which did not have any function, and would get the cash back from him using loans, which would not show as income. Thus, he evaded taxes. Corp veil lifted, where it was seen that the companies were just a veil for evading taxes. 
  • Fraud or Improper Conduct
    • Gildford Motor Company Ltd. v Hall 
      • Principal shareholder of the company was elected Managing director under the condition that during his service, he was not to entice away customers of the company. 
      • After some years, he formed another company, which enticed away the customers of the previous company. 
      • His defence was it was the company taking the customers, not him. This argument was not accepted by the Court. 
  • To determine Government Companies
    • It is a company in which the majority shareholding is by the government. 
    • There are a large number of private companies, but a lot of them have president as shareholder, and some with govt. officers as shareholders. In these cases, government works through these private companies, they can be flexible and conduct commercial functions w/o much interference. 
    • Should these companies be considered as ‘private’ companies by court, or as government companies ? Should the corp veil be lifted to see what the actual nature is? Should govt company be seen as agency or trustee of its members or any other company where it will lose its individuality? 
    • Company which has managerial control will be the holding company
    • It’s a company where govt. holds not less than 51% share. 
    • In case of a govt. Company, there needs to be a check on whether the govt. Company has lost its individuality and whether it is acting as an agent or is acting as a trustee. When a govt. Company performs some function of public nature, it is acting as an agent of the govt . In such a case it loses its individuality in favor of its principal. Such function must be sovereign for a company to be considered an agent and an extension of the govt.. In any other function, the separate individual identity of the company is maintained. 
    • All govt companies are not state or extensions of state. Those who fulfill the conditions laid down in the case of Ajay Hasia and AAI cases
    • Once you are instrumentality of state under Article 12, it holds public trust. CV is lifted to ascertain whether it is merely a govt. company or instrumentality of state.
    • Som Prakash Rekhi vs. UOI (1981) SC
      • There was a company called Burma shell in India, the assets and business of this company was acquired and vested in the central govt in 1981. The requisition had to be through an incorporated company and could not be done by the govt.
      • Some employees had some pending rights in this company and now they claimed those interests (in the nature of provident fund) against the govt. He filed a petition for recovery of his dues and it was dismissed on the ground that the company was acquired by a business that was private in nature and was not an extension of the govt. Therefore no writ jurisdiction could be exercised against the pvt. Company even if the govt. Owned it. 
      • In the SC, Justice Krishna Iyer said that the company was acquired for public interest because it was producing some important product and the new company through which the company was acquired was doing a public duty, even though it was constituted as a private company. As it was doing a public duty, it is an extension of the state and you must lift the corporate veil. He also explained why the govt. Needs to act through a pvt. Company for efficiency. 
  • Whether the Subsidiary is acting as an Agent of the Parent Company
    • If a subsidiary company is formed to act as an agent of holding company, court can lift the corporate veil because that is not allowed.
    • Merely because a company is subsidiary of the holding company does not mean they are one.
    • S.129-Companies are to present financial statement before shareholders every year
    • Rationale-To stop parent company from doing illegal acts in the name of subsidiary. Also under law, both companies have distinct legal personalities
    • State of UP v Renusagar Power Co
      • In case there is a wholly owned subsidiary but act as an agent, corporate veil can be lifted.
      • It was a company incorporated by the state of UP for generation and exclusive supply of electricity. This was found to be an extension of the govt. 
    • Merchandise Transport Ltd v British Transport Commission 1982
      • This company had thousands of vehicles and wanted licences for them but couldn’t do so as it filed an application in its own name by forming a subsidiary company as there was a limit over how many vehicles a company could own. 
      • Court said it can lift the veil to see if they are one company and acting as sham.
    • In which case can business of subsidiary can be considered the business of parent company?
      • Smith, Stone and Knight Limited v Birmingham Corporation (1939)
        • A company acquired a partnership through forming a subsidiary company. The parent company had all shares except few in the subsidiary company and the profits of the subsidiary company were treated as the profits of the parent company. 
        • The managers and effective control of the subsidiary company was in the hands of the parent company. 
        • Another company acquired the subsidiary company through a hostile takeover, the parent company then filed a petition for loses and recovery of compensation for their losses because the relationship between the companies was disturbed. 
        • J. Atkinson gave some grounds for deciding the relationship b/w the parent and subsidiary companies- 
          • Were the profits treated as profits of the parent? 
          • Were the persons conducting the business appointed by the parent? 
          • Was the parent the head and brain of the trading venture? 
          • Did the parent govern the venture, decide what should be done and what capital should be embarked on the venture? 
          • Did the parent make the profits by its skill and direction? 
          • Was the parent in effectual and constant control?
        • In this case the compensation was allowed because the subsidiary company was acting on behalf of the parent company and the takeover disturbed their working. 
      • SAE (India) Ltd v EID Parry (India) Ltd 1998 Mad
        • Parent and subsidiary company have distinct legal personality. 
        • The holding company shall be liable if it offers a guarantee to pay the debt of the subsidiary company. 
  • To ascertain Economic Offenses 
    • Latest Development-Fugitive Offenders Act
    • Santanu Ray v UOI 1989
      • S.11(a) of Central Excise & Salt Act 1944
      • The Veil could be lifted by adjudicating authorities to determine which of the directors behind the company infringed this provisions. 
  • Whether the Company is used for some Illegal/Improper Purpose
    • State of Rajasthan v Gotan Lime 2015
      • There was a partnership firm Gotan Limestones Khanji Udyog which was in the business of mining limestones and held 40 years lease of mining limestone from state govt.
      • This wanted to transfer the licensing of mining to a pvt. Ltd company. So for that purpose it converted itself into a private company from partnership. State Govt. did not object to this change. But after sometime, this company sold its shareholdings to a 3rd company for 160 crores which was alleged to be the cost of lease. 
      • At this point they replaced the directors on board and this company became a subsidiary of ultra-tech cement ltd and got listed on BSE. 
      • Now the state government objected to this. 
      • So they converted them into private company in order to sold the lease to 3rd company
      • Court held that corporate veil can be lifted to ascertain the true nature of the transactions.
  • Determination of Technical Competence of the Company
    • New Horizons Ltd v UOI 1995
      • Dept of telecommunication in Hyderabad invited tenders for supplying telephones, printing, etc. The condition was competency of printing 50K lines. 
      • This company New Horizon was a joint venture. They along with other companies submitted the tender. 
      • One of the respondent got the tender. NHL’s tender was rejected on the ground that as a JV it did not have enough experience.
  • Mere Sham/Cloak 
    • Vodafone International Holdings v UOI 2012
      • For the first time the word sham was explicitly discussed in two context
        • Sham in case of transaction 
        • Sham in the form of entity
      • In both cases, corporate veil can be lifted
      • Lots of bubble/Shell companies for money laundering activities. 
  • Fraudulent Scheme of Arrangement/Compromises
    • Arrangements and compromised falls under corporate restructuring 
    • Arrangements between company and shareholders 
    • Compromise is bw company and customers. 
    • Companies undergo arrangements, mergers, compromise to expand their business, etc.
    • Financial re-engineering 
    • Vodafone Case

LIFTING OF CORPORATE VEIL UNDER STATUTORY PROVISIONS

If any statute is violated then the court can lift the veil to ascertain who is liable. When a company is being wound up and it is found that the company is a defaulter under the IT Act then the company can lift the veil to see who has done the misdeed.

  • Misstatements in Prospectus
    • The prospectus (document inviting others to invest) is issued by company but is drafted by a few and signed by one of the directors. CV can be lifted to ascertain that person. 
    • A prospectus is the face of the company, and people make their decision to invest on the basis of what the prospectus says. The prospectus is obviously created by natural persons, and they should be held responsible. 
    • There is both civil and criminal liability, and the only defence is that those persons sincerely believed that the statement made was true.
      • S.34-Civil liability
      • S.35-Criminal liability
  • Failure to return Application Money
    • When a company issues an IPO, and it doesn’t receive the minimum subscription of 90% of its announced capital, it has to return the application money given to it by those who subscribed within 30 days. If this is not done, the directors are jointly and severally liable.
    • Governed under S.39
    • A company is need of money and it wants to raise capital of 1 crore by raising IPO instead of taking loans. It issues share to public. The minimum subscription for IPO to be successful is to receive 90% of the IPO. It not then IPO fails, then it has to return the money within 30 days then additional interest of 15% per annum will be applicable. 
  • Misdescription of Company’s Name
    • Since the Company is an artificial person, it cannot introduce itself or sign things. Some natural person does this. If the directors whether intentionally or unintentionally describe the name wrongly, they are liable (example, referring ‘A&B’ Company as ‘AB’ Company).
    • Company required to put its name on lots of documents.
    • If its has been put wrongly, CV can be lifted
    • Hendon v Adelman 1973 Delhi HC
      • One of the directors of the company mentioned the company name as LR Agencies Ltd instead of L&R Agencies Ltd.
      • Whether done advertantly or inadvertantly, CV can be lifted
  • Contravention of S.73, 76 and 76A
    1. Related to acceptance of deposits from public
  • S.219-For facilitating the inspector to investigating company’s affairs, CV can lifted
  • S.216-Investigating the ownership of the company
    • Company is not owned by anyone, being a separate legal personality, it owns itself. But since it is artificial, CV can be lifted- 
      • To determine the true person who are financially interested in success or failure of company
      • To determine people who are controlling the policies of company
      • To determine people who had/have beneficial interests in the company

PERSONAL LIABILITY OF DIRECTORS WHEN CV IS LIFTED UNDER STATUTORY PROVISION

  • Section 3A-Statutory minimum requirement of membership. 
  • Section 464-If a company is non compliant of incorporation provisions, then
    the directors of the company can be made liable. 
  • Section 12-If a contract is made mis describing the name of the company,
    then the person making the mis description will personally be held liable. 
  • Section 339-Liability for fraudulent conduct of business
    1. This sec is applicable only during the winding up of the company if it appears to NCLT on an application made to it by the liquidator, creditor or contributories that-
      1. It wanted to defraud any creditor or any other person or
      2. The purpose of company was fraudulent
  • S.464-In case of non-compliance of the norms of the companies act, incorporation advantage can be taken away-
    1. It prohibits association or partnership of person exceeding certain number. The number of partners should not exceed 100 without registration. 
    2. Exceptions
      1. Hindu Undivided Family carrying on any business for gains. 
      2. Under any other special Act
  • Section 138 and 141 of the Negotiable Instruments act 
  • Sections which relate to liability of directors is also valid because the leg
    itself is lifting the corporate veil. 

DISADVANTAGES OF A COMPANY

  • Lifting of the corporate veil
    • This concept does not exists in other forms of business
  • Formality and Expenses
    • Lots of procedures to be followed in incorporating company
  • Loss of Privacy 
    • Disclosure norms are stringent. 
    • Public companies are required to make certain mandatory disclosures. Leads to more accountability
  • Detailed winding up procedure
    • Now IBC and NCLT processes
  • Control by a few
    • A company might have lakhs of shareholders but the controls lies in a few.
    • Only those shareholders who can buy a large stake in the company control the company. 
  • Greater Public accountability
    • By strict statutory compliances 
  • More possibility of fraud
    • Decisions are taken by a select few.
    • Fraud is easy because the company is an artificial person and natural persons who run the company can undertake fraudulent activities in the name of the company.

FORMATION OF A COMPANY

SECTION 3-Constitution of public, private or a one person company. They have to form a memorandum and submit the document to registrar.

Any company can be formed either as a limited liability (limited by shares or guarantee) company or unlimited liability company. During formation, a company also has to present guarantor. 

If there is a change in name of the second person, the name has to be informed to the company and the Registrar of Companies (ROC) But there will no alteration to the Memorandum of the company 

TYPES OF COMPANIES

Private Company

  • Minimum 2 person required. Maximum can be 200
  • Shares not publicly listed 
  • Subject to a lesser number of mandatory disclosures
  • Do not want to be governed by regulatory authorities in the same way as public companies are
  • Owned, controlled and managed entirely by a small group of individuals

Public Company 

  • Minimum 7 members and maximum can be unlimited.

One Person Company

  • Defined u/s 2(62)-it only has one person as a Member. 
  • However, it must be registered as a private company. The person must subscribe at the time of incorporation. 
  • Appoint a nominee at the time of incorporation who shall become a Member in case of the death of the original member or if he becomes incapable of contracting. 
  • The Nominee should give his written consent so there is proof he had agreed to become a Member. His written consent must be registered with the RoC. 
  • What if this clause wasn’t there? Nobody would be able to make decisions for the company.

Why are OPCs preferred over Sole Proprietorships?

  • Separate legal entity – Separate property, can sue and be sued
  • Limited liability
  • Perpetual succession
  • Loan is not the sole responsibility of the Owner
  • Registration is required

Under the 2013 Act, SP can convert to an OPC, and avail the benefits formerly not accrued.

Can a body corporate form an OPC?

No, (allowed under Singapore’s company law) but in India, only a natural person constitutes a ‘person’ for the purposes of an OPC. If an artificial person were allowed to form an OPC, they’d be allowed to circumvent regulations that apply to body corporates, taking action indirectly they wouldn’t be allowed to do directly. SPs are allowed because they gain a separate legal personality which they otherwise didn’t have.

3(1)(c)-OPC is a kind of a private company. It has the following conditionalities attached to it–

  • Paid up share capital-should be less than 50 lakh rupees or such higher amount as may be prescribed but not more than 5 crore rupees
  • Turnover-As per its last PNL account, it doesn’t exceed 2 crore or such higher amount as may be prescribed not exceeding 20 crore rupees.

Other Types of Companies-

  • Statutory Companies
  • Registered Companies
  • Association not for Profit i.e. Section 8 Company
  • Government Companies
  • Foreign Companies
  • Holding and Subsidiary Companies
  • Investment Companies
  • Producer Companies
  • Illegal Associations

Method of conversion of a Pvt Co to Public Co

  • Special Resolution-At least 3/4 of the members must vote in favour of the same.
  • Changing the name of the Company-A private company has the words ‘Pvt. Ltd’ in its name. This must be removed.
  • Increasing the membership-The minimum membership must be not less than seven.
  • Alteration of the Articles (AoA)-Filing of the altered articles with the registrar Alteration to be noted in every copy of the articles

Method of conversion of a Public Co to Private Co

  • Special Resolution
  • Changing the name of the Company
  • Obtaining the approval of the Tribunal (NCLT)
  • As shareholders rights are being affected.
  • Altering the Articles

REGISTRATION OF COMPANIES (S.7)

Once you have decided the type of company, you have to file an application to ROC.

  • Submission of-
    • Memorandum of Association or MoA
      • Includes a charter consisting of 5 clauses/points-
        1. Name of the Company
        2. Membership of the Company
        3. Objectives of the Company
        4. Office of the Company
        5. Capital of the Company
    • Articles of Association or AoA
      1. Regulations of internal management 
    • Declaration of Compliance or DoC
      1. To be filed by secretary, CA or advocate who has been engaged in the formation of the company+any director, manager or secretary of the company who have been named in the incorporation document of the company.
      2. Subscribers to Memorandum
      3. Person incorporating the company will also have to affix their signature
    • Second Declaration
      1. To be filed by subscribers to Memorandum (STM) and First Directors 
      2. That they have not been convicted in relation to any offence relating to any promotion, formation and management of any company.
      3. That they not been found guilty of any fraud, misfeasance (misconduct) and breach of duty to the company under the companies Act or the preceding act or the previous act in the last 5 years. 
    • Third Declaration
      1. That all information provided is correct, complete and true to his knowledge and belief
      2. Information relating to interest of first directors in any other company 
  • Review of documents by RoC
    1. ROC will review the application and issues certificate of incorporation which will bring into existence the company. 
    2. He will also give the Distinct Identification Number (DIN) which is available on MCA Website.

What if any false/incorrect information is given or any material fact has been hidden?

  • If given knowingly, they will be liable u/s 447 of the Companies Act
  • As far as the status of the company is concerned, it will be determined by the NCLT which can pass following orders-
    1. Regulation of management of the company
      1. Changes in MOA, AOA, on ground of public interest
      2. Change the director, name, etc
    2. The liability of the members can be changed from limited to unlimited. 
      1. This is retrospective order 
    3. There can be removal of companies name from the companies register (RoC)
      1. It means the company can no longer run business 
    4. Winding up of company 
      1. This is done in exceptional circumstances 
      2. Once winded up, it cannot revived. 
    5. Any other remedy it may deem fit

Certificate of incorporation (CoI)

This is a conclusive evidence of compliance and date of incorporation 

Moosa Gooam Arif vs. Ebrahim Goolam Arif (1911)

In this case a company was incorporated and the MoA was signed by 7 subscribers (2 adults, 5 minors on whose behalf 1 guardian signed).  Minors are ineligible to contract. Court said that negligence was of ROC which should not have issued the COI. In this case the court said that the certificate cannot be challenged or cancelled.  The remedy is winding up. However, Judicial review is possible when the company incorporated for unlawful purposes, if found that it is unlawful the remedy is to strike of its name from the Registrar or to wind up the company. It cannot be simply cancelled because you cannot kill a person made by law, JR is allowed because something unlawful should not be made lawful by incorporation. 

TV Krishna v Andhra Prabha 1960

There was a newspaper company-Express Newspaper Private Ltd. Under a govt. law on Newspaper Companies, working journalists were to be given increased salary. Meanwhile, the company was sold to Andhra Prabha-a newly incorporated company. The Journalist challenged this sale on the ground that it was deprive them enhanced salary. Court did not cancel the certificate and held that legal persona cannot be ended by cancellation of certificate. 

Saleem Akbar Ali Nanji v UOI Bom HC

Even of the company is incorporated for unlawful purposes, the documents of incorporation cannot be challenged. The only way it cannot be extinguished is by winding up procedure.  

Certification of incorporation is conclusive evidence for-

  1. Date of incorporation 
  2. Compliance

So the certificate cannot be challenged. 

Effect of registration

S.9-From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name

Subscribers to Memorandum and other members will be a body Corporate by the name which has been mentioned in the name clause of the memorandum.

It will be capable of exercising all functions of an incorporated company under the companies act.

  • Perpetual Succession
  • Power to acquire, hold, dispose off property (movable or immovable, tangible or intangible)
  • Power to Contract
  • To sue and be sued under the said name. 

MEMORANDUM OF ASSOCIATION  (MoA)

S.2(56) MoA means memorandum of the company as originally framed or as altered form time to time.

Ashbury Railway Carriage Iron Company Ltd. v Ritchie (1875) IMP

This was one of the first cases to discuss the features and importance of an MoA. It was held that MoA defines the limitations on the powers of a company and contains both positive and negative limitations.

Why does a company needs a MoA? 

A company needs an MoA because it defines the powers and limitations of a company, as an artificial person, its powers must be defined by laying down the objectives beyond which they cannot work. The powers and limitations can be in affirmation or in negative. The MoA serves two purposes, it enables the outsiders to know what are its powers and what is the range within which it can work. Another purpose is that anyone dealing with the company can figure out whether its dealings are ultra vires or not. If ultra-vires then void

Something can be ultra vires the company or the director. Anything which is ultra vires the company (not mentioned in the object clause) is absolutely void but if something is ultra vires the director, it is voidable, and can may be accepted or rejected by the board of directors and the shareholders (ratification)

Eg-If MoA sets the borrowing limit of the company as 50 crores and the company borrows 60 crores, it is void. 

S.4-Explains the Memorandum or MoA and mentions several clauses

  • Name Clause
  • Registered Office clause
  • Object clause
  • Liability Clause
  • Capital Clause
  • The name of a nominee of a one person company (OPC)

NAME CLAUSE S.4(1)(a)

S.4(1)(a)The memorandum of a company shall state the name of the company with the last word-Limited in the case of a public limited company, or the last words-Private Limited in the case of a private limited company

All transactions takes place under this name

Osborn v US 1884

A company must have name to establish its identity. 

The name of the Company-

  • Should not be undesirable in the opinion of Central Govt. It is undesirable when-
    1. Identical or resembles the name of another existing company. 
  • Should not indicate patronage or connection to Government (at any level)
  • The use of such name will be an offense under any law being in existence
    1. Against Public Policy
  • Undesirability is ascertained as per Rule 8 of the Companies incorporation rules of 2014. Some examples are- 
    • The name of the company should not attract the provision of Section 3 of the Emblems and Names (Prevention and Improper use) Act 1950
    • It should not include the name of a registered trademark. 
    • If it includes any word or words which are offensive to any section of people. 
    • The proposed company should not have a similar name to an existing company, such that it indicates that it was calculated with an intention to deceive the public, it should not be allowed. 
  • In case of LLC (Limited Liability Company), it has to use the word “Ltd” as a suffix to its name.
  • If its a private limited company then the suffix “Pvt. Ltd” has to be used. But the central govt. can excuse this requirement for non-profit companies.
    1. Companies for promotion of art, language, culture, religion, etc.

SECTION 12-Liability for Misdescription entails personal liability

LR Agencies v ALR Agencies case

Memorandum is drafted very carefully by lawyers and the registrar has to verify so many things.

Society of Motor Manufacturers and Traders ltd. vs. Motors Manufacturers and Traders Mutual Insurance Company ltd. – the plaintiff was a company that was incorporated in 1902, the defendant company was incorporated in 1922. The plaintiff brought an action against the defendant to restrain them from using the name it was calculated to deceive the people and bank on their goodwill. However, the court said there is no calculated intention to deceive so as to be connected to and associated to other company as the main business of the other company is insurance and anyone with one reading can figure it out. 

Advance Registration of name-

Section 4(4)A person may make an application, in such form and manner and accompanied by such fee, as may be prescribed, to the Registrar for the reservation of a name set out in the application as-

  1. the name of the proposed company; or 
  2. the name to which the company proposes to change its name

If someone wants the name of their future company safe, they can register it. 

The CA allows people to reserve the name of the company. The RoC can reserve the name for a maximum of 20 days (earlier it was 60 days). Within 20 days if the business is not incorporated, it puts a doubt on the intention and the reservation can be cancelled. The promoter will also be liable for a penalty upto 1 lakh. 

The full and complete name must be mentioned at all places and all official documents. The omission of the name must not be by negligence. However it can be accidental. 

Advance Registration-

  1. Name of the proposed the company
  2. Company proposes to change its name.

Cases on the use of the word ‘Ltd’

Durma time ltd. vs. Ashworth (1905)-the omission was accidental
There was BoE (Bill of Exchange) which was to be endorsed by the company and the stamp of the company was to be put on it. The company had a long name and the stamp exceeded the paper size and the ltd. text did not appear on the paper. The court held that the directors cannot be held liable because it was an accidental omission. 

Hendal v Adelman (1973)

In this case the directors were held personally liable for not mentioning L&R agencies ltd, instead of which they wrote LR agencies. This was probably negligence. The exception is section 8 companies (charitable companies) in which the central govt. Can give the license to drop the word ltd. 

Alteration of the name-Mentioned in S.13

This is a cumbersome process as the companies may try to escape their debt. Any alteration can be made by passing a special resolution. It also requires the approval of central govt. And the govt.has given the regional directors the power to approve the names. This must be given in writing. The new name must comply with section 4 (3) & (4). The approval of the central govt. Is not required in case the only thing required is the deletion or addition of the word ‘pvt.’ . The alteration of name does not affect the rights and obligations of the company, and the alteration becomes effective only when it is registered with the RoC.  The constitution of the company (MoA and AoA) does not change. Once the name change is accepted, Central govt. will issue a new certificate of incorporation. The new name becomes effective from the date of incorporation.

S.12-The company has to publish its name. 

Reliance Case study-(Look at the MoA and AoA of the reliance industries) It earlier was registered as mynylon, in 1977 it was registered as Reliance textile ind. Pvt. ltd. it also shifted its registered office from Karnataka to Maharashtra. It in 1985 changed to Reliance. Each time the MoA is altered the RoC has to issue a fresh certificate of incorporation

REGISTERED OFFICE CLAUSE  S.4(1)(b)

This is the 2nd clause of the MoA.This is also an Important clause.

S.4(1)(b)The memorandum of a company shall state the State in which the registered office of the company is to be situated.

Also mentioned in S.12-

S.12 Registered office of Company-

  1. A company shall, on and from the 15th day of its incorporation and at all times thereafter, have a registered office capable of receiving and acknowledging all communications and notices as may be addressed to it. 
  2. The company shall furnish to the Registrar verification of its registered office within a period of 30 days of its incorporation in such manner as may be prescribed. 
  3. Every company shall-
    1. (a) paint or affix its name, and the address of its registered office, and keep the same painted or affixed, on the outside of every office or place in which its business is carried on, in a conspicuous position, in legible letters, and if the characters employed therefor are not those of the language or of one of the languages in general use in that locality, also in the characters of that language or of one of those languages; 
    2. (b) have its name engraved in legible characters on its seal, if any;
    3. (c) get its name, address of its registered office and the Corporate Identity Number along with telephone number, fax number, if any, e-mail and website addresses, if any, printed in all its business letters, billheads, letter papers and in all its notices and other official publications; and 
    4. (d) have its name printed on hundies, promissory notes, bills of exchange and such other documents as may be prescribed
    5. Provided that where a company has changed its name or names during the last two years, it shall paint or affix or print, as the case may be, along with its name, the former name or names so changed during the last two years as required under clauses (a) and (c): 
    6. Provided further that the words-“One Person Company” shall be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved. 
  4. Notice of every change of the situation of the registered office, verified in the manner prescribed, after the date of incorporation of the company, shall be given to the Registrar within fifteen days of the change, who shall record the same. 
  5. Except on the authority of a special resolution passed by a company, the registered office of the company shall not be changed,-
    1. (a) in the case of an existing company, outside the local limits of any city, town or village where such office is situated at the commencement of this Act or where it may be situated later by virtue of a special resolution passed by the company; and 
    2. (b) in the case of any other company, outside the local limits of any city, town or village where such office is first situated or where it may be situated later by virtue of a special resolution passed by the company: 
    3. Provided that no company shall change the place of its registered office from the jurisdiction of one Registrar to the jurisdiction of another Registrar within the same State unless such change is confirmed by the Regional Director on an application made in this behalf by the company in the prescribed manner. 
  6. The confirmation referred to in sub-section (5) shall be communicated within a period of thirty days from the date of receipt of application by the Regional Director to the company and the company shall file the confirmation with the Registrar within a period of sixty days of the date of confirmation who shall register the same and certify the registration within a period of thirty days from the date of filing of such confirmation. 
  7. The certificate referred to in sub-section (6) shall be conclusive evidence that all the requirements of this Act with respect to change of registered office in pursuance of subsection (5) have been complied with and the change shall take effect from the date of the certificate. 
  8. If any default is made in complying with the requirements of this section, the company and every officer who is in default shall be liable to a penalty of one thousand rupees for every day during which the default continues but not exceeding one lakh rupees.

Every company needs to have a registered office to which people can send notices and get information. It is the place where the company wants all communication to be received.

  1. When the registered office has to be changed or shifted in the same city or town, it does not require any approval from the authorities it can just let them know
  2. If the office is to be shifted from one city to another in the same state, the company needs to obtain a special resolution from the shareholders, it need to be informed to the RoC in 30 days. 
  3. If from one state to another, you need a special resolution and then must get the approval of the central govt. within 60 days. The central govt. Must be satisfied that the alteration has the approval of shareholders, creditors and debenture holders. The central govt. Will also check whether adequate arrangements have been made to discharge the debt or liability o the creditors of that state. After the central govt. Disposes the application within 60 days, the office must be registered with the RoC of the new state who will then issue a new certificate of incorporation. 
  4. Clauses-
    1. Name of the State
    2. Place of its domicile (City)
    3. Address at which the company’s Statutory books (account books, audits books, etc) are normally kept and notices/Communication received. 

Three kind of changes

  1. Change from one place to another in the same city
    1. Company just need to pass a resolution by board of directors
  2. Change from one city to another in the same state
    1. Special resolution of shareholders is required 
  3. Change from one state to another State
    1. Longest procedure. 
    2. You need a special resolution of shareholders 
    3. Settlement of creditors (both secured and unsecured) and once it is done obtain the consent by sending them explanatory notices mentioning the reasons behind the shift. Then call a meeting and obtain their consent. 
    4. Debt of the credits must be settled and if not the company must have enough resources to settle those debts within a definite time period.
    5. and then must get the approval of the central govt. within 60 days. 
    6. If the company gets the approval, the company would move to RoC with all the documents which will remove its name and then it will go to new RoC of the state which will issue a new certificate of incorporation. 

As per Rule 25 of Companies Incorporation Act, RoC will verify all the documents. 

OBJECT CLAUSE S.4(1)(c)

(Imp)

S.4(1)(c)-The memorandum of a company shall state, the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof

A company at any time cannot do anything at anytime as it affects the interest of a large number of people. So it has to work according to its object. Its imp from the point of the view as it provides protection to-

  1. Creditors
    1. They have the full right to know the objects of the company before providing money 
  2. Shareholders 
    1. Shareholders must be made aware of where their money is utilised and invested.
  3. Public at large 

Rationale for Object Clause-

  1. Shareholders money must be directed towards a defined object so that the shareholders know where their money is utilised.
  2. For the interest of creditors – they have a right to know the objects for which they are lending the money.
  3. It should be defined in general public interest. 

SHARE CAPITAL CLAUSE S.4(1)(e)

S.4(1)(e)-The memorandum of a company shall state, in the case of a company having a share capital-

  1. the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe which shall not be less than one share; and 
  2. the number of shares each subscriber to the memorandum intends to take, indicated opposite his name

Company has to mention in its MoA its capital known as ‘Authorised Capital’ or ‘Registered Capital’ It also known as nominal capital. This is the maximum extent of capital the company can raise. It also has to specify the type of shares it is coming up with ie, Equity or Preference shares and the number of such shares being issued by the company. A company cannot raise more than the authorised share capital. Equity shares are the ones which are equal in denomination generally. 

Eg-If a co has 1 lac equity shares of Rs. 100 each then it would be able to raise 1 crore. 

At the same time it may also issue preference shares where holders of such shares are given preference in dividend and do not have voting rights. It may issue 50,000 preference shares of Rs. 150 each then 75 lac would be preference share capital. A combination of both of them would be total share capital of the company. Nominal value is the face value of shares.

Illustration

If the nominal capital is 15 core. 

Divides it into two-

  1. Equity Shares-Equity shares are the ones which are equal in denomination generally
    1. 14 crore will be equity shares 
    2. The value will be 10 per share. It will never fall below this level
    3. Can be divided into several clauses
      1. Preferential
      2. Deferred 
      3. Qualified
      4. Special Rights 
    4. Right to vary, modify, alter, amalgamate
  2. Preferential Share-holders of such shares are given preference in dividend and do not have voting rights.

To increase share, ordinary resolution is required u/s 48. But reduction is not that simple. Reduction is as per S.66. It requires tribunals approval. 

S.66-Reduction of share capital-Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner.

DOCTRINE OF ULTRA-VIRES 

Ultra-vires means beyond the power. Anything done outside the scope of the object clause (mentioned in the MoA) would be outside the powers of the company and hence, void ab-initio. Objects clause provides an area within which the Company has to restrict itself, and cannot go beyond. So the objects clause defines the activities of Company and limits it. It provides the negative stipulation that the Company cannot go beyond objects of company, and if it does, its actions will be null and void. 

For example-If a Director has been granted the power to enter into contracts up to 50 lakhs, and he eventually contracts for 70 lakhs without permission, then he is not acting within the limits of his power. He will be personally liable.

If any statute is violated then the court can lift the veil to ascertain who is liable. When a company is being wound up and it is found that the company is a defaulter under the IT Act then the company can lift the veil to see who has done the misdeed. 

Different types of Objects-

  1. Main Object
  2. Incidental/Ancillary Object
  3. Other Objects (Now stands repealed)
  4. Any other object as per the provisions of the company’s Act. Its a kind of extension of Incidental Object

DISTINCTION BETWEEN OBJECTS AND POWERS OF A COMPANY

Objects clause gives the area within which the company has to restrict its activities. It gives a negative stipulation that anything beyond that would be ultra vires. Any such activity would be null and void.

Ashbury Railway Carriage and Iron Co. v Reche (1875)
The Co. was incorporated to manufacture and sell railway carriages, etc and to act as mechanical engineers and general contractors. They entered into contract with Reche-a financing company for construction of railway line in Belgium. The company later repudiated the contract on the ground that it is beyond the scope of object. Reche took them to court on two-grounds-first, that it comes within the objects of the company and second that most shareholders had ratified the contract.
With regard to the first reason according to Reche, construction of railway line falls within the scope of general contractor, and it will fall within general construction. Court said that it will have to be seen holistically, along with mechanical engineering and ‘railway carriages, etc’. The general contractor work must be related to the mechanical engineering, and could not be any general contractor work. Hence, Reche failed. And then the second reason fell because you cannot legitimise any action which is ultra vires of the company. 

Attorney General v Great Eastern Railway Company (1880)
Ashbury was confirmed, but court over here said that the doctrine should be applied reasonably and not unreasonably. Strict application of doctrine should not result in incidental and ancillary objects being considered ultra vires

A Lakshmana Swami Mudaliar v LIC 1963

The directors of the co were authorised to make payments to charitable/benevolent objects or for general public useful object. Meanwhile, LIC took over the company. They made 2 lac payment to a trust after shareholders approved it. In LIC, directors could make payment only for a purpose useful for attainment of company’s object. So it was held to be ultra-vires. 

Also laid down-

  1. Company’s fund cannot be diverted to any kind of charity even if there is an unrestricted power to that effect in the memorandum. 
  2. Objects must be distinguished from powers of the company. 
  3. Powers don’t become independent object themselves. 

Lee Behrens & Co Ltd Re (1932)

What kind of grants/charity extended by company would be considered valid? Laid down 3 pertinent questions-

  1. Is the transaction reasonably incidental to carrying on of company’s business?
  2. Is it a bona-fide transaction?
  3. Is it done for the benefit and to promote the prosperity of company?

Hutton v West Cork Railway Co 1883

The directors of the company proposed to distribute the money received on sale of assets to the employees of the company who had lost their jobs. Its ultra-vires because it doesn’t promote the prosperity of the company. 

E Hannibal & Co Ltd v Frost 1988

Directors of the company proposed to give 5 hundred pounds to widow of a former director 5 years. It was held to be ultra-vires.

Main Objects Rule of Construction: shows how we are to construe the main object of a company.

German Date Coffee Co. , in Re (1882)
German company manufactured coffee from dates, and their main objects were-

  1. Obtain a german patent for manufacturing coffee from alternative sources-dates
  2. Obtain other patents required for manufacturing and improving the product.
  3. To acquire/purchase any other invention for the similar purpose 

Company got a Swedish patent, established a manufacturing plant in Hamburg, and started selling coffee. Case was filed because the main object was that they should sell the coffee using a german patent, and they couldn’t bypass the main object through ancillary object and use a Swedish patent instead. 

Court recognised the main objects rule of construction and said that main object cannot be set aside. 

EFFECT OF DOCTRINE OF ULTRA VIRES

Every ultra vires contract would be null and void and cannot be ratified even later on and even 3rd party cannot be allowed to take benefit from it. There are certain consequences and exceptions to ultra vires contract.

REMEDIES OF ULTRA VIRES CONTRACT

  1. Any member of the co can get an exemption to the performance of the contract
  2. Personal liability on the directors can be imposed
  3. Breach of warranty of authority – when directors are transacting on behalf of the company then they are agents of the company and cannot go beyond the authorised mandate i.e., authorised transactions and in that case they can be made personally liable. So they have to act according to the memorandum of the company.

Injunction 

Personal Liability of Directors- 

Exchange Banking Co Re (1882)

Jehangir R Modi v Shamji Ladha 1886 Bom

Breach of Warranty of Authority 

Weeks v Propert 1873

The company was authorised (under its constitution) to issue debentures the the extent of 60K Pounds. It issued advertisement inviting people to give loans on these debentures even though it has already exhausted the limit. A person gave 5K loan. The director accepted that and issued the debenture to him. This was held to be ultra-vires. The director was personally liable. 

ULTRA-VIRES ACQUIRED PROPERTY 

If the company’s money has been spent in purchasing property but the transaction is ultra-vires. In such situation, the company has a right to acquire that property. Although the transaction is ultra vires even then the company would remain the owner of the property because company’s money has been spent on it.

ULTRA VIRES CONTRACTS-VOID-AB INITIO

They will be null and void and cannot be ratified by estoppel or by ratification. They cannot be consented or assented by lapse of time or by delay or by acquiesce. Because we are not talking about the legality of the contract but about the competency of the company to contract and it is beyond the capacity of the company to contract so it cannot be ratified. This was given by Lord Justice Salmond.  Ashbury case held that such contracts are void ab initio and hence cannot be made intra-vires by-

  1. Estoppel
  2. Lapse of time
  3. Acquiescence/verification of shareholders
  4. Delay 

ULTRA-VIRES TORTS

A Company can be held liable for tortious activity even when it arises out of ultra vires contracts. This doctrine says tat you should be aware of the objects of the company while entering into business of the company. Cases of tortious liability are different from the contracts and the person need not know about the objects of the company for holding the company liable. There is no application of doctrine of ultra vires in general.

Two things to be established for making the company liable for torts-

  1. That the activity falls within the scope of the memorandum of the company
  2. The servant committed the tort within the course of within the course of the employment. 

ALTERATION OF THE OBJECT CLAUSE

The object clause is necessary to protect the interest of shareholders.

Procedure of amendment is given in S.13(8) and Rule 32 of the Company Rules. It requires-

  1. Special Resolution
  2. Notice with adequate details
    1. Advertisement on website, etc
  3. RoC approval

S.13(8)-A company, which has raised money from public through prospectus and still has any unutilised amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and-

  1. the details, as may be prescribed, in respect of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating therein the justification for such change; 
  2. the dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with regulations to be specified by the Securities and Exchange Board

UK doesn’t have Doctrine of UV

Canada Trust v Lloyd 

Company Liability limited by Shares S.4(1)(d)

S.4(1)(d)-The memorandum of a company shall state the liability of members of the company, whether limited or unlimited, and also state,-

  1. in the case of a company limited by shares, that liability of its members is limited to the amount unpaid, if any, on the shares held by them; and 
  2. in the case of a company limited by guarantee, the amount up to which each member undertakes to contribute— 
    1. (A) to the assets of the company in the event of its being wound-up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member, as the case may be; and 
    2. (B) to the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories among themselves;

Company will have to make a call within on year.

Company Liability limited by guarantee

This has no shareholders but members. At the time of subscription, members give the guarantee to make the payment towards the assets of the company as and when required 

Unlimited Liability Companies,

In case of unlimited liability companies, the MOA will have to mention that the liability is unlimited. 

How to change the liability clause? 

By converting itself into a different company as provided u/s 18

S.18-Conversion of companies already registered-

  1. A company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of this Chapter. 
  2. Where the conversion is required to be done under this section, the Registrar shall on an application made by the company, after satisfying himself that the provisions of this Chapter applicable for registration of companies have been complied with, close the former registration of the companyand after registering the documents referred to in sub-section (1), issue a certificate of incorporation in the same manner as its first registration
  3. The registration of a company under this section shall not affect any debts, liabilities, obligations or contracts incurred or entered into, by or on behalf of the company before conversion and such debts, liabilities, obligations and contracts may be enforced in the manner as if such registration had not been done

If a limited liability company wants to convert itself into unlimited liability company, it requires re-registration. 

ARTICLE OF ASSOCIATION (AoA)

S.2(5)Articles means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act

AoA comes next to memorandum.

AoAs are the internal rules, regulations and by-laws that govern the relationship bw company and the members and the members inter-say

It is drafted by the company and members.

It provides for organisational structure of the company, 

A company may have different directors with different powers. There are three types of directors in the company-

  1. Executive Directors (whole time employment), 
  2. Independent directors (part-time employment), 
  3. Non-Executive directors (may or may not be in whole time employment)]

It provides for the allocation of power to and between different organs of the company.

It prescribes procedure for decision making

It provides for additional power to shareholders. Shareholders get substantive power from the Company Act. But the detailed procedure is mentioned in the AoA. 

Entrenchment Provisions

S.5(3)The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with

S.5(4)The provisions for entrenchment referred to in sub-section (3) shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company

S.5(5)Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed

In order to pass an agenda, AoA may provide for super-special majority. 

If it does not have an entrenchment clause, it may alter the AoA to include the entrenchment clause. 

AoA has to be drafted from scratch, Model AoA is given in Table F (Public company with shares), G, H, I, J. 

Requirements-

  1. Forms and Sign of AoA
  2. It should be printed
  3. Divided into para
  4. Numbered consecutively
  5. Each subscribers to the MoA has to sign the document-one witness

Content-

As per the UK Company Act, AoA is most important but in India, it is the memorandum because of the Object clause.

Content should be subject to the Company Act, MoA

Johnson v Football Club Ltd

Power of shareholders to proceed against the company comes from the Company Act. Any clause/provision of AoA restricting this power is void as its against public policy.

Noble v Layette Investment ltd 1978

Clauses were contrary to UK Corporations Act and hence held void.

S.123 provides that no dividend can be paid out except out of profit.

S.123-Declaration of dividend-

  1. No dividend shall be declared or paid by a company for any financial year except-
    1. out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2), or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or out of both; or 
    2. out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government

Two companies with different objects cannot merge.

Relationship b/w MoA and AoA is governed by S.6

S.6-Act to override memorandum, articles, etc

Save as otherwise expressly provided in this Act-

  1. the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its Board of Directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and 
  2. any provision contained in the memorandum, articles, agreement or resolution shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be

Ashbury v Watson laid down that-

  1. AoA is subordinate to MoA. 
  2. AoA governs procedural aspect of company. Members have control over it and can change it by special resolution.
  3. MoA cannot be controlled by the members. 
  4. MoA is more fundamental document and can be altered only under some circumstances. For altering MoA, permission of shareholders, creditors, central govt is required
  5. Internal procedures provided in AoA do not exceed the power of the company laid down in the MoA. 

Allen v Cold Reefs of West Africa Ltd (1900)

In India, companies have power to amend the articles. 

S.10 provides for the binding force of MoA and AoA

S.10-Effect of memorandum and articles-

  1. Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles. 
  2. All monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company

No companies can be incorporated without drafting them. MoA sets relationship bw the company and outsiders while AoA sets relationship bw the company and insiders. 

1. That the company is bound to members and members are bound to company

2. Whether and to what extent the company is bound to outsiders (creditors, etc)

3. To what extent members are bound inter-say? 

Peveril Gold Mine Ltd Re 1898

Wood v Odessa Waterwork Co 1889

Barland’s Trustee v Steel Bros and Co Ltd 1901

When one of the shareholder became bankrupt-

Held that members are bound by every clause of the AoA. Contracts contained in the AoA of the company is the original intent of the company and members are bound by it.

Whether and to what extent the company is bound to outsiders (creditors, etc)

They are bound as it is mentioned in the MoA. No unlimited liability 

Two doctrines (IMP)

  1. Constructive Notice (favours the company over outsiders)
  2. Indoor Management (favours outsiders over the company)

AoA of the company does not bind the company to outsiders. 

Even a member can be outsider. (As a shareholder) He will work in dual capacity.

S.2(55)-Subscriber to MoA, shareholder

Eley v Positive Govt. Security Life Assurance Co 1876

AoA contained that plaintiff should be solicitor to the company and should not be removed unless there is misconduct by him. He was also a member. In the capacity of solicitor, he becomes an outsider. He was removed later as solicitor. In filed a case, that company violated the provisions of AoA. His petition was dismissed as he filed in the capacity of solicitor and AoA does not govern relationship bw company and outsiders.

Whether members are bound to members?

A company has members A, B, C and D. A stays in Delhi. B stays in Chennai. Per say they are not bound to each other but that is a contested issue. But if a member wants to file a case against another member for breach of his membership right, he can do so through the company. 

Rayfield v Hands 1960

Rayfield was shareholders of the company. AoA provided that shareholders can sell it to members. 

Court held that directors are members and Rayfield can enforce his right against him.

Hill Properties ltd v UBI 2014

The co allotted flat to its members on full payment. P took loan from the bank to get the flat and to get the loan he has to mortgage to flat itself. When he became defaulter, the bank took away the flat.  Irrespective of what is written in the AoA, Bank is governed by its own statute. Any statute will prevail over AoA as AoA does not have the force of the statute. 

ALTERATION OF ARTICLES

S.14-Alteration of Articles-

  1. Subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alterations having the effect of conversion of— 
    1. (a) a private company into a public company; or 
    2. (b) a public company into a private company: 
    3. Provided that where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, the company shall, as from the date of such alteration, cease to be a private company: 
    4. Provided further that any alteration having the effect of conversion of a public company into a private company shall not take effect except with the approval of the Tribunal which shall make such order as it may deem fit. 
  2. Every alteration of the articles under this section and a copy of the order of the Tribunal approving the alteration as per sub-section (1) shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days in such manner as may be prescribed, who shall register the same. 
  3. Any alteration of the articles registered under sub-section (2) shall, subject to the provisions of this Act, be valid as if it were originally in the articles

The AoA cannot have a clause which can takeaway the right of shareholders to alter to AoA by special resolution. 

It shouldn’t be against the Act and MoA. 

Hutton v Scarborough Cliff Hotel Co Ltd 1865

A resolution was passed which altered the articles by inserting the power to issue new shares with preferential dividend. This is invalid as share capital is the domain of MoA

Conversion of Private Co into Public Co

Alteration to AoA can lead to conversion of Pvt co into Public Co. If that happens it would be deemed to be public co since the date of alteration certification is issued.

But to convert Public co into pvt co, approval of tribunal is required as per S.14. 

Inconsistency bw ‘Shareholders Agreement’ and AoA (IMP)

In such case, AoA will prevail. 

VB Rangaraj Case v VB Gopal Krishnan and Ors 1992 SC (IMP)

Held that  shareholder agreement if contrary to AoA will not be binding either on the company or on shareholders

World Phone India Pvt Ltd v WPI Group Inc USA 2013

When the affirmative rights granted to shareholders are inconsistent to AoA and AoA is silent on this issue, its an indication of inconsistency. Affirmative rights are a kind of consent, veto right that has to be exercised collectively.  

Vodafone Intl Holdings Ltd v UOI 2012

Restrictions imposed under shareholder agreement provisions although may be in compliance with other laws, but they become enforceable only when they are incorporated in the AoA

Umesh Kumar Bareja v IL&FS Transportation Network Ltd 2014 Delhi HC

Two companies Rahi and IL&FS collaborated to form an airport company and for that purpose made a SPV. As per the shareholder agreement Rahi was to make investment of 30 crore and acquire 60% stake and the ILFS was to make 20 crore investment and acquire 40% stakes. When shares were not allotted to ILFS, the matter was referred to Arbitration as per shareholder agreement. But this provision was not inserted in the AoA. Therefore they could not do arbitration.

S.10A-It provides that a company that has been incorporated after this ordinance cannot commence the business unless a declaration is filed by the director within 180 days of the incorporation that every subscriber to MoA has paid the value of the shares taken by him. This is applicable to companies having share capital (public or private)

Before this provision was inserted, companies were not required to obtain certificate of commencement of business. 

If RoC so believes, he may remove the company’s name for non-compliance. 

RELATIONSHIP B/W EMPLOYMENT CONTRACT AND AOA

If you are in the employment and your Employment Contract is based on AoA.  If AoA fixes remuneration as 1 lac. 1 year later the company alters the AoA and reduces the salary to 75K. Automatically the salary would reduce as it was based on AoA. But that would not be the case, were  the EC was independent. He could sue for breach of contract. 

Two common law doctrines-

  1. Doctrine of Constructive Notice
    1. There is presumed notice that any person entering into contract with company has read the notice
  2. Doctrine of Indoor management

CASES ON CONSTRUCTIVE NOTICE

Kotla Venkataswamy v Chinta Rama Murti Mad HC (IMP)

Plaintiff accepted mortgage deed signed only by Working Director and Secy. During the currency of the mortgage, the company sold the property to the defendant. Plaintiff sued. Court said, there was presumed notice and plaintiff should have read and signed. He is also presumed to have understood the terms in the proper meaning. That he should understand companies powers and powers of his officers. READ

All those clauses which deal with the powers of the company, constructive notice doctrine will apply to them.

In some cases it has been held to be unreal doctrine

In India too, this doctrine is not applicable in all cases. 

Dehradun Mussoorie Electric Tramway Co v Jagmandar Das 1932 Allahabad HC

AoA of this company provided that director could delegate all his/her powers except the power to borrow. They used to have managing agents of company who borrowed a sum of money from defendant in the form of overdraft without the approval of director. Question was of recovery of this amount. Court said that since this was a temporary loan which was taken during the operation of business so constructive notice shall not apply

DOCTRINE OF INDOOR MANAGEMENT

This is exactly opposite to constructive notice. In the latter company was protected against outsiders. But here outsiders are protected against the company. 

Rationale-People can know external positions of the company but they cannot be supposed to know the internal positions of the company.

Royal British Bank v Turquand 1856

Directors of a company borrowed money from plaintiff and AoA provided that directors can borrow money from time to time after due approval of shareholders in a general meeting. Bank read those articles and gave money when asked by directors. When the bank asked for repayment of loan, the company refused saying it did not pass any resolution sanctioning the loan. Bank was held entitled to recover the loan.

Exceptions to doctrine of indoor management-

Over a period of time, this doctrine has not been expanded but exceptions has been created

  1. Knowledge of irregularity
  2. Suspicion of irregularity
  3. Forgery
  4. Representation through Articles/Cases of Negligence 
  5. Act outside apparent authority 
  6. No knowledge of AoA

Knowledge of Irregularity 

That the outsider had knowledge of irregularity. 

Suspicion of irregularity

It is quite similar to knowledge of irregularity 

Forgery

Void/illegal. Absence of Consent of company. 

Ruben v Great Fingal Consolidated 1906

South London Greyhound Racecourse Ltd v Wake 1931

Representation through Articles

That a person who contracts with a director of the company knowing that the board has power to delegate its authority to this director then that person may presume that this power has been exercised. If director makes such representation, then the person should not assume that he has the delegated power but should verify it. If he fails to verify, its his negligence and he will not get the benefit of indoor management

X contracts with director of a company knowing that the board has power to delegate its authority to this director then X may presume that this power has been exercised. If there is no express delegation in AoA, he has to verify it.

Houghton & Co v Nothard Lowe and Wills Ltd 1927

The outsider takes a reasoned decision after reading the AoA. 

If delegation clause is expressly mentioned, he can act on it but if there is unusual condition, he should verify the delegation. 

Anything ultra-vires of authority of director is voidable at the instance of shareholders. 

Act outside Apparent Authority 

An outsider accepted the property of the company given to him by the company’s accountant. It was outside the apparent authority of accountant. Such power rests with board of directors.

Anand Bihari lal v Dinshaw & Co (1942)

This person received the property of the company by the accountant and it was held 

No knowledge of AoA

Ignorance of Law is not an excuse/bliss. AoA is a public document available on company’s website and at office.

PRE-INCORPORATION CONTRACTS 

Are the valid? To what extent?

Validity 

  1. The period before 1963
    1. The settled rule was that a company comes into existence after incorporation.
    2. Before incorporation, its not a person and therefore cannot enter into contract. 
    3. Common Law Rule
    4. Keler v Baxter 1866
      1. Held that in order to enter into contract, two or more legal entities are required and a company in its pre-incorporation stage is not a legal entity.
    5. Shares cannot be acquired/issued before incorporation
    6. It has no taxable income before incorporation
    7. AP Tourism Development Corp v Pumpa Hotel Ltd 2010
      1. An Arb Agreement was held to be invalid as it was entered into when the company with which it was made was non-existent. 
    8. Two principles-
      1. It cannot sue before incorporation 
      2. It cannot be sued before incorporation

Natal Land and Colonisation Co v Pauline Colliery Syndicate  1904

A company cannot avail the benefit of contract in its pre-incorporation phase by any means.

Period after 1963 (Specific Relief Act came into being)-

S.15(h)-Where a promotor enters into a contract before incorporation for the purpose of company and if the contract is warranted by terms of incorporation, the company may adopt and enforce the contract.

S.19(e)-It allows the outsiders to enforce the contract against the company in two situations-

  1. If the company had adopted it after its incorporation.
  2. The contract is within the scope of the terms of incorporation

If that (relief) is not granted, the remedy- 

Whether there is a personal liability of contracting agent?

General Principle – Where the contract is made and both parties know that the company is a non-entity before incorporation, the promoter can be made personally liable. 

But if he drafts the contract in such way mentioning that he is merely the agent if the non-existing company, it can save him from personal liability. But this is not an absolute remedy. 

Kelner v Baxter 1860

P intended to sell wine to a company yet to be formed. He agreed to sell it to the proposed directors. They intended to buy the wine on behalf of the company but because company was non-existent, they personally took the delivery by putting their signatures. Had the company been in existence, it would have accepted the delivery by stamping its seal. Later they were held personally liable because they signed on delivery

Newborne v Sensolid (Great Britain Ltd) 1954

P was a promoter and a prospective director of a limited company yet to come into existence (Leopold Newborne London Ltd) This company was to supply some goods to D. In the contract it the name of the prospective company Leopold Newborne London Ltd was mentioned and below it was the signature of the P. 

It was held that contract was made not with the plaintiff but with the company. Therefore the plaintiff cannot claim relief.  

FORMATION OF COMPANIES

S.3-Formation of a Company-

  1. A company may be formed for any lawful purpose by— 
    1. (a) seven or more persons, where the company to be formed is to be a public company
    2. (b) two or more persons, where the company to be formed is to be a private company; or 
    3. (c) one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration: 
      1. Provided that the memorandum of One Person Company shall indicate the name of the other person, with his prior written consent in the prescribed form, who shall, in the event of the subscriber‘s death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles: 
      2. Provided further that such other person may withdraw his consent in such manner as may be prescribed: 
      3. Provided also that the member of One Person Company may at any time change the name of such other person by giving notice in such manner as may be prescribed: 
      4. Provided also that it shall be the duty of the member of One Person Company to intimate the company the change, if any, in the name of the other person nominated by him by indicating in the memorandum or otherwise within such time and in such manner as may be prescribed, and the company shall intimate the Registrar any such change within such time and in such manner as may be prescribed: 
      5. Provided also that any such change in the name of the person shall not be deemed to be an alteration of the memorandum
  2. A company formed under sub-section (1) may be either— 
    1. (a) a company limited by shares; or
    2. (b) a company limited by guarantee; or
    3. (c) an unlimited company

KIND OF COMPANIES

UNLIMITED LIABILITY COMPANIES-

  1. Both public and private companies can be unlimited liability companies
  2. There is no limit on liability of members of company-
  3. These sections are not applicable in case of unlimited companies-
    1. S.66-provides that reduction of share capital cannot be done without approval of tribunal
    2. S.67-Restriction on purchase by company or giving of loans by it for purchase of its shares 
  4. Can this company register as limited liability company? 
    1. Yes by altering its MoA and AoA, S.18
    2. But debt, liabilities, obligations and contracts will remain same. 

LIMITED LIABILITY COMPANIES-

  1. They are of two types-
    1. Company limited by shares
    2. Company limited by guarantee
  2. Company limited by guarantee
    1. MoA will have to state the no of members and the amount they have guaranteed.
    2. As far as S.66 and S.67 are concerned, the latter is not applicable. S.66 will apply. 
    3. A limited co which does not have share capital, can it give right to outsiders to have shares in the divisible profit (by resolution, etc) ?
      1. No. S.4 prohibits that. Outsiders don’t have any right in divisible profit. 
    4. Can we transfer the membership of a guaranteed company?
      1. Yes. But court will see whether it is in the interest of the company if the so reaches it. Otherwise the board will decide.

Narendra Kr Agarwal v Saroj Maloo 1995

The co was running a stock exchange through membership. There was contest on the manner of transfer of membership. Court said that the criteria and procedure cannot be same as in case of transfer of membership. 

PRIVATE COMPANY

S.2(68)-Private company means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,

  1. restricts the right to transfer its shares;
  2. except in case of One Person Company, limits the number of its members to 200: 
    1. Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that-
      1. persons who are in the employment of the company; and 
      2. persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
  3. prohibits any invitation to the public to subscribe for any securities of the company
  1. S.3(1)(b)-A company may be formed for any lawful purpose by two or more persons, where the company to be formed is to be a private company by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.
  2. There is no limit on shares-
  3. Transferability of shares-
  4. Restriction on no of members
    1. Max-200 members. 
  5. Prohibition on issuance of Prospectus 
    1. A pvt co cannot go for public issue 
  6. Benefits of private company– 
    1. Since no prospectus, no worry about minimum subscriptions (in public co, 90% of issues issued subscriptions)
    2. Only 2 directors (can be permanent) 
    3. No control on amount of remuneration of directors
    4. Disclosure of interests- 

Conversion of Pvt Company to Public Company 

Two ways-

  1. Conversion by Default-
    1. Companies get 6 months to fix their non-compliance otherwise they will be delisted. 
  2. Conversion by Choice-
    1. S.14 procedure
    2. Pass a special resolution
    3. Delete the restriction from AOA (S.2(68)

Sahaara Company Case

They were a private company but issued shares to millions of people. 

Can a private co be incorporated by 2 members, one of them being a preference shareholder?

No, Because Preference Shareholders don’t have voting rights.

Preference Shareholders don’t have voting rights or other equity rights but get preference on company’s winding up. Their dividend is fix.

Bradford Investment Pvt Ltd 1990

PUBLIC COMPANY

S.2(71)-Public company means a company which-

  1. is not a private company;
  2. has a minimum paid-up share capital as may be prescribed: 

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles

S.3(1)(a)-A company may be formed for any lawful purpose by seven or more persons, where the company to be formed is to be a public company by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.

Earlier there was a requirement of minimum share capital of 5 lac

  1. No restriction on transferability of shares
  2. No restriction on transferability of shares
  3. Invites public to see prospectus

Company X is a pvt subsidiary co of Y-a public company. For purposes of the Co Act, X is deemed to be a public co but can be a pvt co in its AoA. 

ONE PERSON COMPANY 

S.2(62)-One Person Company means a company which has only one person as a member;

S.3(1)(c)-A company may be formed for any lawful purpose by one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration

  1. Provided that the memorandum of One Person Company shall indicate the name of the other person, with his prior written consent in the prescribed form, who shall, in the event of the subscriber‘s death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles: 
  2. Provided further that such other person may withdraw his consent in such manner as may be prescribed: 
  3. Provided also that the member of One Person Company may at any time change the name of such other person by giving notice in such manner as may be prescribed: 
  4. Provided also that it shall be the duty of the member of One Person Company to intimate the company the change, if any, in the name of the other person nominated by him by indicating in the memorandum or otherwise within such time and in such manner as may be prescribed, and the company shall intimate the Registrar any such change within such time and in such manner as may be prescribed: 
  5. Provided also that any such change in the name of the person shall not be deemed to be an alteration of the memorandum

Process of incorporation of a OPC-

  1. By subscribing names to the MoA in the prescribed manner and by complying the requirements of the act wrt registration. 
    1. Name of the nominee-with his prior written consent 
    2. He can withdraw his consent by giving 30 days notice 
    3. OPC member can change the nominee at any time
    4. Nominee should be natural person, India citizen
    5. Body corporate cannot form OPC

S.193-Contracts by OPC

  1. Where One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also the director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract
    1. Provided that nothing in this sub-section shall apply to contracts entered into by the company in the ordinary course of its business. 
  2. The company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors under sub-section (1) within a period of fifteen days of the date of approval by the Board of Directors

Rationale of this section-To distinguish it from the situation that arose in Solomon v Solomon 

Process-

  1. Obtain Director identification number (DIN)
  2. Name of the company
  3. Get the consent of the nominee
  4. File the consent doc, MoA, AoA and other docs with RoC
  5. Obtain certificate of incorporation 

An OPC cannot be converted into Public co and S.8 company (non for profit associations). 

But it can be converted to pvt co by adding suffix pvt ltd. 

SMALL COMPANY

 S.2(85)-Small company means a company, other than a public company,—

  1. paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may  be prescribed which shall not be more than five crore rupees; or 
  2. turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees: 
    1. Provided that nothing in this clause shall apply to-
      (A) a holding company or a subsidiary company;
      (B) a company registered under section 8; or
      (C) a company or body corporate governed by any special Act

A co other than a public co. whose paid up capital does not exceed 50 lac at a time or such higher amount as prescribed by the govt not exceeding 10 crore. Whose turnover of immediate preceding year does not exceed 2 crore or higher amount as prescribed by the govt not exceeding 100 crore.

HOLDING COMPANY (HC)

2(46)-Holding company, in relation to one or more other companies, means a company of which such companies are subsidiary companies

HC is a parent co of subsidiary companies. 

SUBSIDIARY COMPANIES 

S.2(87)-Subsidiary company or subsidiary,in relation to any other company (that is to say the holding company), means a company in which the holding company-

  1. controls the composition of the Board of Directors; or
  2. exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: 
    1. Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. 
    2. Explanation-For the purposes of this clause,
      1. (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company; 
      2. (b) the composition of a company‘s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors; 
      3. (c) the expression ‘company’ includes any body corporate; 
      4. (d) layer in relation to a holding company means its subsidiary or subsidiaries

This is a company where the Holding Company (HC) controls the composition of board of directors Subsidiary Companies. Ability to appoint or remove BoD.

Where HC controls more than one half of total voting power of SC either at its own or together with one or more subsidiary companies. 

Control S.2(27) shall include-

  1. Right to appoint majority of directors 
  2. Right to control the management of the SC or policy decisions exercisable by a person either individually or in concert, either directly or indirectly
  3. By virtue of their shareholdings or management rights or shareholder agreements or voting agreements or in any other manner. 

Total Voting Power

S2(89)-Total voting power, in relation to any matter, means the total number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes

ASSOCIATE COMPANY 

2(6)-Associate company, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. 

Explanation-For the purposes of this clause, significant influence‖ means control of at least twenty per cent. of total share capital, or of business decisions under an agreement

This is a new category of company introduced by the 2013 Act

One company A in relation to other company B can be associate company B if-

  1. Company ‘A’ has significant influence on B
  2. It is not a subsidiary co. 
  3. Includes joint venture companies

Significant Influence-at least 20% voting power or control of or participation in business decision under an agreement. 

JV means a joint agreement where the parties that have joint control over the arrangement that their rights over the net assets of the arrangement. Such JVs are known as associate of each other. 

Co ‘A’ and B jointly formed co C. ‘A’ and B would be associate co of co C. 

GOVERNMENT COMPANIES 

S.2(45)Government company‖ means any company in which not less than fifty-one 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 by one or more State Governments, and includes a company which is a subsidiary company of such a Government company

Companies where govt holds not less than 51% either individually by state govt or central govt or by both. 

Its legal status is same as any other co. This was held in numerous cases-

Heavy Engineering Mazdoor Co

In Re River Steam Navigation 

AP State Road Transport Corp v ITO

It was held that no common assumption that its state.

That its State under Art 12 of constitution is no absolute rule.

Only in certain cases they can be considered instrumentalists of state

RD Shetty v IAAI 1979

If the functions of the corporation are of public importance and closely related to governmental functions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of govt.

Ajay Hasia v Khalid Mohammad Majeed 1981

6 indicative factors-

  1. Whether the entire capital is owned by State
  2. So much financial assistance by State
  3. Whether State confers or protects the monopoly state of the entity
  4. Whether “Deep and pervasive control” over management 
    1. Govt appoints majority of stakeholders 
  5. Whether Performs Important public function
  6. Earlier it would be done by State department but later transferred to this entity.

Mysore Paper Mills Ltd v Mysore Paper Mills Officers Association 2002

Corporate veil can be lifted to determine the ‘TRUE NATURE’ of the company

MOA is checked to determine the object. 

Govt co cannot seek privilege or claim any exemption from tax. 

Balco Employees Union v Union of India 2002

Yes, Balco was a corporation and has power to sell its share. If it changes its character from State to Private entity, it can do so.

Centre for PIL v UOI 2003

Whether govt co can shell its shares?

Yes, but if wants to continue functioning as govt co, it will have to retain at least 51% shares. 

Public Sector Undertakings

They are generally govt owned enterprises. They generally come into being by statute. In Foreign countries they are known as ‘State owned enterprises’ SOEs 

Difference between Co and Corporation-A co when incorporated by an act or parliament or statute, it is corporations. 

FOREIGN COMPANIES 

2(42)-Foreign company means any company or body corporate incorporated outside India which-

  1. has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
  2. conducts any business activity in India in any other manner

A foreign co is any co or body corporate incorporated outside India which has a place of business in India whether by itself or through agent, either physically or through electronic mode and it conducts any business activity in India in any other manner. 

Place of business-includes having share transfer office

Companies registration of Foreign co Rules 2014

Defines-

Electronic mode-

  1. All B2B, B2C transaction and data interchange and other digital supply transaction
  2. Offering to accept deposits or invite deposits or subscriptions in India or citizens of India through IDR (Indian Depository Regime)
  3. If there are financial settlements or web based marketing or advisory and transactional services, data base services, products and supply chain managements. 
  4. Online services through telemarketing, telecommunication, etc
  5. All related data communication services. 

S.8 COMPANIES

They are non for profit associations.

Central govt has power to grant or licence to those person or association of person who intends to form S.8 companies.

They are formed by obtaining a licence from govt (RoC on MCA Website)

Main constituents-

  1. That such a co has as its object the promotion of art, culture, sports, science, education, religion, etc.
  2. It intends to apply its profit or other income to promote its objects. 
  3. It prohibits to payment of dividend to members.

Govt can also revoke the licence 

Benefits-

  1. Filing of annual returns but it will not be taxable. Format is different

S.8-Formulation of companies with charitable objects, etc.— 

  1. Where it is proved to the satisfaction of the Central Government that a person or an association of persons proposed to be registered under this Act as a limited company— 
    1. (a) has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object; 
    2. (b) intends to apply its profits, if any, or other income in promoting its objects; and 
    3. (c) intends to prohibit the payment of any dividend to its members, 
    4. the Central Government may, by licence issued in such manner as may be prescribed, and on such conditions as it deems fit, allow that person or association of persons to be registered as a limited company under this section without the addition to its name of the word ―Limited‖, or as the case may be, the words ―Private Limited‖ , and thereupon the Registrar shall, on application, in the prescribed form, register such person or association of persons as a company under this section. 
  2. The company registered under this section shall enjoy all the privileges and be subject to all the obligations of limited companies. 
  3. A firm may be a member of the company registered under this section.
  4. (i) A company registered under this section shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government. 
    1. (ii) A company registered under this section may convert itself into company of any other kind only after complying with such conditions as may be prescribed. 
  5. Where it is proved to the satisfaction of the Central Government that a limited company registered under this Act or under any previous company law has been formed with any of the objects specified in clause (a) of sub-section (1) and with the restrictions and prohibitions as mentioned respectively in clauses (b) and (c) of that sub-section, it may, by licence, allow the company to be registered under this section subject to such conditions as the Central Government deems fit and to change its name by omitting the word ―Limited‖, or as the case may be, the words ―Private Limited‖ from its name and thereupon the Registrar shall, on application, in the prescribed form, register such company under this section and all the provisions of this section shall apply to that company. 
  6. The Central Government may, by order, revoke the licence granted to a company registered under this section if the company contravenes any of the requirements of this section or any of the conditions subject to which a licence is issued or the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest, and without prejudice to any other action against the company under this Act, direct the company to convert its status and change its name to add the word ―Limited or the words ―Private Limited, as the case may be, to its name and thereupon the Registrar shall, without prejudice to any action that may be taken under sub-section (7), on application, in the prescribed form, register the company accordingly
    1. Provided that no such order shall be made unless the company is given a reasonable opportunity of being heard: 
    2. Provided further that a copy of every such order shall be given to the Registrar. 
  7. Where a licence is revoked under sub-section (6), the Central Government may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section
    1. Provided that no such order shall be made unless the company is given a reasonable opportunity of being heard. 
  8. Where a licence is revoked under sub-section (6) and where the Central Government is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order. 
  9. If on the winding up or dissolution of a company registered under this section, there remains, after the satisfaction of its debts and liabilities, any asset, they may be transferred to another company registered under this section and having similar objects, subject to such conditions as the Tribunal may impose, or may be sold and proceeds thereof credited to the Rehabilitation and Insolvency Fund formed under section 269. 
  10. (10)A company registered under this section shall amalgamate only with another company registered under this section and having similar objects. 
  11. (11)If a company makes any default in complying with any of the requirements laid down in this section, the company shall, without prejudice to any other action under the provisions of this section, be punishable with fine which shall not be less than ten lakh rupees but which may extend to one crore rupees and the directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than twenty- five thousand rupees but which may extend to twenty-five lakh rupees, or with both: 
    1. Provided that when it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447.

PROMOTERS S.2(69)

S.2(69)-Promoter means a person

  1. who has been named as such in a prospectus or is identified by the company in the annual  return referred to in section 92; or 
  2. who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or 
  3. in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity

Who are promoters?

1956 act did not define the term promoter but the act fixed liability on them many times.

A judge said that its a term of business.

Promoter is a person who incorporates a co, make arrangements, provides funds. 

A person doing this work in his professional capacity will not be a promotor (ie co secy) 

But in 2009, SEBI regulations defined promoter for the first time-

2013 Act for the first time under S.2(69)-promoter means a person—

  1. who has been named as such in a prospectus or is identified by the company in the annual  return referred to in section 92; or 
  2. who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or 
  3. in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act: 
  4. Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity

Whether promoter is involved only at the incorporation of the co?

No, Clause b says-who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise

Duties and Liabilities of a Promotor-

He has a fiduciary position. 

Erlanger v New Sombrero Phosphates 1878

Erlanger purchased an island which had phosphate mines for 55K Pounds. He incorporated a co to work as a mining company. He arranged all members of the co. He had 5 directors all named by him. 2 were totally under the control of Erlanger. When the co was incorporated, a resolution was passed to acquire the island from Erlanger. 2 directors were abroad and out of remaining 3, 2 were under the control of Erlanger. Acquisition was for 1 lac 10K Pounds. The co then issued prospectus and many people took shares and co came to have sufficient funds to purchase the island. But the co proved to be unsuccessful. It turned to liquidation. At the time of liquidation, the liquidator sued Erlanger. Erlanger said that the board had knowledge of what happened. Question was whether the board was independent? No and in such case where the director are not independent, disclosure should be made to the shareholders. His dealing with the co has to fair and open. He must disclose his position in the co, his profit in the deal and also his interest in the property.

Some other Sections where the promoters can be held liable-

S.26 (now repealed)

S.35-Compensation for mis-statement

S.300-Power to order examination of promoters, directors, etc. 

CHAPTER III PROSPECTUS AND ALLOTMENT OF SECURITIES


S.23-Public offer and private placement- 

  1. A public company may issue securities—
    1. to public through prospectus (herein referred to as “public offer”) by complying with the  provisions of this Part; or 
    2. through private placement by complying with the provisions of Part II of this Chapter; or 
    3. through a rights issue or a bonus issue in accordance with the provisions of this Act and in case of a listed company or a company which intends to get its securities listed also with the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made thereunder. 
  2. A private company may issue securities—
    (a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or (b) through private placement by complying with the provisions of Part II of this Chapter. 
  3. Explanation-For the purposes of this Chapter, “Public Offer” includes ‘initial public offer’ or ‘further public offer’ of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus

Explanation

A public co may issue securities to public through-

  1. Prospectus and this is known as public offer
  2. Private Placements (select group of persons)
  3. Through rights issues (existing shareholders under their rights)
  4. Through Bonus issues (surplus in profits of company)
    1. This is beneficial for taxation purposes otherwise the surplus will be taxable

Eg-A co has profit of 100 crore and capital of 1K crore. It needs 10 crore. It has two options to raise this capital-by issuing shares or taking debt. Both takes time. So it can convert its profit surplus into shares by bonus issues where shareholders will not have to pay for the shares. This is known as capitalisation of profit. 

Private co may issue securities to public through-

  1. Private Placements (select group of persons)
  2. Through Rights issues (existing shareholders under their rights)

Public Offer-

Initial Public Offer (IPO)-A public after being listed. Its first public offer will be known as IPO

Further Public Offer (FPO)-further issue of shares. Subsequent public offers are known as FPO

Offer for Sale (OFS)-The existing SHOs, if they have extra shares, they can offer it to public. It is known as sale of existing shares of shareholders to public. 

S.24-Power of Securities and Exchange Board to regulate issue and transfer of securities, etc-

(1) The provisions contained in this Chapter, Chapter IV and in section 127 shall,— 

  1. in so far as they relate to-
    1. issue and transfer of securities; and 
    2. non-payment of dividend, by listed companies or those companies which intend to get their securities listed on any recognised stock exchange in India, except as provided under this Act, be administered by the SEBI by making regulations in this behalf; 
  2. in any other case, be administered by the Central Government. 
  3. Explanation-For the removal of doubts, it is hereby declared that all powers relating to all other matters relating to prospectus, return of allotment, redemption of preference shares and any other matter specifically provided in this Act, shall be exercised by the Central Government, the Tribunal or the Registrar, as the case may be
  4. The Securities and Exchange Board shall, in respect of matters specified in subsection (1) and the matters delegated to it under proviso to sub-section (1) of section 458, exercise the powers conferred upon it under sub-sections (1), (2A), (3) and (4) of section 11, sections 11A, 11B and 11D of the Securities and Exchange Board of India Act, 1992 (15 of 1992)

S.24 gives power to SEBI to deal with certain securities-

Administered by Central Government-RoC, RD, NCLT

Prospectus S.2(70)

When co wants to go for public offer, it has to prepare a doc known as prospectus or offer document

S.2(70)-Prospectus means any document described or issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of body corporate

Types of Prospectus

  1. Abridged Prospectus-
  2. Red Herring Prospectus-
  3. Shelf Prospectus-  

You subscribe to Shares and Purchase debentures.

ABRIDGED PROSPECTUS

S.2(1)-Abridged prospectus means a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations in this behalf

It is a memorandum that contains salient features of Prospectus as prescribed by SEBI is known as Abridged Prospectus. S.21 talks about this. 

S.26 talks about contents of Prospectus 

S.26 Matters to be stated in prospectus-IMP

  1. Every prospectus issued by or on behalf of a public company either with reference to its formation or subsequently, or by or on behalf of any person who is or has been engaged or interested in the formation of a public company, shall be dated and signed and shall-
    1. (a) state the following information, namely:— 
      1. (i) names and addresses of the registered office of the company, company secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees, if any, underwriters and such other persons as may be prescribed; 
      2. (ii) dates of the opening and closing of the issue, and declaration about the issue of allotment letters and refunds within the prescribed time; 
      3. (iii) a statement by the Board of Directors about the separate bank account where all monies received out of the issue are to be transferred and disclosure of details of all monies including utilised and unutilised monies out of the previous issue in the prescribed manner; 
      4. (iv) details about underwriting of the issue;
      5. (v) consent of the directors, auditors, bankers to the issue, expert‘s opinion, if any, and of such other persons, as may be prescribed; 
      6. (vi) the authority for the issue and the details of the resolution passed therefor; 
      7. (vii) procedure and time schedule for allotment and issue of securities; 
      8. (viii) capital structure of the company in the prescribed manner; 
      9. (ix) main objects of public offer, terms of the present issue and such other particulars as may be prescribed; 
      10. (10)(x) main objects and present business of the company and its location, schedule of implementation of the project; 
      11. (xi) particulars relating to—
        1. (A) management perception of risk factors specific to the project; (B) gestation period of the project;
        2. (C) extent of progress made in the project;
        3. (D) deadlines for completion of the project; and 
        4. (E) any litigation or legal action pending or taken by a Government Department or a statutory body during the last five years immediately preceding the year of the issue of prospectus against the promoter of the company; 
      12. (12)(xii) minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash; 
      13. (13)(xiii) details of directors including their appointments and remuneration, and such particulars of the nature and extent of their interests in the company as may be prescribed; and 
      14. (14)(xiv) disclosures in such manner as may be prescribed about sources of promoter‘s contribution; 
    2. (b) set out the following reports for the purposes of the financial information, namely:—
      1. (i) reports by the auditors of the company with respect to its profits and losses and assets and liabilities and such other matters as may be prescribed; 
      2. (ii) reports relating to profits and losses for each of the five financial years immediately preceding the financial year of the issue of prospectus including such reports of its subsidiaries and in such manner as may be prescribed: 
        1. Provided that in case of a company with respect to which a period of five years has not elapsed from the date of incorporation, the prospectus shall set out in such manner as may be prescribed, the reports relating to profits and losses for each of the financial years immediately preceding the financial year of the issue of prospectus including such reports of its subsidiaries; 
      3. (iii) reports made in the prescribed manner by the auditors upon the profits and losses of the business of the company for each of the five financial years immediately preceding issue and assets and liabilities of its business on the last date to which the accounts of the business were made up, being a date not more than one hundred and eighty days before the issue of the prospectus: 
        1. Provided that in case of a company with respect to which a period of five years has not elapsed from the date of incorporation, the prospectus shall set out in the prescribed manner, the reports made by the auditors upon the profits and losses of the business of the company for all financial years from the date of its incorporation, and assets and liabilities of its business on the last date before the issue of prospectus; and 
      4. (iv) reports about the business or transaction to which the proceeds of the securities are to be applied directly or indirectly; 
    3. (c) make a declaration about the compliance of the provisions of this Act and a statement to the effect that nothing in the prospectus is contrary to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made thereunder; and 
    4. (d) State such other matters and set out such other reports, as may be prescribed. 
  2. (2) Nothing in sub-section (1) shall apply— 
    1. (a) to the issue to existing members or debenture-holders of a company, of a prospectus or form of application relating to shares in or debentures of the company, whether an applicant has a right to renounce the shares or not under sub-clause (ii) of clause (a) of sub-section (1) of section 62 in favour of any other person; or 
    2. (b) To the issue of a prospectus or form of application relating to shares or debentures which are, or are to be, in all respects uniform with shares or debentures previously issued and for the time being dealt in or quoted on a recognised stock exchange. 
  3. (3) Subject to sub-section (2), the provisions of sub-section (1) shall apply to a prospectus or a form of application, whether issued on or with reference to the formation of a company or subsequently. 
    1. Explanation-The date indicated in the prospectus shall be deemed to be the date of its publication. 
  4. (4) No prospectus shall be issued by or on behalf of a company or in relation to an intended company unless on or before the date of its publication, there has been delivered to the Registrar for registration, a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his duly authorised attorney. 
  5. (5) A prospectus issued under sub-section (1) shall not include a statement purporting to be made by an expert unless the expert is a person who is not, and has not been, engaged or interested in the formation or promotion or management, of the company and has given his written consent to the issue of the prospectus and has not withdrawn such consent before the delivery of a copy of the prospectus to the Registrar for registration and a statement to that effect shall be included in the prospectus. 
  6. (6) Every prospectus issued under sub-section (1) shall, on the face of it,—
    1. (a) state that a copy has been delivered for registration to the Registrar as required under sub-section (4); and
    2. (b) Specify any documents required by this section to be attached to the copy so delivered or refer to statements included in the prospectus which specify these documents.
  7. (7) The Registrar shall not register a prospectus unless the requirements of this section with respect to its registration are complied with and the prospectus is accompanied by the consent in writing of all the persons named in the prospectus. 
  8. (8) No prospectus shall be valid if it is issued more than ninety days after the date on which a copy thereof is delivered to the Registrar under sub-section (4). 
  9. (9) If a prospectus is issued in contravention of the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees and every person who is knowingly a party to the issue of such prospectus shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or with both

1956 act gave a list which had to be mentioned in the prospectus. 

But present section says- 

  1. Every prospectus issued by or on behalf of a public company either with reference to its formation or subsequently, or by or on behalf of any person who is or has been engaged or interested in the formation of a public company, shall be dated and signed and shall state the information, as directed by SEBI
  2. Nothing in sub-section (1) shall apply— 
    1. (a) to the issue to existing members or debenture-holders of a company, of a prospectus or form of application relating to shares in or debentures of the company, whether an applicant has a right to renounce the shares or not under sub-clause (ii) of clause (a) of sub-section (1) of section 62 in favour of any other person; or 
      1. S.62 gives right to existing shareholders, the right to first offer. They can accept or renounce this offer. In such cases sub-section 1 of S.26 is not applicable. 
    2. (b) to the issue of a prospectus or form of application relating to shares or debentures which are, or are to be, in all respects uniform with shares or debentures previously issued and for the time being dealt in or quoted on a recognised stock exchange.
  3. Subject to sub-section (2), the provisions of sub-section (1) shall apply to a prospectus or a form of application, whether issued on or with reference to the formation of a company or subsequently. 
    1. Explanation-The date indicated in the prospectus shall be deemed to be the date of its publication.
  4. No prospectus shall be issued by or on behalf of a company or in relation to an intended company unless on or before the date of its publication, there has been delivered to the Registrar for registration, a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his duly authorised attorney
  5. A prospectus issued under sub-section (1) shall not include a statement purporting to be made by an expert unless the expert is a person who is not, and has not been, engaged or interested in the formation or promotion or management, of the company and has given his written consent to the issue of the prospectus and has not withdrawn such consent before the delivery of a copy of the prospectus to the Registrar for registration and a statement to that effect shall be included in the prospectus.
  6. Every prospectus issued under sub-section (1) shall, on the face of it,—
    1. state that a copy has been delivered for registration to the Registrar as required under sub-section (4); and
    2. Specify any documents required by this section to be attached to the copy so delivered or refer to statements included in the prospectus which specify these documents.
  7. The Registrar shall not register a prospectus unless the requirements of this section with respect to its registration are complied with and the prospectus is accompanied by the consent in writing of all the persons named in the prospectus. 
  8. No prospectus shall be valid if it is issued more than ninety days after the date on which a copy thereof is delivered to the Registrar under sub-section (4)
  9. If a prospectus is issued in contravention of the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees and every person who is knowingly a party to the issue of such prospectus shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or with both.

P has to be filed with RoC and should contain consent in writing of all persons who are named as directors, promoters, etc has to be given.

Within 90 days of submission, the company has to come up with public issue. 

S.25 Document containing offer of securities for sale to be deemed prospectus.— 

  1. Where a company allots or agrees to allot any securities of the company with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company; and all enactments and rules of law as to the contents of prospectus and as to liability in respect of mis-statements, in and omissions from, prospectus, or otherwise relating to prospectus, shall apply with the modifications specified in subsections (3) and (4) and shall have effect accordingly, as if the securities had been offered to the public for subscription and as if persons accepting the offer in respect of any securities were subscribers for those securities, but without prejudice to the liability, if any, of the persons by whom the offer is made in respect of mis-statements contained in the document or otherwise in respect thereof. 
  2. For the purposes of this Act, it shall, unless the contrary is proved, be evidence that an allotment of, or an agreement to allot, securities was made with a view to the securities being offered for sale to the public if it is shown— 
    1. that an offer of the securities or of any of them for sale to the public was made within six months after the allotment or agreement to allot; or 
    2. that at the date when the offer was made, the whole consideration to be received by the company in respect of the securities had not been received by it. 
  3. Section 26 as applied by this section shall have effect as if —
    1. it required a prospectus to state in addition to the matters required by that section to be stated in a prospectus— 
      1. the net amount of the consideration received or to be received by the company in respect of the securities to which the offer relates; and 
      2. the time and place at which the contract where under the said securities have been or are to be allotted may be inspected; 
    2. the persons making the offer were persons named in a prospectus as directors of a company. 
  4. Where a person making an offer to which this section relates is a company or a firm, it shall be sufficient if the document referred to in sub-section (1) is signed on behalf of the company or firm by two directors of the company or by not less than one-half of the partners in the firm, as the case may be

S.27 talks about variation in terms of contracts or objects in prospectus

S.27-Variation in terms of contract or objects in prospectus-

  1. A company shall not, at any time, vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued, except subject to the approval of, or except subject to an authority given by the company in general meeting by way of special resolution: 
    1. Provided that the details, as may be prescribed, of the notice in respect of such resolution to shareholders, shall also be published in the newspapers (one in English and one in vernacular language) in the city where the registered office of the company is situated indicating clearly the justification for such variation: 
    2. Provided further that such company shall not use any amount raised by it through prospectus for buying, trading or otherwise dealing in equity shares of any other listed company
  2. The dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus, shall be given an exit offer by promoters or controlling shareholders at such exit price, and in such manner and conditions as may be specified by the Securities and Exchange Board by making regulations in this behalf

Eg-A company issued P for raising funds for setting up a Mill. A company has to enter into a lot of contracts. Can co change those contracts?

S.27 says that no variation allowed except by approval of the company in general meeting by special resolution or by designated authority by special resolution. All that should also be published in the newspapers in two languages-english and local.

S.28-Offer of sale of shares by certain members of company-

  1. Where certain members of a company propose, in consultation with the Board of Directors to offer, in accordance with the provisions of any law for the time being in force, whole or part of their holding of shares to the public, they may do so in accordance with such procedure as may be prescribed. 
  2. Any document by which the offer of sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company and all laws and rules made thereunder as to the contents of the prospectus and as to liability in respect of mis-statements in and omission from prospectus or otherwise relating to prospectus shall apply as if this is a prospectus issued by the company. 
  3. The members, whether individuals or bodies corporate or both, whose shares are proposed to be offered to the public, shall collectively authorise the company, whose shares are offered for sale to the public, to take all actions in respect of offer of sale for and on their behalf and they shall reimburse the company all expenses incurred by it on this matter

Offer of sale shall be deemed prospectus u/s 25

S.25-Document containing offer of securities for sale to be deemed prospectus.

Where a company allots or agrees to allot any securities of the company with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company; and all enactments and rules of law as to the contents of prospectus and as to liability in respect of mis-statements, in and omissions from, prospectus, or otherwise relating to prospectus, shall apply with the modifications specified in subsections (3) and (4) and shall have effect accordingly, as if the securities had been offered to the public for subscription and as if persons accepting the offer in respect of any securities were subscribers for those securities, but without prejudice to the liability, if any, of the persons by whom the offer is made in respect of mis-statements contained in the document or otherwise in respect thereof

S.29 provides that public offers has to be in dematerialised form (DMAT)

S.29-Public offer of securities to be in dematerialised form-

  1. Notwithstanding anything contained in any other provisions of this Act
    1. (a) every company making public offer; and 
    2. (b) such other class or classes of public companies as may be prescribed,
      shall issue the securities only in dematerialised form by complying with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder. 
  2. Any company, other than a company mentioned in sub-section (1), may convert its securities into dematerialised form or issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in accordance with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder

Earlier we had shares in physical forms where trading was possible only delivery form. To encourage trading in the virtual/digital form, this section was inserted. 

Trading now has to be through DMAT account.

SHELF PROSPECTUS

S.31-Shelf Prospectus

  1. Any class or classes of companies, as the Securities and Exchange Board may provide by regulations in this behalf, may file a shelf prospectus with the Registrar at the stage of the first offer of securities included therein which shall indicate a period not exceeding one year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities under that prospectus, and in respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required. 
  2. A company filing a shelf prospectus shall be required to file an information memorandum containing all material facts relating to new charges created, changes in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities and the succeeding offer of securities and such other changes as may be prescribed, with the Registrar within the prescribed time, prior to the issue of a second or subsequent offer of securities under the shelf prospectus: 
    1. Provided that where a company or any other person has received applications for the allotment of securities along with advance payments of subscription before the making of any such change, the company or other person shall intimate the changes to such applicants and if they express a desire to withdraw their application, the company or other person shall refund all the monies received as subscription within fifteen days thereof. 
  3. Where an information memorandum is filed, every time an offer of securities is made under sub-section (2), such memorandum together with the shelf prospectus shall be deemed to be a prospectus. 
    1. Explanation-For the purposes of this section, the expression “shelf prospectus” means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus

A company which has filed self-prospectus is required to file an information memorandum to apprise the change between two consecutive prospectus. The information memorandum is deemed to a prospectus.

RED-HERRING PROSPECTUS (RHP) 

S.32 Red herring prospectus- 

  1. A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus. 
  2. A company proposing to issue a red herring prospectus under sub-section (1) shall file it with the Registrar at least three days prior to the opening of the subscription list and the offer. 
  3. A red herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus. 
  4. Upon the closing of the offer of securities under this section, the prospectus stating therein the total capital raised, whether by way of debt or share capital, and the closing price of the securities and any other details as are not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board. 
    1. Explanation-For the purposes of this section, the expression “red herring prospectus” means a prospectus which does not include complete particulars of the quantum or price of the securities included therein

It is a prospectus which does not include complete info about quantum of securities and price of securities.

Rationale-To sense the public mood about the prospect of public offer. To understand the price at which public is willing to buy the shares.

Let’s say Co needs 1K crores but it does not know whether people would be willing to subscribe to its share. So a process of book building is used to understand the price at which public is willing to buy the shares. Through RHP, it will inform the public about the proposed public offer. 

REMEDIES FOR MIS-REPRESENTATION IN THE PROSPECTUS

Damages for Deceit

Derry v Peek 1889

A co was running tramways using animal power. Later it wanted to use steam. 

Two permissions were required

  • Act of Parliamentary 
  • Board of Trade Approval

The co got the authorisation from Parliament. They were sure that they will get approval from BOT so they issued prospectus. Many subscribed to the shares. BOT later refused the approval. One of the shareholders filed a case against the co directors that they had given false statement in the prospectus. Court held that that was untrue statement made with honest belief. (99% is not 100%) and that BOT approval was mere formality. Lord Hershel said that if false representation is made knowingly or without belief in its truth or recklessly, carelessly whether it is false or true only then it would be fraud

Now this is no longer liable.

S.17 of the Contract Act

S.17-Fraud includes suggestions that a fact is true when it is not true. And the person making the suggestion does not believe it to be true.

S.35 of Companies Act provides for compensation for civil liabilities for mis-statement in prospectus. Even if there is an honest belief that the statements are true but the statement given were false, you will be liable.

S.35-Civil liability for mis-statements in prospectus-

  1. Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person who
    1. (a) is a director of the company at the time of the issue of the prospectus;
    2. (b) has authorised himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval of time; 
    3. (c) is a promoter of the company;
    4. (d) has authorised the issue of the prospectus; and
    5. (e) is an expert referred to in sub-section (5) of section 26, shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or damage. 
  2. No person shall be liable under sub-section (1), if he proves—
    1. (a) that, having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent; or 
    2. (b) that the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent. 
  3. Notwithstanding anything contained in this section, where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person referred to in subsection (1) shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus

List of liable persons-

  • Every Director at the time of the issue of prospectus
  • Every person who authorised the Prospectus
  • Every person who authorised to be named Prospectus
  • Every prompter 
  • Every expert

Defenses-

  • That he had withdrawn Consent
  • Without knowledge and consent and when he came to he gave a public notice
  • Wrt Expert Opinion, he can say that he was competent to make such statement

If the P was issued for fraudulent purpose, these persons can be held liable with personal unlimited liability.

Contract Act Remedies-

Rescission for Misrepresentation 

Any shareholder can sue the company for rescission of contracts. 

Requisites-

  • There should be a false representation in the prospectus
  • False representation should be of facts and not about law
  • Reliance and inducement
  • By or on behalf of company

When this right can get lost?

  • By Affirmation
  • Unreasonable Delay
  • By commencement of the winding up of the company

When any situation is deemed to be untrue?

  • If it is false in form or the context in which it is included
  • Omissions can also be misleading and make the prospectus false. 

R v Kylsant (IMP)

The company has been paying dividend from 1911-1927. It was said that 5-8% of dividend in this time period except for the year 1914 when no dividend was given and 1926 when 4% was given. The truth was that the company was suffering losses from 1921 onwards and dividend that was paid was from the accumulated profits of the company. False in the context

Derry v Peak 

Co issued Prospectus and shareholders applied for the shares. Prospectus should have led to the allotment of shares. 

Peek v Gurney 1873

A company came up with a prospectus. P read the Prospectus but did not buy any shares. Allotment process was over. After few months, he brought good number of shares from secondary market. Later he claimed mis-representation in Prospectus. Should he be allowed to fix civil/tortuous liability on directors?

The principle is that if you are buying shares on the basis of the prospectus and then you suffer loss or damage due to misrepresentation in the prospectus, you will be protected. But if you didn’t buy on the basis of the prospectus, then there will be no liability on the company

If the prospectus was meant to be valid for post-public issue as well, then liability can be attached. 

Mis-representation should be of facts and not law

CRIMINAL LIABILITY-

S.34 Criminal liability for mis-statements in prospectus-

Where a prospectus, issued, circulated or distributed under this Chapter, includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorises the issue of such prospectus shall be liable under section 447

Provided that nothing in this section shall apply to a person if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary

Two defences-

  1. If he proves that such statement or omission was immaterial.
  2. He had reasonable grounds to believe that the statement was true. 

S.447 Punishment for fraud

Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud: 

Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years. 

Explanation-For the purposes of this section

  1. fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss; 
  2. wrongful gain‖ means the gain by unlawful means of property to which the person gaining is not legally entitled; 
  3. wrongful loss‖ means the loss by unlawful means of property to which the person losing is legally entitled

S.36 Punishment for fraudulently inducing persons to invest money-

Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into,— 

  1. any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities; or 
  2. any agreement, the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities; or 
  3. any agreement for, or with a view to obtaining credit facilities from any bank or financial institution, shall be liable for action under section 447

S.38 Punishment for personation for acquisition, etc., of securities-

  1. Any person who-
    1. (a) makes or abets making of an application in a fictitious name to a company for acquiring, or subscribing for, its securities; or 
    2. (b) makes or abets making of multiple applications to a company in different names or in different combinations of his name or surname for acquiring or subscribing for its securities; or 
    3. (c) Otherwise induces directly or indirectly a company to allot, or register any transfer of, securities to him, or to any other person in a fictitious name, shall be liable for action under section 447
  2. The provisions of sub-section (1) shall be prominently reproduced in every prospectus issued by a company and in every form of application for securities. 
  3. Where a person has been convicted under this section, the Court may also order disgorgement of gain, if any, made by, and seizure and disposal of the securities in possession of, such person. 
  4. The amount received through disgorgement or disposal of securities under subsection (3) shall be credited to the Investor Education and Protection Fund

Disgorgement

Note-In case of offenses related to securities market, the court of first instance shall be SEBI and the provisions of SCERA will apply.

S.33 Issue of application forms for securities-

  1. No form of application for the purchase of any of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus
    1. Provided that nothing in this sub-section shall apply if it is shown that the form of application was issued-
      1. (a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities; or 
      2. (b) in relation to securities which were not offered to the public.
  2. A copy of the prospectus shall, on a request being made by any person before the closing of the subscription list and the offer, be furnished to him.

It provides how the application form has to be made-

Co comes up with the prospectus. It then provides the place of application form. One fills the form and submits it to companies registered office.

Public issue only when you achieve minimum subscription as per SEBI regulation. If minimum subscription is doubtful, then co may invite underwriters to buy that under underwriting agreement. Its a kind of insurance

Eg-A co achieves 80% subscriptions. For the remaining 10% companies may invite underwriters to buy them as per underwriting agreement. They are therefore not supposed to be provided the prospectus. But underwriting agreement has to be mentioned in the prospectus. Underwriters will get some commission per share for hedging/insuring/guaranteeing the public issue.  

Two types of securities-

  1. Shares
  2. Debentures

SHARES

Defined under S.2(84)

S.2(84)-Share means a share in the share capital of a company and includes stock

Unite of the share-capital

Right to participate in the profit of the company

Stock-When the company maintains distinction bw shares and stocks (lum-sum). 

Its not necessary that co divides its capital into shares. 

Types of Movable properties-

  1. Chose in Action
    1. No immediate possession but has a right to it 
    2. This right can be enforced by a legal action 
    3. Has to be evidenced by certain documents 
  2. Chose in Possession
    1. Immediate physical possession of the property

Shares are movable property falling under ‘Chose in Action’ One gets share certificate informing you credentials and no of shares you own. Now its in the form of DMAT

Shares are regarded as goods under Sale of Goods Act

S.44 Nature of shares or debenturesThe shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company

As per Sale of Goods Act 1930, goods include shares.

Are shareholders part owners of the Company?

No, They are subscribers to the shares of the company. Company is a separate legal entity. They can have a control over the management of the affairs of the company. 

Allotment of Shares

Acceptant of application means allotment of shares. A valid allotment has to comply with the pre-requisites of the companies act and the contract act. 

Minimum Subscription Details-

S.39-Allotment of securities by company

  1. No allotment of any securities of a company offered to the public for subscription shall be made unless the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company by cheque or other instrument. 
  2. The amount payable on application on every security shall not be less than five per cent. of the nominal amount of the security or such other percentage or amount, as may be specified by the Securities and Exchange Board by making regulations in this behalf
  3. If the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of thirty days from the date of issue of the prospectus, or such other period as may be specified by the Securities and Exchange Board, the amount received under sub-section (1) shall be returned to applicants within such time and manner as may be prescribed
  4. Whenever a company having a share capital makes any allotment of securities, it shall file with the Registrar a return of allotment in such manner as may be prescribed. 
  5. In case of any default under sub-section (3) or sub-section (4), the company and its officer who is in default shall be liable to a penalty, for each default, of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less

Application money can be given by cheque or other instruments. If the above conditions are not followed, it will be invalid allotment. 

Can the co adjust the application money towards any claim it has against the applicant? No

If any allotment of securities is made without receiving application money, it is invalid. 

Dhananjay Pandey v Surgical Bias

Once the allotment process is over, a return of allotment has to be filed with RoC

 The co cannot adjust the application money towards any claim it has against the applicant.

S.40 Securities to be dealt with in stock exchanges-

  1. Every company making public offer shall, before making such offer, make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange or exchanges
  2. Where a prospectus states that an application under sub-section (1) has been made, such prospectus shall also state the name or names of the stock exchange in which the securities shall be dealt with
  3. All monies received on application from the public for subscription to the securities shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than— 
    1. (a) for adjustment against allotment of securities where the securities have been permitted to be dealt with in the stock exchange or stock exchanges specified in the prospectus; or 
    2. (b) for the repayment of monies within the time specified by the Securities and Exchange Board, received from applicants in pursuance of the prospectus, where the company is for any other reason unable to allot securities. 
  4. Any condition purporting to require or bind any applicant for securities to waive compliance with any of the requirements of this section shall be void

All listed companies are listed companies but vice-versa is not true. 

Listing agreement comes from SCRA. 

They have to also fulfill the condition of S.70 of the Companies Act.

Unlisted company means its securities have not been listed on any recognised stock exchange. 

Listing is not required for private placements. But funds raised by pvt placements can be listed. 

It is not necessary for a public co to raise funding only through listing. 

Listing gives an advantage of liquidity (option of conversion and exit). 

A public co can go for a public issue but it can also raise funds by private placements. 

Listing is mandatory for public issue and not for other issues. 

A pvt co that cannot raise funds by public issue but it can list the funds raised by pvt placement. They are traded over the counters. 

Advantage of Listing-

  1. Liquidity
  2. SEBI compliance 

There is a condition precedent for listing-

  1. Amounts raised by co through public issue has to be kept in a separate Bank Account and shall not be utilised for any purpose other than for adjustment against allotment of securities and for the repayment of monies received from applicants where the company is for any other reason unable to allot securities (failed to raise 90% subscriptions). 
  2. In case of oversubscription, the amount has to be returned. Oversubscription is defined by ICBR regulations. 

General Principles of Allotment 

  1. Allotment should be made by appropriate authorities ie board of directors. This power can be delegated of permissible by AoA
  2. Allotment should be made within reasonable time
  3. Allotment should be properly communicated.
    1. If by letters, they have to be properly stamped.
  4. Allotments should be absolute and unconditional. IMP
    1. Total no of shares referred in the application form should be allotted. 
    2. Exceptions
      1. Conditions precedent to Allotment
        1. Eg if the investor says that he will subscribe to the shares only if he is made a clerk in the company. 
      2. Conditions subsequent to the Allotment. They will not affect the validity of the allotment. 

Private Placements-

Entire procedure of Pvt Placement has been changed by the 2019 amendment.

S.42 deals with it. 

It means the offer of securities or invitation to subscribe securities to a select group of persons other than by way of public offer through Pvt Placement cum application which satisfies the condition of S.42.  

Application is offer

Prospectus is invitation

Select group of persons are those identified by the board whose numbers shall not exceed 50 or other prescribed number (200) excluding-

  1. Qualified Institutional Buyers (QIBs) 
  2. Employees of the Company 
    1. Offered under Employees Stock Option (ESOP) u/s 62(1)(b).

Contained in the Companies Prospectus and Allotment of Securities Rules 2014. 

Qualified Institutional Buyers (QIBs) are defined in the ICDR regulations. 

Pvt Placement shall not carry the option of renunciation. Otherwise it will no longer be a pvt placement. 

S.42-Offer or invitation for subscription of securities on PRIVATE PLACEMENT

  1. Without prejudice to the provisions of section 26, a company may, subject to the provisions of this section, make private placement through issue of a private placement offer letter. 
  2. Subject to sub-section (1), the offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed, [excluding qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62], in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed. 
    1. Explanation I—If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter. 
    2. Explanation II—For the purposes of this section, the expression— 
      1. (i) “qualified institutional buyer‘‘ means the qualified institutional buyer as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 as amended from time to time. 
      2. (ii) “private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section. 
  3. No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company. 
  4. Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be required to be complied with. 
  5. All monies payable towards subscription of securities under this section shall be paid through cheque or demand draft or other banking channels but not by cash. 
  6. A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent. per annum from the expiry of the sixtieth day: 
    1. Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than— 
      1. (a) for adjustment against allotment of securities; or 
      2. (b) for the repayment of monies where the company is unable to allot securities. 
  7. All offers covered under this section shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe, and that such persons shall receive the offer by name, and that a complete record of such offers shall be kept by the company in such manner as may be prescribed and complete information about such offer shall be filed with the Registrar within a period of thirty days of circulation of relevant private placement offer letter. 
  8. No company offering securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer. 
  9. Whenever a company makes any allotment of securities under this section, it shall file with the Registrar a return of allotment in such manner as may be prescribed, including the complete list of all security-holders, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed. 
  10. (10)If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty

Shri Gopal Paper Mills Ltd v CIT 1967 Cal HC 

The court interpreted the word shares-

It has 3 meanings or phases-

  1. When it is still the part of the share capital in the unissued form. Lying in the shell of the share capital
  2. When it is exploited by the company by issuing it to a shareholder. 
  3. When it is converted to stock. 
    1. Only fully paid up share capital can be converted to stock

DIFFERENT KINDS OF SHARES (S.43)

KINDS OF SHARE CAPITALS

S.43-Kinds of share capital-The share capital of a company limited by shares shall be of two kinds, namely:- 

  1. Equity Share capital-
    1. (i) with voting rights; or 
    2. (ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and 
  2. Preference Share Capital:
    Provided that nothing contained in this Act shall affect the rights of the preference shareholders who are entitled to participate in the proceeds of winding up before the commencement of this Act. 
    1. Explanation-For the purposes of this section,-
      1. (i) equity share capital‘‘, with reference to any company limited by shares, means all share capital which is not preference share capital; 
      2. (ii) preference share capital‘‘, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to-
        1. payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and 
        2. repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company; 
      3. (iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:— 
        1. that in respect of dividends, in addition to the preferential rights to the amounts specified in sub-clause (a) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid; 
        2. that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in sub-clause (b) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.

Equity and Preference Share Capital 

Equity Share means the share that is not the preference share capital. All shareholders of equity shares have equal shares ie people having same no of shares have equal rights. 

A co may issue equity shares with voting rights or with differential rights. The differential rights may be wrt to dividend they receive, voting or otherwise. 

Preference Shares-

  1. These shareholders must be assured of preferential dividend during the life of the company
  2. On winding up, it must carry a preferential right to be paid. 

Different kind of PS

Participating and non-participating 

Those who have right to participate in the additional/surplus profits of the co are participating preferential shareholders. This has to mentioned in the AoA

Cumulative and Non-Cumulative 

The unpaid profits gets accumulated and gets carried forward to next year. This is cumulative. 

REDEEMABLE AND IR-REDEEMABLE SHARES (S.55)

Redeemable means the company can take back. 

Equity shares are irredeemable. No co is allowed to issue irredeemable preference shares. Time period is 20 years. Rule 10 of the Companies (Share Capital and Debenture) Rules 2014. 

Conditions for redeeming shares-

  1. No such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend
  2. No such shares shall be redeemed unless they are fully paid
  3. It has to create a reserve, to be called the Capital Redemption Reserve Account (CRRA), and out of the profits of company, that part of the profit through it wants to redeem shares, should be transferred to this account.
  4. Premium, if any, payable on redemption of any preference shares shall be provided for out of the profits of the company. 
  5. If not in a position to redeem preferential share, it may, with the consent of the holders of three-fourths in value (not in number of shareholders) of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due including the dividend thereon, in respect of the unredeemed preference shares. 

S.55-Issue and redemption of preference shares.

  1. No company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable. 
  2. A company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed: 
    1. Provided that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders: 
    2. Provided further that— 
      1. (a) no such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption; 
      2. (b) no such shares shall be redeemed unless they are fully paid
      3. (c) where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and 
      4. (d) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed: 
        1. Provided also that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company‘s securities premium account, before such shares are redeemed. 
        2. (ii) in a case not falling under sub-clause (i) above, the premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company‘s securities premium account, before such shares are redeemed. 
  3. Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed: 
    1. Provided that the Tribunal shall, while giving approval under this sub-section, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares
    2. ExplanationFor the removal of doubts, it is hereby declared that the issue of further redeemable preference shares or the redemption of preference shares under this section shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the company. 
  4. The capital redemption reserve account may, notwithstanding anything in this section, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares. 
    1. ExplanationFor the purposes of sub-section (2), the term infrastructure projects‘‘ means the infrastructure projects specified in Schedule VI.

Mid-Term Syllabus-Till Prospectus

To be continued


Bibliography

The Companies Act 2013


Disclaimer– All information and contents available on this page are for general informational purposes only and in no way intended to constitute legal advice. Information on this website may also not be the most up-to-date and the author shall not be responsible for any damage (direct, incidental or consequential) arising out of the use of any information contained on this site. Use of any of the links or resources contained within the site does not create an attorney-client relationship between the reader/user and the author.

ध्यान दें – इस सफ़े पर दी गयी जानकारी जागरूकता के लिहाज़ से दी गयी सिर्फ़ आम जानकारी ही है और इसका मक़सद या इरादा कोई क़ानूनी सलाह-मशवरा देना नहीं है। इस वेबसाइट पर दी गयी जानकारी में कुछ ग़ैर इरादतन कमियाँ भी हो सकती है और उन जानकारियों के इस्तेमाल से हुए किसी भी नुक़सान की ज़िम्मेदारी वेबसाइट की ना होगी।