September2019 31000
September2019 31000
September2019 31000
CORPORATE LAW
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Class II
Distance Education Program
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National Law School of India University
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Aditya Kamath, BA. LLM
Formation of a Company
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(i) Promotion
(ii) Registration
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(iii) Floatation
(iv) Commencement of Business
PROMOTION: Promotional activities include the
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wide range of commercial activities which include
many technical and non-technical operations. Not a
legal term but one of Business and Commerce.
Whaley BridgePrinting Co v. Green [(1880) Q.B.D. 111].
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According to Bowell L.J, ‘promotion’ is not a term of
law, but of business operations familiar to the
commercial world, by which a company is generally
brought into existence.
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2 (69) “promoter” means a person—
(a) who has been named as such in a prospectus or is
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identified by the company in the annual return referred
to in section 92; or
(b) who has control over the affairs of the company,
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directly or indirectly whether as a shareholder, director
or otherwise; or
(c) in accordance with whose advice, directions or
instructions the Board of Directors of the company is
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accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a
person who is acting merely in a professional capacity;
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Position of a promoter: Not an Agent, not a member. A
fiduciary relationship exists between the promoter and
the company, first laid down by Blackburn, LJ in
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Erlanger Vs. New Sombrero Porphate Co (1878)3
A.C 1280].
Gluckstein v. Barnes [(1900) A.C 240]
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Duties of a promoter:
Not to make any Secret profit. Ladysoell Mining
Co v. Brooks (35 Ch.D 400),
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Disclose to company any interest in any
transaction entered into by company.
Liability of Promoters: Promoter is liable to the
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original allottee of shares for the misstatements
contained in the prospectus. He may also be
imprisoned for a term extending to two years or fine
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upto Rs. 50,000 for such untrue statements in the
prospectus.
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Subscription
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Person competent to contract- need not be
beneficiary- eg. Trustee, agent etc.
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Partnerships/HUF cannot- will be deemed individual
members.
A person becomes a subscriber by signing the
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memorandum as a subscriber, at the place intended for
that purpose.
Arthanari Transport Pvt. Ltd. v. K.P. Sami
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Gowaden [35 Comp.cases 930]- Signature on all
pages.
Mossa Gulam Arif v. Ibrahim Gulam Arif[ILR (1913)
40 Cal I (PC)]- minors
Pre- Incorporation Contracts
Do they bind the company as it has not come into existence as yet,
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hence how can one represent that which does not exist?
Must a new contract must be entered after company is incorporated?
Even so, the law of restitution , being one of equity would apply.
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Promoters will be held personally liable.
Kelner v Baxter- Wine bought by persons who sought to form
company.
Seth Sobhagmal Lodha,v. Edward Mills Co. Ltd– held company
not liable.
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Newborne v Sensolid (Great Britain) Ltd.- Signed in the name of the
Company while it was being incorporated.
Jai Narain Parasrampuria Vs. Pushpa Devi Saraf (2006) 7 SCC 756-
NO requirement of inclusion in articles, what is meant by
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“warranted by incorporation”
According to Sec. 15 (h) and 19(e) of the Specific Relief Act, specific
performance can be enforced against a company where its promoters
have before its incorporation entered into a contract for the purpose of
the company and such contract is warranted by terms of incorporation.
Normally included in Articles so as to make valid.
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Registration of a Company
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Step 1: Name and Approval – 5-6 names- end with Private Limited or
Limited based on the type- ROC will reply in 7 days as to availability
2-3 weeks to incorporate thereafter- MOA, AOA to be filled with other
required docs and registration fee which is based on Share capital
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stated in MOA.
Certificate of incorporation issued thereafter- conclusive proof of
formalities of Act being fulfilled.
Mossa Gulam Arif v. Ibrahim Gulam Arif (ILF40 Cal.1)- two
minors subscribed to memorandum- inc challenged- could not
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reopen.
Pvt. Ltd may commence business immediately.
Public Ltd. may now issue prospectus to ROC or statement in lieu if
not inviting public investment- can commence business immediately.
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Certificate of Incorporation
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Creates a new legal personality.
Mossa Gulam Arif v. Ibrahim Gulam Arif (ILF40
Cal.1)
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Shall presume that all requirements have been fulfilled
unless proved otherwise.
Section 7(7) of the 2013 Act, which enables the NCLT
to direct the removal of the name of a company from
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the register, in certain situations. (See Section 7(7) of
the 2013 Act).
Memorandum of Association
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Section 2(56) defines the memorandum thus: “Memorandum means
the memorandum of association’ of a company as originally framed or
as altered from time to time”
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Section 4 explain the details of the form and contents of the MOA.
Chapter II explains in Detail all provisions relating to the MOA
. The clauses of the memorandum
1. The name clause.—The various contents of the memorandum
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are essentially called 'clauses'. Every memorandum must state the
name of the company with which it is to be registered. The name must
exactly be the same name as has been made available by the Registrar,
with the word 'Limited' as the last word in the case of a public limited
company and the words 'Private Limited' as the last words in the case of
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a private limited company.
ALTERATION- May be ordered by the Central Govt, may be done Suo
moto by Company after approval of the Central Govt.
2. The objects clause.—According to this section, the objects as stated in
the memorandum, should be divided into three groups under three distinct
headings, namely:—
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A. Main objects (to be pursued by the company on its incorporation);
B. Objects incidental or ancillary to the attainment of the main objects;
C. Other objects.
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Cotman V. Brougham [(1918) A.C. 514], :gives protection to subscribers who
learn from it the purposes to which their money can be applied. In the second
place it gives protection to persons who deal with the company and who can
infer from it the extent of the company’s powers”
Attorney General v. G.E. Rly.Co.[1980]S.A.C. 473 that a company may do
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anything which is incidental to and consequential upon the objects specified
and such act will not be held ultra vires.
Doctrine of Ultra Vires: Ashbury Rly. Carriage & iron Company
v.Riche[1875] LR 7 HL 653.- Mechanical Engineers and General Contractors-
contract for financing building of Railway.
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Lakshmanaswami Mudaliar v. L.I.C AIR 1963 SC 1185: LIC took over
company, no more had any business of its own, hence donation ultra
vires.
Belhouse Ltd v. City Wall Properties Ltd [(1966)36 Comp. Cases 779] In
this case, the object clause included the power to carry on any other trade or
business whatsoever, which can, in the opinion of Board of Directors, be
advantageously carried on by the Company.
1. The ultra vires transactions are null and void ab initio
2. Any member can get an order of Injunction from the court in case he
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finds that the company is about to undertake an ultra vires act.
3. It is the duty of the director to ensure that the corporate capital is used
only for the legitimate business of the company, In case of such capital
being diverted, the directors are personally liable to replace it. The
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directors and other officers are personally accountable to third parties
in case of ultra vires transactions.
4. Where a company’s money has been used ultra vires to acquire some
property, the company’s right over such property is held secured.
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Can Share Holders Ratify an Ultra Vires Act? - Ashbury Railway Carriage
& Iron Co. Ltd v Riche (1875) LR 7 HL 653.- NO
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3. The Registered office Clause: -- Every Company must have a
registered office which establishes its domicile. The notice of the exact
address of the registered office must be given to the ROC in Form No.
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18 within 30 days from the date of incorporation.
4. The liability clause.—The memorandum of a company, should
state that the liability of the members of the company is limited. In
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addition, the memorandum of a company limited by guarantee should
also state that each member would undertake to contribute 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.
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5. The capital clause.—The memorandum of a company having a
share capital (including a guarantee company having a share capital
but excluding an unlimited company) should state the total amount of
the share capital with which the company is to be registered and its
division in different classes or kinds of capital the number of shares of
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each kind and the face value of each share.
6. The association and subscription clause.—The memorandum of
every company should declare the intention of the subscribers to the
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memorandum for associating themselves with the company and
agreeing to take up the shares in the company, in the number stated
against the respective promoter's name, not being less than one. The
total number of shares agreed to be taken up by all the subscribers
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should also be stated.
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Alteration of Memorandum
13. (1) Save as provided in section 61, a company may, by a special
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resolution and after complying with the procedure specified in this
section, alter the provisions of its memorandum.
(8) A company, which has raised money from public through prospectus
and still has any unutilised amount out of the money so raised, shall
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not change its objects for which it raised the money through
prospectus unless a special resolution is passed by the company
and—
(i) the details, as may be prescribed, in respect of such resolution shall
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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;
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(ii) 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.
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(9) The Registrar shall register any alteration of the
memorandum with respect to the objects of the
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company and certify the registration within a
period of thirty days from the date of filing of the
special resolution in accordance with clause (a) of
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sub-section (6) of this section.
(10) No alteration made under this section shall
have any effect until it has been registered in
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accordance with the provisions of this section.
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DRAFTING EXERCISE
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Take a look at the MOA object clause-
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Pick from the following industries:
1. Automotive rental
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2. ITES
3. Logistics
4. Pharma
Articles of Association
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5. (1) The articles of a company shall contain the regulations for
management of the company.
(2) The articles shall also contain such matters, as may be prescribed:
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Provided that nothing prescribed in this sub-section shall be deemed
to prevent a company from including such additional matters in its
articles as may be considered necessary for its management.
(3) The articles may contain provisions for entrenchment to the effect that
specified provisions of the articles may be altered only if conditions or
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procedures as that are more restrictive than those applicable in the case
of a special resolution, are met or complied with.
(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
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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.
(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.
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They prescribe the rules and regulations for a company for governing
its day-to-day administration; they are the rules for the internal
management of the company.
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Mandatory for Private Limited and Unlimited companies to register
with MOA.
The status of the articles was aptly described by Lord Cairns LC in
Ashbury Railway Carriage & Iron Co. Ltd. v Riche2 thus: "The
memorandum is, as it were, the area beyond which the actions of the
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company cannot go; inside that area the shareholders may make such
regulations for their own government as they think fit". The articles
cannot, thus, override the memorandum and neither the
memorandum nor the articles shall override the Act.
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Re New British Iron Co, Exp Beckwith (1898) 1 Ch 324; Borland's Trustee
v Steel Brothers & Co Ltd (1901) 1 Ch 279. – Article are a contract
between the company and its members.
They also govern th relation between members inter se.
Status of MOA and AOA:
Now it is settled law that they are contractual terms between the
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company and its members in respect of maters relating to ‘Membership
Rights’ only.
In Eley v. Positive Life Assurance Co. Ltd. [(1876)1 EX.D 88] the
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articles of a company provided that one ‘E’ should be the solicitor
of the company. The company refused to appoint him. Held, he could
not claim damages for breach of contract for the following reasons:
(1) There was no specific contract between the parties, express or implied.
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(2) ‘E’ could not rely upon the relevant provisions in the articles because
those provisions did not affect him in his capacity as a member.
Binding force of MOA and AOA:
1. Upon the company and its members: Binding as far as membership
rights go- Hickman v Kent or Romney Marsh Sheep Breeders’
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Association [(1915)1 Ch.881],- Arbitration clause- suit filed-
held no jurisdiction.
2. Between members themselves- Binding.
3. Between Company and outsiders: Normally do not act as a
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contract unless parties have transacted based on the Articles-
Example Salary of MD fixed in Articles.
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Alteration of Articles: Section 14
14. (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—
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a) a private company into a public company; or
b) a public company into a private company:
Provided that where a company being a private company alters its
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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:
Provided further that any alteration having the effect of conversion of a
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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.
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(2) Every alteration of the articles under this section and a copy of the
order of theTribunal 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
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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.
Alteration may also be retrospective:
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Sidebotton v Kershaw Lees & Co. Ltd [(1920)1 Ch. 154- Directors
allowed to buy out shares of members who engaged in competitive
State of Karnataka v. Mysore Coffee Curing Works Ltd. [(1984)55
Comp. cas.70].- power to nominate three Directors and another as
Chairman of the Board.
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A person dealing with a company must be taken to have read the
Companies Act and the articles of the company he is dealing with, and
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will be deemed to have had constructive notice of their contents.
Kotla Venkatswamy v.Chinta Ramamurthy [AIR 1934, Mad. 579] –
all documents to be signed by MD, Working Director and
Secretary- only last two signed Mortgage deed, held not valid and
outsider cannot claim.
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Doctrine of Indoor Management (Turquand Rule) :
Royal Bank v Turquand [(1856) 119 ER 886]. – Directors could borrow
subject to resolution at a general meeting- Shareholders claimed no
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such meeting- court said meeting presumed.
Sri Kishan Rathi v. Mondal Bros & Co Ltd [AIR 1967 Cal 75]- need not
and cannot, and is not obliged, to look further in the internal
management of the company and embark on an investigation.
EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT:
1. Knowledge of Irregularity: Howard v. Patent Ivory
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Manufacturing Co [(1888) 38 Ch D 156], the directors issue of
debentures to themselves- assent of general meeting needed, not
obtained.
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Hely-Hutchinson v. Brayhead Ltd - new Director- Contract for
Indemnity with director that company and himself held out to be
authorised to do so though not- company liable.
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2. Suspicion of irregularity: Anand Bihari Lal v. Dinshaw & Co [AIR
1942 Oudh 417]- the plaintiff accepted a transfer of the defendant
company’s property, from the company accountant who had no
authority to transfer.
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3. No knowledge of Articles: Rama Corporation v Proved Tin and
General Investment Co.[1952] 1 All.ER 554 – Director no power to
delegate, borrow- plaintiff did not refer to Articles at all, held no IM
was possible.
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4. Forgery- Ruben v. Great Fingal Consolidated [(1906) AC 439],
Forged Share certificate issued by secretary- with signatures of two
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directors and seal of co.
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the company.
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