COMPANY LAW

2 Marks-
56) Define company- Justice Lindley.
- Prof. Lindley, company is defined as, “An association of many persons who
contribute money or money’s worth to a common stock, and employ it in some common
trade or business (i.e., for a common purpose), and who share the profit or loss (as the
case may be) arising therefore. The common stock so contributed is denoted in money
and it the capital of the company. The persons who contribute it, or to whom it belongs,
are members. The proportion of capital to which each member is entitled is his share.
Shares are always transferable although the right to transfer them is often more or less
restricted”.

6m-
4) Characteristics of a company.
-1. Separate Legal Entity
A company formed and registered under the companies act is a distinct legal entity. It is
a creation of law and is sometimes called artificial person having invisible and
intangible. It is a fiction of law with legal, but no natural or physical existence.
Case of Salomon Vs Salomon Co Ltd: S Sold his boots business to a newly formed
company for $30, 000. His wife, one daughter and four sons took up one share of $ 1
each. S took 23, 000 shares of $ 1 each and $ 10, 000 debentures in the company. The
debentures gave S a charge over the assets of the company as the consideration for
the transfer of the business. Subsequently when the company was wound up, its assets
were found to be worth $6, 000 and its liabilities amounted to $ 17, 000 of which $ 10,
000 were due to S (secured by debentures) and $ 7, 000 due to unsecured
Creditors. The unsecured creditors claimed that S and the company were one and the
same person and that the company was a mere agent for S and hence they should be
paid in priority to S. Held, the company was, in the eyes of the law, a separate person
independent from S and was not his agent. S, though virtually the holder of all the
shares in the company, was also a secured creditor and was entitled to repayment in
priority to the unsecured creditors.
2. Perpetual Succession
A company is an artificial person, as such it never dies. Its life does not depend on the
life of its members. It may not affected by insolvency, mental disorder or retirement of its
members. It is created by law and can be put an end to only by the process of law. Even
the earthquake, flood or hydrogen bomb cannot destroy it. It continues to exist even if
all its human members are dead. Unlike a natural person a company never dies. It is an
entity with a perpetual succession. Its existence is not affected by the death, lunacy and
insolvency of its members.
3. Limited Liability
In a company limited by shares, the liability of members is limited to the unpaid value of
the shares. If the face value of a share in a company is Rs.10 and a member has
already paid Rs.7 per share, he can be called upto to pay not more than Rs.3 per share
during the lifetime of the company.
In a company limited by guarantee, the liability of members is limited to such amount as
the members may undertake to contribute to the assets of the company in the event of
its being wound up.
4. Common seal
A company is a juristic person with a perpetual succession and a common seal. Since
the company has no physical existence, it must act through its agents and all such
contracts entered into by its agents must be under the seal of the company. The
common seal acts as the official signature of the company. Every company mush has a
seal with its name engraved on it.
5. Transferability of shares
The capital of a company is divided into parts, called shares. These shares are, subject
to certain conditions, freely transferable so that no shareholder is permanently or
necessarily wedded to the company. When the joint stock companies were established,
the great object was that the shares should be capable of being easily transferred.
6. Capacity to sue and be sued
A company can sue and be sued in its corporate name. It may also inflict or suffer
wrongs. It can in fact do or have done to it most of the things which may be done by or
to a human being. On incorporation, a company acquires separate and independent
legal personality. As a legal person, it can sue and be sued in its name.
7. Separate Property
A company, as already observed, is a legal person distinct from its members. It is
therefore capable of owing, enjoying and disposing of property in its own name.
Although, the capital and assets of the company are contributed by its shareholders,
they are not the private and joint owners of the property of the company. The property of
the company is not the property of the shareholders; it is the property of the company.

2m-
4) Cumulative shares.
- Kind of Preference Shares
- Cumulative Preference Shares
In case dividend is not declared, because of inadequate profit, the right to dividend for
thatyear does not lapse in the case of cumulative preference shares.
-Dividends not declared and paid get accumulative so that they may be paid out of
profits of subsequent years of arrears of dividend before any dividend is paid to equity
shareholders.
- Preference shares are always cumulative, unless the contrary is expressly stated in
the Articles of Association.

6m-
25) Types of Shares
- According to section 2 (46) of the companies act, a share means a share in the share
capital of the company and includes stock, except where a distinction between stock
and shares is express or implied. A share indicates certain rights and liabilities.

According to the Companies Act, 1956 a company can issue only types of shares viz.,
1. Preference Shares and 2. Equity Shares

I. PREFERENCE SHARES
The term preference shares focus certain preferential rights over other types of shares.
They are,
i) A preferential right to get a fixed rate of dividend during the life of the company. It
means that only after payment of dividend to preference shareholders, the surplus, if
any, can be used for paying dividend to equity shareholders.
ii) A preferential right to the return of share capital at the time of winding up of the
company. This means that when the company goes into liquidation, after discharging
debts due to outsiders, the surplus assets must first be used for returning the share
capital contributed by the preference shareholders. The remaining surplus alone will
be enjoyed by equity shareholders.
Preference shareholders must carry both these preferential rights. However, preference
shareholders have certain disabilities. For instance, they do not normally enjoy voting
rights.
However they get the right to vote.
1. On any resolution affecting their rights
2. On all resolution when dividend has not been paid to them for certain period as
prescribed in the Act.

II. EQUITY SHARES

- Equity shares are those, which are not preference shares. They were also known as
ordinary shares. They are entitled to get dividend only after the fixed rate of dividend is
paid to preference shareholders.
- Similarly at the time of winding up of the company, only after returning preference
shares capital in full, and if there is any surplus, it will be paid to equity shareholders.
- The rate of dividend varies from year to year depending on the profits earned by the
company. The larger the profits the higher may be the dividend for equity shareholders.
In the case of reputed companies, rate of dividend paid to equity shareholders is far
higher than the fixed rate paid to preference shareholders.
-However, when there is no profit in any year, equity shareholders’ dividend for that year
will not be paid as arrears of dividend in subsequent year even though profits may be
very large. Equity shareholders are entitled to vote on all resolutions.

6m-
23) Debentures.
- Meaning of Debentures:
According to Sec. 2 (12) of the companies Act, 1956, debentures include “debenture
stock, bonds and any other securities of a company”.
Debentures are debt instruments issued by a joint stock company. Amounts collected by
way of debentures form part of the loan capital of a company. They are repayable after
a fixed period. Debenture holders get interest on their debentures. They are creditors of
the company. They do not get dividend. Only shareholders get dividend.
Characteristics of Debentures
1. Debentures are debt instruments.
2. They generally carry fixed rate of interest.
3. They are normally repayable at the end of a fixed period. Repayment of debenture or
cancellation of debenture liability in the books of the company is known as redemption
of
debentures.
4. They can be issued at par, premium or at discount depending on the reputation of the
company.
5. They can either be placed privately or offered for public subscription.
6. They may or may not be listed in the stock exchange.
7. If offered for public subscription, they should be rated by a credit rating agency
approved by
SEBI, prior to listing.
8. Interest is payable on debentures at a fixed rate irrespective of the profit earned by
the business.
9. Debentures may be issued with or without the security of assets of the company.
10. In the event of winding up of the company the debenture holders are treated as
creditors and
given priority in repayment of their money.
11. Debenture holders normally do not have representation in the Board of the
company.
Types of Debentures
Debentures are classified as follows
1. On the Basis of Repayment
a. Redeemable Debentures: These debentures are paid off or redeemed after the
prescribed period.
b. Irredeemable or Perpetual Debentures: These debentures are permanent debentures
of a company. They are paid back only in the event of winding up of a company.

On the basis of Conversion

a. Convertible Debentures: These debentures are issued with an option to debenture
holders to convert them into shares after a fixed period. Convertible debentures are
either partially convertible debentures or fully convertible debentures.
b. Non Convertible Debentures: These are debentures issued without conversion
option. The total amount of the debenture will be redeemed by the issuing company at
the end of the specific period.

6m-
27) definec company + features
- COMPANY MEANING
A company means an association of individual formed for some common purpose. But it
is a voluntary association of persons. It has capital divisible into parts, known as shares,
an artificial person created by a process of law and it has a perpetual succession and a
common seal.

Characteristics of a Company
1. Separate Legal Entity
- A company formed and registered under the companies act is a distinct legal
entity. It is a creation of law and is sometimes called artificial person having
invisible and intangible. It is a fiction of law with legal, but no natural or physical
existence.
- Case of Salomon Vs Salomon Co Ltd: S Sold his boots business to a newly
formed company for $30, 000. His wife, one daughter and four sons took up one
share of $ 1 each. S took 23, 000 shares of $ 1 each and $ 10, 000 debentures in
the company. The debentures gave S a charge over the assets of the company
as the consideration for the transfer of the business. Subsequently when the
company was wound up, its assets were found to be worth $6, 000 and its
liabilities amounted to $ 17, 000 of which $ 10, 000 were due to S (secured by
debentures) and $ 7, 000 due to unsecured creditors.
- The unsecured creditors claimed that S and the company were one and the
same person and that the company was a mere agent for S and hence they
 should be paid in priority to S. Held, the company was, in the eyes of the law, a
separate person independent from S and was not his agent. S, though virtually
the holder of all the shares in the company, was also a secured creditor and was
entitled to repayment in priority to the unsecured creditors.
2. Perpetual Succession
- A company is an artificial person, as such it never dies. Its life does not depend
on the life of its members. It may not affected by insolvency, mental disorder or
retirement of its members. It is created by law and can be put an end to only by
the process of law. Even the earthquake, flood or hydrogen bomb cannot destroy
it. It continues to exist even if all its human members are dead. Unlike a natural
person a company never dies.
- It is an entity with a perpetual succession. Its existence is not affected by the
death, lunacy and insolvency of its members.
3. Limited Liability
- In a company limited by shares, the liability of members is limited to the unpaid
value of the shares. If the face value of a share in a company is Rs.10 and a
member has already paid Rs.7 per share, he can be called upto to pay not more
than Rs.3 per share during the lifetime of the company.
- In a company limited by guarantee, the liability of members is limited to such
amount as the members may undertake to contribute to the assets of the
company in the event of its being wound up.
4. Common seal
- A company is a juristic person with a perpetual succession and a common seal.
Since the company has no physical existence, it must act through its agents and
all such contracts entered into by its agents must be under the seal of the
company. The common seal acts as the official signature of the company. Every
company mush has a seal with its name engraved on it.
5. Transferability of shares
- The capital of a company is divided into parts, called shares. These shares are,
subject to certain conditions, freely transferable so that no shareholder is
permanently or necessarily wedded to the company.
- When the joint stock companies were established, the great object was that the
shares should be capable of being easily transferred.
6. Capacity to sue and be sued
- A company can sue and be sued in its corporate name. It may also inflict or
suffer wrongs.
- It can in fact do or have done to it most of the things which may be done by or to
a human being.
- On incorporation, a company acquires separate and independent legal
personality. As a legal person, it can sue and be sued in its name.
7. Separate Property
- A company, as already observed, is a legal person distinct from its members. It is
therefore capable of owing, enjoying and disposing of property in its own name.
Although, the capital and assets of the company are contributed by its
shareholders, they are not the private and joint owners of the property of the
company.
- The property of the company is not the property of the shareholders; it is the
property of the company.

12m-
2) Independent corporate personality-solomon v. Solomon & co., Lee Vs. Lee’s Air
Farming, Kondoli Tea estate, state trading corp. V. commercial tax officer.
- Corporate Personality
Corporate Personality is the creation of law. Legal personality of corporation is
recognized both in English and Indian law. A corporation is an artificial person enjoying
in law capacity to have rights and duties and holding property.
-A corporation is distinguished by reference to different kinds of things which the law
selects for personification. The individuals forming the corpus of corporation are called
its members. The juristic personality of corporations pre-supposes the existence of
three conditions:
(1) There must be a group or body of human beings associated for a certain purpose.
(2) There must be organs through which the corporation functions, and
(3) The corporation is attributed will by legal fiction. A corporation is distinct from its
individual members.
- It has the legal personality of its own and it can sue and can be sued in its own name.
It does not come to end with the death of its individual members and therefore, has a
perpetual existence.
-However, unlike natural persons, a corporation can act only through its agents. Law
provides procedure for winding up of a corporate body. Besides, corporations the banks,
railways, universities, colleges, church, temple, hospitals etc. are also conferred legal
personality. Union of India and States are also recognized as legal or juristic persons.
- In certain cases, the corpus of the legal person shall be some fund or estate which
reserved certain special uses. For instance, a trust – estate or the estate of an
insolvent, a charitable fund etc..; are included within the term ‘legal personality’.
-Corporations are of two kinds:
1. Corporation Aggregate: Is an association of human beings united for the purpose of
forwarding their certain interest. A limited Company is one of the best examples. Such a
company is formed
by a number of persons who as shareholders of the company contribute or promise to
contribute
to the capital of the company for the furtherance of a common object. Their liability is
limited to the extent of their shareholding in the company. A limited liability company is
thus formed by the personification of the shareholders. The property is not that of the
shareholders, but its own property and its assets and liabilities are different from that of
its members. The shareholders have a right to receive dividends from the profits of the
company but not the property of the company.
-The principle of corporate personality of a company was recognized in the case of
Saloman v. Saloman & Co.
2. Corporation Sole: Is an incorporated series of successive persons. It consists of a
single person who is personified and regarded by law as a legal person. In other words,
a single person, who is in exercise of some office or function, deals in legal capacity and
has legal rights and duties.
- A corporation sole is perpetual. Post – Master- General, Public Trustee, Comptroller
and auditor general of India, the Crown in England etc. are some examples of a
corporation sole. Generally, corporation sole are the holders of a public office which are
recognized by law as a corporation.
-The chief characteristic of a corporation sole is its “continuous entity endowed with a
capacity for endless duration”. A corporation sole is an illustration of double capacity.
-The object of a corporation sole is similar to that of a corporation aggregate. In it a
single person holding a public office holds the office in a series of succession, meaning
thereby that with his death , his property, right and liabilities etc., do not extinguish but
they are vested in the person who succeeds him.
-Thus, on the death of a corporation sole, his natural personality is destroyed, but legal
personality continues to be represented by the successive person. In consequence, the
death of a corporation sole does not adversely affect the interests of the public in
general.

Salomon v. Salomon & Co. Ltd (1897):

-This case established the doctrine of separate legal personality, where Mr. Salomon, a
boot manufacturer, incorporated his business and transferred ownership to a company
he controlled.
- When the company went insolvent, creditors argued that Mr. Salomon should be
personally liable.
- However, the House of Lords ruled that the company had a separate legal personality,
and Mr. Salomon was not personally liable for its debts. This principle highlights that the
corporation exists independently from its shareholders.

Lee v. Lee’s Air Farming Ltd (1961):

-This case further reinforced the separate legal entity principle. Mr. Lee, the controlling
shareholder, director, and an employee of his own company, died in an accident while
working for the company.
- His widow sought workers’ compensation, which was initially challenged since Mr. Lee
owned and controlled the company.
- However, the Privy Council ruled that Lee was an employee of the company because
the company, as a separate legal entity, could enter into an employment contract with
him, demonstrating the autonomy of corporate personality.

Kondoli Tea Company Ltd (1886):

-In this case, the court held that shareholders in a company were distinct from the
company itself, establishing that even if shareholders are identifiable, they do not own
the company's assets directly.
-This principle reinforces the autonomy of corporate ownership and obligations.

State Trading Corporation of India v. Commercial Tax Officer (1963):

-In this case, the Indian Supreme Court held that the State Trading Corporation, as a
government-owned entity, was a separate legal entity.
-The ruling highlighted that even when the state owns a company, it does not negate the
company’s independent personality.
-The court concluded that administrative and tax liabilities fall on the corporation itself
rather than the state.

12m-
1) Lifting of corporate veil- judicial / legal circumstances of lifting veil.
- Lifting of corporate veil
-Company enjoys a separate position from that of position of its owners. It is artificial but
yet a person in eyes of law. Problems arise when this position of the company is
misused.
-It is not incorrect to say that, though the company is an unreal person, but still it cannot
act on its own. There has to be some human agency involved so that company is able
to perform its functions.
-When this human agency is working, in the name of the company, for achieving goals
approved by law, the social order is not disturbed. But when this medium of operations
begins to be tainted, conflicts arise. This authority rather becomes firing of bullets from
someone else’s gun.
- When directors, or whosoever be in charge of the company, start committing frauds, or
illegal activities, or even activities outside purview of the objective/articles of the
company, principle of lifting the corporate veil is initiated. It is disregarding the corporate
personality of a company, in order to look behind the scenes, to determine who the real
culprit of the committed offence is.
Thus, wherever this personality of the company is employed for the purpose of
committing illegality or for defrauding others, Courts have authority to ignore the
corporate character and look at the reality behind the corporate veil in order to ensure
justice is served.
-This approach of judiciary in cracking open the corporate shell is somewhat cautious
and circumspect.
-In the case United States v. Milwaukee Refrigerator Transit Company, it was stated “A
corporation will be looked upon as a legal entity, as a general rule, and until sufficient
reason to the contrary appears; but, when the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons.”
-Supreme Court of India had adopted the similar thinking in the case Tata Engineering
and Locomotive Co. Ltd. vs. State of Bihar & Ors. where the corporations petitioning
had joined together and claimed protection under Article 286 of Constitution of India for
non-imposition of taxon the sale or purchase of goods, the Apex Court held that “If their
contention is accepted, it would really mean that what the corporations or companies
cannot achieve directly, they can achieve indirectly by relying upon the doctrine of lifting
the veil.”

*When can be the veil lifted?

-The doctrine, though one of the most used doctrines by Courts, is still, however, not
running upon a hard-and-fast rule. The basis for invoking such operations does not
follow a laid down policy.
-Howsoever, over the period of time, Courts and Legislatures throughout the globe have
attempted to narrow down scope and applicability of the doctrine under following two
heads: -
1) Statutory Provisions
-The Companies Act, 2013 has been integrated with various provisions which tend to
point out the person who’s liable for any such improper/illegal activity. These persons
are more often referred as “officer who is in default” under Section 2(60) of the Act,
which includes people such as directors or key-managerial positions. Few instances of
such frameworks are as following: -
A. Misstatement in Prospectus: -
Under Section 26 (9), Section 34 and Section 35 of the Act, it is made punishable to
furnish untrue or false statements in prospectus of the company. Through issuing
prospectus, companies offer securities for sale. Prospectus issued under Section 26
contains key notes of the company such as details of shares and debentures, names of
directors, main objects and present business of the company. If any person attempts to
furnish false or untrue statements in prospectus, he is subject to penalty or
imprisonment or both prescribed under the aforesaid sections, depending upon the
case. Each of these sections create a distinct aspect, that which type of incorrect
information furnishing would make such person liable for what amount or serving term.
B. Failure to return application money: -
Under Section 39 (3) of the Act, against allotment of securities, 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, then such officers
in default are to be fined with an amount of one thousand rupees for each day during
which such default continues or one lakh
rupees, whichever is less.
C. Mis description of Company’s name: -
The name of the company is most important. Usage of approved name entitles the
company to enter into contracts and make them legally binding. This name should be
prior approved under Section 4 and printed under Section 12 of the Act. Thus, if any
representative of the company collects bills or sign on behalf of the company, and enter
in incorrect particulars of the company, then such persons are to be held personally
liable. Similar things happened in the case Hendon vs. Adelman where signatory
directors were held personally liable for stating company’s name on a signed cheque as
“L R Agencies Ltd” while the original name was “L & R Agencies Ltd.”
D. For investigation of ownership of company: -
Under Section 216 of the Act, the Central Government is authorized to appoint
inspectors to investigate and report on matters relating to the company, and its
membership for the purpose of determining the true persons who are financially
interested in the success or failure of the company; or who are able to control or to
materially influence the policies of the company.
E. Fraudulent conduct: -
Under Section 339 of the Act, wherever in case of winding up of the company, it is found
that company’s name was being used for carrying out a fraudulent activity, the Court is
empowered to hold any such person be liable for such unlawful activities, be it director,
manager, or any other officer of the company. In the case Delhi Development Authority
vs. Skipper Construction Company (P) it was stated that “where, therefore, the
corporate character is employed for the purpose of committing illegality or for defrauding
others, the court would ignore the corporate character and will look at the reality behind
the corporate veil so as to enable it to pass appropriate orders to do justice between the
parties concerned.
F. Inducing persons to invest money in company: -
Under Section 36 of the Act, any person who makes false, deceptive, misleading or
untrue statements or promises to any other person or conceals relevant data from other
person with a view to induce him to enter into either of following:-
i. An agreement of acquiring, disposing, subscribing or underwriting securities.
ii. An agreement to secure profits to any of the parties from the yield of securities or by
reference to fluctuations in the value of securities.
iii. An agreement to obtain credit facilities from any bank or financial institution.
In such circumstances, the corporate personality can be ignored with a view to identify
the real culprit and make him personally liable under Section 447 of the Act accordingly.
G. Furnishing false statements: -
Under Section 448 of the Act, if in any return, report, certificate, financial statement,
prospectus, statement or other document required, any person makes false or untrue
statements, or conceals any relevant or material fact, then he is liable under Section
447 of the Act. If any document is sent from company to any place else, content of the
documents are sent on the letter-head of the company, Now when this letter is received
by any other person, he is supposed to be under assumption that he has received the
letter from the company. This “any other person” here is persons appointed under the
Act, such as Registrar of Companies (ROC). If he is furnished any false or untrue
statement, that is also an offence. Thus, in order to determine the real guilty
person, who allowed such documents being released in the name of the company is to
be found by way of lifting the corporate veil.
H. Repeated defaults: -
Under Section 449 of the Act, if a company or an officer of a company commits an
offence punishable either with fine or with imprisonment and this offence is being
committed again within period of 3 years, such company and officer are to pay twice the
penalty of that offence in addition to any imprisonment provided for that offence.

2) Judicial Pronouncements: -
Though the Legislature has attempted to insert numerous provisions in the Act to make
sure guilty person is pointed out as veil is pierced, there are instances where Judiciary
has played it’s part better and kept a check that no guilty person, due to a mere
technicality, walks free. Following are few such scenarios where Court may without any
doubt lift the corporate veil: -
A. Tax Evasion: -
It’s duty of every earning person to pay respective taxes. Company is no different than a
person in eyes of law. If anyone attempts to unlawfully avoid this duty, he is said to be
committing an offence. When strict rules are laid down for human being, why leave
company? One clear illustration was is Dinshaw Maneckjee Petit re. where the founding
person of 4 new private companies, Sir Dinshaw, was enjoying huge dividend and
interest income, and in order to evade his tax, he thus found 4 sham companies. His
income was credited in accounts of these companies and these amounts were repaid to
Sir Dinshaw but in form of a pretended loan. These loans entitled him to have certain
tax benefits. It was rather held that purpose of founding these new companies was
simple as means of avoiding super-tax.
B. Prevention of fraud/ improper conduct: -
It is obvious that no company can commit fraud on its own. There has to be a human
agency involved to commit such acts. Thus, one may make efforts to prevent upcoming
frauds. Similar thing was observed in the case Gilford Motor Co Ltd vs. Horne where,
Horne was appointed as Managing Director of the company, provided he accepts the
condition that he will not attempt to entice or solicit customers of the company while he
is holding the post or even afterwards. However, shortly thereafter, he opened a
company, in his wife’s name, which carried out a competing business to that of the first
company, with himself being in management. When the matter was brought into the
Court, it was held that the newfound company was mere cloak or sham, for purpose of
enabling Sir Dinshaw to commit breach of his covenant against solicitation.
C. Determination of enemy character: -
The purpose behind formation of company is self-profit. A company will not attempt to
do good towards society consciously. However, it may opt to cause damage instead.
Similar things were observed in the case Dailmer Co Ltd vs. Continental Tyres &
Rubber Co Ltd. The facts were such that a Germany based company was incorporated
in England to sell tyres manufactures in Germany. The German company had however
held the bulk of shares in this English company. As World War I broke out, the English
company commenced an action to recover trade debt. The question was brought before
House of Lords which decided the case against the claimant, stating that, company is
not a real person but a legal entity, it cannot be a friend or an enemy. However,
it may assume an enemy character when persons in de facto control of its affairs are
residents of the enemy territory. Thus, the claim was dismissed. It was rather held in the
case Sivfracht vs. Van Udens Scheepvart that, if in such scenarios where
a company is suspected to be of enemy character or is proved to be of enemy
character, then such granted monetary funds would be used as machinery to destroy
the concerned State itself. That would be monstrous and against public policy of that
concerned State.
D. Liability for ultra-vires acts: -
Every company is bound to perform in compliance of its memorandum of association,
articles of association, and the Companies Act, 2013. Any action done outside purview
of either is said to be “ultra-vires” or improper or beyond the legitimate scope. Such
operations of the company can be subjected to penalty.
The doctrine of ultra-vires acts against companies was evolved in the case Ashbury
Railway Carriage & Iron Company Ltd v. Hector Riche where a company entered into a
contract for financing construction of railway lines, and this operation was not mentioned
in the memorandum. The House of Lords held this action as ultra-vires and contract,
null and void.
E. Public Interest/Public Policy
Where the conduct of the company is in conflict with public interest or public policies,
Courts are empowered to lift the veil and personally hold such persons liable who are
guilty of the act. To protect public policy is a just ground for lifting the corporate
personality. One such scenario is Jyoti Limited vs. Kanwaljit Kaur Bhasin & Anr., where
it was held that corporate veil maybe ignored if representatives of the company commit
contempt of the Court so punishment can be inflicted upon.
F. Agency companies: -
Where it is expedient to identify the principal and agent concerning an improper action
performed
by the agent, the corporate veil maybe neglected. Such as in the case of Bharat Steel
Tubes Ltd vs IFCI where it was held that it doesn’t matter, and it isn’t necessary that
Government should be holding more than 51% of the paid-up capital to be the principal.
In fact, in the case New Tiruper Area Development Corporation Ltd vs. State of Tamil
Nadu where Government was holding mere 17.4% of the investment funds, it was found
that Area Development Corporation was actually a public authority through the
Government. It was created under a public-private participation to build, operate and
transfer water supply and sewage treatment systems.
G. Negligent activities: -
Every company law distinguishes between holding and subsidiary companies. Holding
companies under Indian company law are the companies which have right in
composition of Board of Directors, or which have more than 50% of the total share
capital of the subsidiary company. For example, Tata Sons is the holding company while
Tata Motors, TCS, Tata Steel are its subsidiary companies.
In cases where subsidiary companies have been found with tainted operations, Courts
have power to make holding companies liable for actions of their subsidiary companies
as well for breach of duty or negligence on their part. Such as in the case of Chandler
vs Cape Plc where an employee brought an action against holding company ‘Cape Plc’
for not taking proper health and safety measures, even though employee was employed
in its subsidiary company. Employee was appointed in the year 1959 in the subsidiary
company while he had discovered the fact that he is suffering from asbestosis in year
2007. When he was aware of his condition it was that the subsidiary company was no
longer in existence, thus, he brought action against the holding company, which was still
in existence. This matter was held to be maintainable. Rather, holding company was
held guilty and made liable as it owed duty of care towards employees. It was for
the first time where a holding company, despite the fact that it’s a legal entity separate
from that of its subsidiary, is however liable for actions of its subsidiary.
H. Sham Companies: -
The Courts are also empowered to lift the corporate veil if they are of the opinion that
such companies are sham or hoax. Such companies are mere cloaks and their
personalities can be ignored in order to identify the real culprit. This principle can be
seen in the prior discussed case of Gilford Motor Co Ltd vs. Horne where it was held
that the newfound company was mere cloak or sham, for purpose of enabling Sir
Dinshaw to commit breach of his covenant against solicitation.
I. Companies intentionally avoiding legal obligations: -
Wherever it is found that an incorporated company is deliberately trying to avoid legal
obligations, or wherever it is found that this incorporation of a company is being used to
avoid force of law, the Courts have authority to disregard this legal personality of the
company and proceed as if no company existed. The liabilities can be straight away
imposed on persons concerned.

6m-
15) Equity shares
- II. EQUITY SHARES
Equity shares are those, which are not preference shares. They were also known as
ordinary shares.
-They are entitled to get dividend only after the fixed rate of dividend is paid to
preference shareholders. Similarly at the time of winding up of the company, only after
returning preference shares capital in full, and if there is any surplus, it will be paid to
equity shareholders.
-The rate of dividend varies from year to year depending on the profits earned by the
company. The larger the profits the higher may be the dividend for equity shareholders.
-In the case of reputed companies, rate of dividend paid to equity shareholders is far
higher than the fixed rate paid to preference shareholders.
- However, when there is no profit in any year, equity shareholders’
dividend for that year will not be paid as arrears of dividend in subsequent year even
though profits may be very large. Equity shareholders are entitled to vote on all
resolutions.

VOTING RIGHTS
Equity shareholders’ rights
-An equity shareholder of a company limited by shares has a right to vote on every
resolution placed before the company.
-His voting right on a poll is in proportion to his share of the paid-up equity capital of the
company. The right of vote is an individual right in respect of which a member has a
right to sue.
-He has a right to say, “whether I vote with the majority or with the minority, you shall
record my vote: that is a right belonging to my interest in the company, and if you will
not, I shall institute legal proceedings to compel you”.
6m-
21) MOA and its clauses.
- MOA is one of the core documents, which has to be filed with the Registrar of
companies at the time of incorporation of a company.
- It is a document, which sets out the constitution of the
company and is really the fundamental conditions upon which alone the company is
allowed to be incorporated.
-In other words, it contains the fundamental conditions upon which alone the company
is allowed to be incorporated. It defines the activities the company is permitted to
undertake.
- Any act done which is outside the scope outlined in its memorandum is ultra vires
(beyond the power of) the company and is not binding on it.

- Contents of Memorandum
1. Name Clause
A company may be registered with any name it likes. But a name, which in the opinion
of the Central Government is undesirable, and in particular which is identical or which
too nearly resembles the name of an existing company shall register no company. Every
public company must write the word ‘limited’ after its name and every private company
must write the word ‘private limited’ after its name.
Rules regarding name
i) undesirable name to be avoided
ii) identical name to be avoided
iii) injunction if identical name adopted
iv) limited or private limited as the last word or words
v) prohibition of use of certain names
vi) restriction on use of certain key words as part of name
2. Registered Office Clause
This clause states the name of the state where the registered office of the company is to
situate. The registered office clause is important for two reasons. First, it ascertains the
domicile and nationality of a company. Second, it is place where various registers
relating to the company must be kept and to which all communications and notice must
be sent.
3. Object Clause
The object clause is the most important clause in the memorandum of association of a
company. It is not merely a record of what is contemplated by the subscribers. But it
serves a twofold purpose;
1) it gives an idea to the prospective shareholders the purpose for which their money
will be utilized;
2) it enables the persons dealing with the company to ascertain its powers.
4. Liability Clause
This clause states that the liability of the members of the company is limited. In the case
of a company limited by shares, the members are liable only to the amount unpaid on
the shares taken by him. In the case of a company limited by guarantee, the members
are liable to the amount undertaken to be contributed by them to the assets of the
company in the event of its being wound up.
5. Capital Clause
The memorandum of a company limited by shares must state the authorized or nominal
share capital, the different kinds of shares, and the nominal value of each share. The
chief point to consider in regard to this clause is what funds are necessary to set the
business going or, if it is proposed by an existing concern, what sum is needed to pay
its price and what, in addition, is wanted to keep the business going.
6. Association Clause or Subscription Clause
This clause provides that those who have agreed to subscribe to the memorandum
must signify their willingness to associate and form a company. The memorandum has
to be signed by each subscriber in the presence of at least one witness who must attest
the signature. Each subscriber must write opposite his name the number of shares he
shall take.

12m-
6) Legal position of Directors + duties of Directors.
- MEANING
A director includes any person occupying the position of director by whatever name
called. Only an individual can be appointed a director.

POSITION OF DIRECTORS
1. Directors as agents
When the directors enter into contract with third parties sign documents for and on
behalf of the company etc, they act as the agent of the company. They bind the
company be their acts.
2. Directors as Trustees
They are in the position of trustees, when they manage the assets and properties of the
company. Similarly when they exercise the powers entrusted to them they are in the
same position. It means that they should safeguard the interest of the company and
should never abuse the powers for promoting their personal ends.
3. Directors as Officers
Directors also act as officers of the company. When they have to manage the affairs of
the company, they are in the position to Chief Executive Officers. Thus the directors
combine in themselves the roles of agents, trustees and officers.
QUALIFICATION OF DIRECTORS
1. Only individuals can be appointed as directors of the company.
2. They must have contractual capacity
3. They must possess qualification shares, if laid down in the Articles. In such a case
the qualification must be acquired within two months of their appointment as directors.
The nominal value of qualification share should not exceed Rs.5,000 or one share
where its nominal value exceeds Rs.5,000.

APPOINTMENT OF DIRECTORS
First directors are usually named in the Articles if the Articles are silent, the signatories
to the memorandum shall be deemed to be the first directors of the company.
a. Appointment of Directors by the Company
Subsequent directors are elected by shareholders at the AGM. If a company adopts the
principle of retirement by rotation, one-third of the directors must retire by rotation. The
retiring directors are eligible for reappointment.
b. Appointment by Board of Directors
The Board can appoint additional directors. They can fill up casual vacancy caused by
death, resignations, etc. they can also appoint alternate director. If empowered by
Articles, the Board may appoint an alternate director during his absence for a period of
the less than 3 months from the date in which meetings of the Board are ordinarily held.
c. Appointment by Third Parties
If authorized by the Articles, third parties such as vendor of the business, banking or
financial institutions which have advanced loans to the companies, can appoint their
nominees on the Board.
d. Appointment by Central Government
The Central Government can also appoint directors on an order passed by the
Company Law Board or on the application of not less than 100 members of the
company or of members holding 10% of the total voting power.

NUMBER OF DIRECTORSHIP
A person can hold office as director in not more than 15 companies at the same time.
In calculating the number of directorships, the directorship of independent private limited
companies, non-profit associations, and alternate directorships excluded.
Every public company must have at least 3 directors and every private company must
have at least 2 directors.

POWER OF DIRECTORS
According to sec.292, the powers are mentioned below;
1. General Powers
The board of directors of a company is entitled to exercise all such powers and to do all
such acts and things as the company is authorized to do. However the Board shall not
do any act which is to be done by the company in general meeting.
2. Statutory Powers
By means of resolutions passed at the Board meetings, the following powers can be
exercised by the directors.
i. To make calls
ii. To issue debentures
iii. To borrow money otherwise than on debentures
iv. To make loans
3. Other powers to be exercised at Board Meetings
i. To fill up casual vacancy in the office of directors
ii. To appoint additional directors, if authorized by the articles
iii. To appoint an alternate director if authorized by the articles
iv. To accord sanction to contracts in which any director or his relative is interested
v. To recommend a certain rate of dividend to be declared at the annual general
meeting
vi. To make investments in the companies in the same group
vii. To appoint the first auditors of the company
viii. To fill up the casual vacancy of the office of an auditor not caused by resignation
4. Restrictions on the powers of directors
The following powers cannot be exercised by the Board without the consent of the
shareholders in the general meeting.
i. To sell, lease or otherwise dispose of the whole or substantially the whole of the
undertaking of the company
ii. To extent time for repayment of any debt due by a director
iii. To borrow money where the money to be borrowed together with that already
borrowed is in excess of the aggregate of the paid up capital and free reserves
iv. To contribute to charitable funds in excess of the prescribed limit

DUTIES OF DIRECTORS
1. Fiduciary Obligation
Since the company is an artificial person, it acts through the agency of natural persons
who are known as directors. Though the directors have powers, they have to do it for
the benefit of the company. Accordingly they must display good faith in all dealings or
acting on behalf of the company.
2. Duty to Care
The directors should work very careful and honesty so that the company will get more
profits. Directors must act honesty in the performance of his duties.
3. Duty to attend the Board Meeting
Board meetings are the appropriate places for the decisions and policy making of the
company. If the does not attend the meetings, it shows his negligence. If he absents for
three consecutive meetings, then he shall be removed from the company. It is the duty
of the directors to attend the board meetings regularly.
4. Duty not to delegate
The directors must perform their duties personally. The powers of the company are
delegated to the directors. Therefore he cannot delegate his powers to others persons.
5. Duty to disclose interest
Every director who is in any way whether directly or indirectly concerned or interested
in arrangement or proposed contract or arrangement, entered into or on behalf of the
company shall disclose the nature of his concern or interest at a meeting of the board of
directors.
6. Statutory Duties
Some of the important duties laid down in the Companies Act are listed below;
a. To sign a prospectus and deliver it to the Registrar before its issued to the public
b. To see that all moneys received from applicants for shares are kept in a
scheduled bank
c. Not to allot shares before receiving minimum subscription
d. To forward a statutory report to all its members at least 21 days before the date
of the meeting
e. To hold the meetings at least once in three months
f. If a director is interested in a contract, to disclose the nature of his interest
g. To call for annual general meeting every year
h. To file all statutory returns with prescribed authorities
i. To take steps for filing declaration of solvency in the case of voluntary winding
Up

LIABILITY OF DIRECTORS
A. liability to outsiders
The directors are personally liable to third parties of contract in the following cases;
They contract with outsiders in their personal capacity
They contract as agents of an undisclosed principal.
They enter into a contract on behalf of prospective company
When the contract is ultra vires the company
When they fail to repay application money
When they make misstatement in prospectus
When they make irregular
B. Liability to Company
The directors shall be liable to the company for the following;
Where they have acted ultra vires the company
When they have acted negligently
Where there is a breach of trust
Directors are liable to the company for misfeasance
C. Criminal Liability of Directors
Directors may incur criminal liability for the following activities;
a. Misstatement in the prospectus
b. Failure to file return of allotment
c. Failure to issue share certificates within the prescribed period
d. Failure to pay dividend within 42 days from the date of declaration
e. Failure to lay before the AGM audited profit and loss account and balance sheet
f. Failure to file copies of special resolution with the Registrar within 30 days of passing
the resolution
g. Failure to furnish the necessary information to the company’s auditors
h. Destruction of important document
i. Holding the office of directors in more than 15 companies excluding private
companies.

12m-
5) Golden rule of framing Prospectus + Remedies available for misrepresentation
of prospectus.

A prospectus is a formal legal document issued by companies to potential investors,

providing essential information about the company and its securities. The purpose of a
prospectus is to ensure transparency, allowing investors to make informed decisions. In
administrative and corporate law, strict regulations govern the framing of a prospectus
to protect public investors and maintain market integrity.

The Golden Rule of Framing a Prospectus

The "golden rule" of framing a prospectus requires that all information provided must be
complete, accurate, and not misleading in any way. This principle was established in the
landmark English case of New Brunswick and Canada Railway & Land Co. v.
Muggeridge (1860), which emphasized that a prospectus should disclose all material
facts accurately to protect investors from false representations.

Key Aspects of the Golden Rule

1. Full Disclosure: The prospectus must provide all relevant information that a
reasonable investor would need to make an informed decision. This includes
financial details, management information, business risks, and any significant
contracts.
 2. Accuracy and Honesty: All statements made in the prospectus must be truthful,
with no exaggeration or concealment of material facts. Misleading or
exaggerated claims can result in legal liability for misrepresentation.
3. Avoidance of Material Omissions: The company must avoid leaving out any
information that could mislead potential investors. For example, omitting
significant liabilities or ongoing litigation could lead to investor losses and legal
repercussions for the company.
4. Compliance with Regulatory Requirements: In India, the Securities and
Exchange Board of India (SEBI) governs the requirements for a prospectus.
SEBI mandates strict adherence to regulations concerning disclosure, protecting
investors and ensuring companies maintain transparent communication.

Misrepresentation in a Prospectus

Misrepresentation occurs when the information in a prospectus is false or misleading,

causing investors to make uninformed or erroneous decisions. Misrepresentation can
be:

● Innocent Misrepresentation: Where the issuer provides incorrect information

without intent to deceive.
● Negligent Misrepresentation: Where the issuer fails to exercise due care in
ensuring the accuracy of the information.
● Fraudulent Misrepresentation: Where the issuer knowingly provides false or
deceptive information to induce investors.

Types of Misrepresentation in a Prospectus

1. False Statements: Incorrect information regarding the company’s financial

health, management, or business prospects.
2. Omission of Material Facts: Leaving out key facts such as outstanding debts or
legal issues that would influence an investor’s decision.
3. Exaggerated Claims: Making exaggerated statements about potential returns,
future projects, or company performance.

Remedies Available for Misrepresentation in a Prospectus

The law provides several remedies for investors who suffer losses due to
misrepresentation in a prospectus. These remedies ensure investor protection and
uphold corporate accountability.

1. Civil Remedies:
 ○ Rescission: The investor may cancel the contract and recover their
investment if they can prove that they invested based on misleading
information. Rescission places the parties back in their original positions
as if the contract had never been made.
○ Damages for Misrepresentation: If an investor suffers financial loss due
to false or misleading information, they may sue for damages under tort
law. In cases of fraudulent misrepresentation, the investor may recover all
losses directly linked to the false statements.
○ Special Damages Under the Companies Act: Section 35 of the
Companies Act, 2013, provides that any person who makes or authorizes
false statements in a prospectus is liable to compensate affected
investors. This applies to the company, directors, promoters, and any
other persons involved in preparing the prospectus.
2. Criminal Liability:
○ Prosecution for Fraudulent Misrepresentation: Section 447 of the
Companies Act provides for penalties, including imprisonment, for anyone
found guilty of fraudulently inducing investors by misrepresentation in a
prospectus. This holds individuals criminally accountable, potentially
deterring future misconduct.
○ Penalties Under SEBI Regulations: SEBI may impose fines and
restrictions on companies that issue misleading prospectuses, helping to
maintain transparency and protect the market's integrity.
3. Administrative Remedies:
○ Investor Protection Measures by SEBI: SEBI has the power to
investigate companies suspected of misrepresentation and can impose
penalties, restrict trading activities, or issue bans. SEBI may also provide
compensation schemes to protect the interests of affected investors.
○ Market Bans and Director Disqualification: Directors involved in the
issuance of misleading prospectuses may be disqualified from holding
directorships in the future, discouraging malpractice and ensuring
accountability.
4. Statutory Remedy under the Companies Act, 2013:
○ Section 36 – Punishment for Fraudulently Inducing Investment: This
section allows affected investors to file complaints and obtain justice when
fraudulently induced to invest. Punishment includes fines and
imprisonment for offenders.
○ Section 447 – Penalty for Fraud: This section allows for criminal action
with severe penalties for any corporate fraud, reinforcing the legal
consequences of issuing a misleading prospectus.

Conclusion
The golden rule of framing a prospectus emphasizes transparency, full disclosure, and
accuracy, protecting investor interests. Misrepresentation in a prospectus can lead to
civil, criminal, and administrative remedies, which serve to uphold investor rights and
corporate accountability. This framework under administrative law ensures companies
present accurate, honest information, thus building investor confidence and supporting
market integrity.

6m-
26) FEMA
- FEMA in Company Law

The Foreign Exchange Management Act (FEMA), 1999, is a key regulatory framework
governing foreign exchange in India. It replaced the Foreign Exchange Regulation Act
(FERA) of 1973 and represents a shift toward a more liberalized approach, aligning with
India’s open-market policies. FEMA’s main objectives are to facilitate external trade,
promote orderly development of the foreign exchange market, and regulate
cross-border capital flow.

Key Features of FEMA in Company Law

1. Regulation of Foreign Exchange Transactions: FEMA regulates all transactions

involving foreign exchange, essential for companies involved in international
trade and investment. It classifies transactions as:
○ Current Account Transactions: Routine business expenses like imports
and exports.
○ Capital Account Transactions: Investment-related transactions, such as
equity investments and loans.
2. Guidelines for Foreign Direct Investment (FDI): FEMA provides a regulatory
framework for FDI, defining permissible sectors, investment caps, and
compliance requirements. It helps companies attract foreign investments within a
structured legal framework, contributing to India’s economic growth.
3. Compliance and Reporting Requirements: Companies dealing with foreign
exchange must comply with FEMA’s reporting requirements, including transaction
details, annual returns, and foreign currency transactions. The Reserve Bank of
India (RBI) monitors these transactions to ensure compliance.
4. Role of Enforcement Directorate (ED): The ED enforces FEMA regulations,
investigating non-compliance and imposing penalties for violations. Offenses are
treated as civil rather than criminal under FEMA, with penalties typically involving
fines.