Company Law Study Material – 3rd Sem

COMPANY LAW

3rd SEMESTER

Harinath Janumpally
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Company Law Study Material – 3rd Sem

COMPANY LAW IMP QUESTIONS

SL.NO SHORT QUESTIONS
1 ADVANTAGES AND DIS-ADVANTAGES OF INCORPORATION 3
2 PRE AND POST-INCORPORATION CONTRACTS 3
3 IMPORTANCE OF MEMORANDUM OF ASSOCIATION {NAME CLAUSE, IDENTICAL NAMES (SEC 4)} 3
4 PROMOTERS STAND IN A FIDUCIARY RELATIONSHIP WITH THE COMPANY 3
5 DOCTRINE OF ULTRA VIRES 5
6 DIFFERENT KINDS OF MEETINGS OF THE SHAREHOLDERS 4
7 OPPRESSION AND MISMANAGEMENT 3
8 PROTECTION ACCORDED TO THE MINORITY SHAREHOLDERS 3

LONG QUESTIONS
1 DEFINITION OF COMPANY. WHAT ARE ITS CHARACTERISTICS? 9
2 DOCTRINE OF LIFTING THE CORPORATE VEIL 4
3 CLASSIFICATION OF COMPANIES 8
4 DEFINE DIRECTOR. WHAT ARE THE RIGHTS AND DUTIES OF A DIRECTOR? POWERS OF DIRECTORS 5
INCLUDING STARTING A NEW BUSINESS SEC 179(H), QUALIFICATIONS OF A DIRECTOR
5 PROSPECTUS, WHAT ARE THE INGREDIENTS TO CONSTITUTE A PROSPECTUS 3
6 WINDING UP (CIRCUMSTANCES UNDER WHICH A COMPANY CAN BE WOUND UP-TYPES) 8
WINDING UP BY CREDITORS, VOLUNTARY, COMPULSORY
7 WHO CAN APPLY FOR WINDING UP? CONSEQUENCES OF COURT'S WINDING UP ORDER 2

CASES
INSURANCE IN INDIVIDUAL'S NAME (Macaura v Northern Assurance Co. Ltd, 1925, timber co.
1 case) 2
2 PRIVATE COMPANY BECOMING A PUBLIC COMPANY BY VIRTUE OF 43A 2
3 SUBSCRIPTION OF SHARES 2
4 DEFINE DIRECTOR. WHAT ARE THE RIGHTS AND DUTIES OF A DIRECTOR? POWERS OF DIRECTORS 2
INCLUDING STARTING A NEW BUSINESS SEC 179(H), QUALIFICATIONS OF A DIRECTOR
5 WINDING UP (CIRCUMSTANCES UNDER WHICH A COMPANY CAN BE WOUND UP-TYPES) 2
WINDING UP BY CREDITORS, VOLUNTARY, COMPULSORY

Due to lack of time, I have prepared this material in hurry and I appreciate your suggestions for
improving the quality of material regarding spelling mistakes, syntax errors, wrong description of
Sections or Articles and wrong information about the subject. Thanks in advance.

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Company Law Study Material – 3rd Sem

OSMANIA UNIVERSITY
PAPER-IV: COMPANY LAW SYLLABUS
Unit- I: Corporate Personality - General Principles of Company Law - Nature and Definition
of Company - Private Company and Public Company - Characteristics of a Company -
Different kinds of Company - Registration & Incorporation of Company - Lifting the
Corporate Veil – Company distinguished from Partnership, HUF and LLP--Position under the
Companies Acts of 1956 and 2013

Unit – II: Promoters - Memorandum of Association - Doctrine of Ultra vires - Articles of

Association - Doctrine of Indoor Management - Prospectus - Civil and Criminal liability for
misstatement in prospectus - Statement in lieu of Prospectus – Pre-incorporation Contracts
- Membership in a Company - Borrowing Powers – Debentures & Charges-Position under the
Companies Acts of 1956 and 2013

Unit- III: Shares & Stock - Kinds of shares - Statutory restrictions on allotment of shares -
Intermediaries – Call on shares for future of shares- Transfer of shares – Transmission of
shares – Reduction on transfer of shares - Rectification of register on transfer - Certification
and issue of certificate of transfer of shares - Limitation of time for issue of certificates -
Object and effect of share certificate-Position under the Companies Acts of 1956 and 2013

Unit – IV: Directors – Different kinds of Directors - Appointment, position , qualifications and
disqualifications- powers of Directors - Rights and Duties of Directors - Meetings and
proceedings - kinds of meetings - Statutory meeting- Statutory report - Annual General
Meeting - Extraordinary meeting - Power of the Tribunal to order meeting - class meetings -
Requisites for a valid meeting - Chairman for meetings - Duties of Chairman - Proxy -
Resolutions – Minutes Shareholders Activism-Corporate Social Responsibility-Position under
the Companies Acts of 1956 and 2013

Unit – V: Accounts and Audit - Inspection and Investigation - Compromises, Reconstruction

and Amalgamation - Majority rule and Rights of minority share holders - Prevention of
oppression and mismanagement - Revival and rehabilitation of sick industrial companies -
Mergers, Amalgamation and Takeover - Dissolution of a company – Winding up of
companies-Modes of winding up of companies – consequences of winding up - The
insolvency and Bankruptcy Code, 2016 in relation to winding up of companies –Authorities
under the Act- Department of Company Affairs - NCLAT, NCLT, Company Law Board,
Regional Directors, ROC, Public Trustee or Advisory Committee & SFIO -Their powers and
functions- – Jurisdiction of Courts - The impact of the Companies Act, 2013.

Suggested Readings: 1. Shah : Lectures on Company Law, N.M.Tripati, Bombay. 2. Avtar Sing
: Company Law, Eastern Book Company. 3. Charlesworth: Company Law, Sweet and
Maxwell. 4. Ramaiah: Company Law, Wadhwa & Co. 5. Dutta: Company Law, Eastern Law
House, Calcutta. 6. The Companies Act, 2013. 7. Executive Programme Study Material on
Company Law, The Institute of Company Secretaries of India, New Delhi available
atwww.icsi.edu.

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SHORT ANSWERS
1. Advantages and disadvantages of incorporation.
Answer: Definition of Company: The word ‘Company’ has no strict technical or legal
meaning.
A Company, in common parlance, means a group of persons associated together for the
attainment of a common end, social or economic. In a broad sense, a company may mean
an association of individuals formed for some common purpose.
As per Section 2(20) of Companies Act, 2013 ‘company’ means a company incorporated
under this Act or under any previous company law.

Advantages of Company form of Organisation:

The company form of organisation has been successful in almost all countries of the
world. This form is suitable where large resources are required, and the production has to
be carried out on a large scale. The number of joint-stock companies has shown a
phenomenal increase in the twentieth century.
Some of the merits of company form of organization are discussed below:
1. Accumulation of Large Resources:
The main drawback of the sole trade and partnership concerns has been the scarcity of
resources. The resources of a sole trader and of partners being limited, these enterprises
have always suffered for want of funds. A company can collect a large sum of money from
a large number of shareholders. There is no limit on the number of shareholders in a
public company. If the need for more funds arises, the number of shareholders can be
increased. Joint-stock companies are suitable for those businesses where large resources
are required.
2. Limited Liability:
The liability of members in a company form of organisation is limited to the nominal value
of the shares they have acquired. If a person has purchased a share of Rs. 100, his liability
is limited to Rs. 100 only. If the share is partly paid, then he can be required to pay only
the unpaid value of the share. In no case, the total payment will exceed Rs. 100. The
limited liability encourages many persons to invest in shares of joint-stock companies.
Many persons will be reluctant to invest in those enterprises where liability is unlimited.
3. Continuity of Existence (Perpetual Succession):
When a company is incorporated, it becomes a separate legal entity. It is an entity with
perpetual succession. The members of a company may go on changing from time to time,
but that does not affect the continuity of a company. The death or insolvency of members
does not in any way affect the corporate existence of the company. The continuity of a
company is not only in the interests of the members but is also beneficial for society. The
discontinuation of a company may cause wastage of resources and inconvenience to the
consumers.
4. Efficient Management:
In the company form of organisation, ownership is separate from management. It enables
the company to appoint an expert and qualified persons for managing various business
functions. The availability of large-scale resources enables the company to attract
talented persons by offering them higher salaries and better career opportunities.
Efficient management will help the company to expand and diversify its activities.

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5. Economies of Large Scale Production:

With the availability of large resources, the company can organise production on a big
scale. The increase in scale and size of the business will result in economies in production,
purchase, marketing and management, etc. These economies will enable the company to
produce goods at a lower cost, thus resulting in more profits. The company will help
consumers by providing them with cheaper goods and will also be able to accumulate
more resources for further expansion.
6. Transferability of Shares:
The shares of a public company are freely transferable. A shareholder can dispose of his
shares at any time when the market conditions are favourable, or he is in need of money.
The company does not return share-money before its winding up, but shareholders can
easily sell their shares through stock exchange markets.
Stock Exchange provides a ready market for the purchase and sale of shares. The facility of
transferring shares encourages many persons to invest. This provides liquidity to the
investor and stability to the company. On the other hand, the partnership form of
organisation does not provide free transferability of shares.
7. Ability to Cope with Changing Business Environments:
The present business enterprises operate under uncertain economic and technological
environments. Technological changes are taking place every day. The needs of consumers
are varied and changing, to cope with the changing economic environment every business
is required to invest money on research and developmental programmes. Sole trade
concern or partnership firms cannot afford to spend money on research work. Joint-stock
companies can afford to invest money on research projects. It will enable them to cope
with changing business conditions.
8. Diffused Risk:
In Sole trade and in the partnership business, the risk is shared by a small number of
persons. Further uncertainties discourage them from taking up new ventures for fear of
risk. In company form of organisation, the number of contributories is large; so the risk is
shared by a large number of persons. The burden to be shared by different individuals
becomes insignificant. It enables companies to take up new ventures.
9. Democratic Set-up:
The values of shares are generally small. It enables persons with low incomes to purchase
the shares of companies. Shareholders come from all walks of life. Every individual has an
opportunity to become a shareholder. Secondly, the Board of Directors is elected by the
members. So members have a say in deciding the policies of the company. The company
form of organisation is democratic both from ownership and management side.
10. Social Benefits:
The company form of organisation mobilises scattered savings of the community. These
savings can be better used for productive purposes. The companies also enable financial
institutions to invest their money by providing them avenues. It also enables the
utilisation of natural resources for better productive uses. Large-scale production enjoys a
number of economies enabling low cost of production. The society is supplied with
enough quantity of goods.
11. Attracts small investors: Atracts investments from small investors.
12. Corporate Finances:

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The shares of an incorporated company being transferable, it can raise maximum

capital in minimum possible time. That apart, an incorporated company has the privilege
of raising its capital by public subscriptions either by way of shares or debentures. The
public financial institutions willingly lend loan to companies as it is generally secured by
floating charge which is an exclusive privilege of a registered company.
13. Separate Property:
Incorporation helps the property of the company to be clearly distinguished from that
of its members. The property is vested in the company as a corporate body and no
changes of individual membership affect the title.
14. Centralised Management.
15. Capacity to sue and being sued: A company can sue and be sued in its corporate name.
16. Extensive borrowing capacity.
17. Economic development:
The results of scientific and technological research would not have seen the light of the
day but for th company form of organisation. It is only through joint stock company
system that industries, commerce transport, communication, banking and insurance have
developed all over the world.
18. Scope for new technology (R & D),

Disadvantages of Company Form of Organisation:

The company form of the organisation suffers from the following drawbacks:
1. The difficulty of formation:
Promotion of a company is not an easy task. A number of stages are involved in company
promotion. The suitability of a particular type of business is to be decided first. A number
of persons should be ready to associate for getting a company incorporated. A lot of legal
formalities are required to be performed at the time of registration. The shares will have
to be sold during a particular time. Promotion of a company is both expensive and risky.
2. Separation of Ownership and Management:
The ownership and management of a public company are in different hands. The owners,
i.e., shareholders, play an insignificant role in the working of the company. On the other
hand, control is in the hands of those who have no stakes in the company. The
management may indulge in speculative business activities. There is no direct relationship
between efforts and rewards. The profits of the company belong to shareholders, and the
Board of Directors are paid only a commission. The management does not take a personal
interest in the working of the company as is the case in partnership and sole-trade
business.
3. Evils of Factory System:
The company form of organisation leads to large-scale production. The evils of factory
system like insanitation, air pollution, congestion of cities are attributed to joint-stock
companies. Joint-stock companies facilitate the formation of business combinations which
ultimately leads to the monopolistic control and exploitation of consumers.
4. Speculation in Shares:
The joint-stock companies facilitate speculation in the shares at stock exchanges. The
prices of shares depend upon both economic and non-economic factors. The speculators
try to fluctuate the prices of shares according to their suitability. The stock exchanges will
not help the growth of healthy investment when speculative activities are being carried

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on. The management of joint-stock companies also sometimes encourage speculation in

shares for their personal gains.
5. Fraudulent Management:
The promoters and directors may indulge in fraudulent practices. The management is in
the hands of those persons who have not invested much in the company. The Company
Law has devised methods to check fraudulent practices, but they have not proved enough
to check them completely.
6. Lack of Secrecy:
The management of companies remains in the hands of many persons. Everything is
discussed in the meetings of the Board of Directors. Trade secrets cannot be maintained.
In the case of sole trade and partnership concerns, such secrecy is possible because a few
persons are involved in management.
7. Delay in Decision-making:
In the company form of the organization, no single individual can make a policy decision.
All important decisions are taken either by the Board of Directors or are referred to the
general house. The decision-making process is time-consuming. If some business
opportunity arises and a quick decision is needed, it will not be possible to arrange
meetings all of a sudden. So many opportunities may be lost because of a delay in
decision-making.
8. The concentration of Economic Power:
The company form of organization has helped the concentration of economic power in a
few hands. Some persons become directors in a number of companies and try to
formulate policies which promote their own interests. The shares of a number of
companies are purchased to create subsidiary companies. The interlocking of direction-
ship and establishment of subsidiary companies have facilitated the concentration of
economic power in the hands of a few business houses.
9. Excessive State Regulations:
A large number of rules and regulations are framed for the working of the companies. The
companies will have to follow the rules even for their internal working. The government
tries to regulate the working of the companies because large public money is involved.
The formalities are many, and the penalties for their non-compliance are heavy. This often
detracts companies from their main objectives for which they have been formed.
10. Piercing the Corporal Veil:
When some individuals start using the veil of corporate personality for fraud or
improper conduct, then the Courts lift the veil and look at the persons behind the
company who are the real beneficiaries and then some of the advantages of corporate
personality disappear. The separate entity of the company is disregarded and the
schemes and intentions of the persons behind are exposed to full view.
11. Personal Liability of Directors or Members:
The Companies Act also imposes personal liability on the directors or members of a
company in certain cases. Though the independent existence of the company is
maintained, the company may also be liable. But, apart from the liability of the company,
those cloaked behind it are also made liable.
12. Expenses and formation:
Incorporation of a company is an expensive affair. Besides, it involves completion of a
number of formalities. Moreover, the administration of a company has to be carried on

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strictly in accordance with the provisions of the company law and and activities are
limited its memorandum which at times creates problems in its progress. On the other
hand, a partnership firm does not involve these complexities and as such, it is
comparatively a simple affair. The very fact that there are more than 200 offences under
the Companies Act amply suggests the magnitude of formalities involved in the working of
an incorporated company. There are as many as 50 items in respect of which returns have
to be filed by incorporated companies. Organisations like ED, ROC, SEBI, SFIO and CBI like
organisations investigate the affairs of the company and the management has to fact
unnecessary harassment from these organisation.
13. Company is not a citizen:
Though company is a legal person, it is not a citizen under the constitutional law of
India or the Citizenship Act, 1955.
14. Oligarchic Management:
Company management is democratic in theory only. In actual practice, it is a case of
oligarchy. Company management is a management of few, by a few and for a few.
15. Bureaucracy and Redtapism:
Company management is highly complex. It is a series of wheels within wheels. Every
matter has to pass through several hands in a systematic manner. As a result decisions
are delayed. Quick decisions and prompt action which are so vital to take advantage of
the changing market conditions are conspicuously absent in company form organisation.
16. Lack of personal interest and initiative:
Companies are managed by directors and paid officials. Directors do not have as much
personal interest and initiative as the proprietors would have. The paid officials hesitate
to take initiative and bear responsibility and business risk.
17. Interfering in Government decisions:
In many countries, companies have grown so powerful that they can influence the
policies and programmes of the Government. They give donations to political parties and
create pockets of influence in Government circles. Thus they buy political power with
economic power. They influence the Governmental decisions by lobbying.
18. Opression and mismanagement.
19. Lack of risk: the shareholders, banks and other financial institutions has to bear the
loss due to no liability feature, we are seeing the problem of non-performing assets in the
banks.

2. PRE AND POST-INCORPORATION CONTRACTS

Answer: Preliminary Contracts or Pre-Incorporation Contracts
As the name stands, these contracts are made before the formation of a company. For the
formation of the company, the promoters are required to enter into various contracts with third
parties, e.g. purchasing some property or hiring the services of professions like lawyers,
technicians, etc.
After the incorporation of the company, such contracts are not attached to the company, as the
company obtains legal entity status only after its incorporation.
As per the Act, the company, can neither sue, nor it can be sued on the basis of such contracts
because the company was not a party to such contracts. At the same time, the company cannot
even ratify or adopt such contracts to get the benefit of such contracts.

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Highlights of Preliminary Contracts

A. Contracts entered by the promoters on behalf of the company which is yet to be
incorporated.
B. Can be applicable to public limited and private limited companies.
C. Company is not bound by pre-incorporation contracts.
D. The company cannot sue or be sued on the basis of such contracts.
E. Promoters, they themselves remain personally liable, on all such contracts unless a new
contract on the same terms as that of the old one is made by the company after
incorporation.
F. The company, after its incorporation, cannot even ratify such contracts.
G. The liability of the promoter ceases on the adoption of such agreement by the company
after incorporation
H. As per the Act, either party can rescind the agreement if the incorporation is not obtained
in a specific period of time.
I. Further to the incorporation of the company, the company may adopt the preliminary
agreement. In certain cases, the company can enforce a pre-incorporation contract if it is
warranted by the terms of incorporation. At the same time, specific performance of such
contracts can be enforced by other parties against the company if such contracts are for
the purposes of the company and are warranted by the terms of incorporation of the
company. This is so provided under the provisions of Specific Relief Act, 1963.
Provisional Contracts
As per the Act, the contracts made after incorporation of the company , but before it is entitled
to commence business are termed as Provisional Contracts.
Any contract made by a company before the date on which it is entitled to commence business
shall be provisional only and binding on the company until that date, and on that date, it shall
become binding.
The private companies can commence its business immediately after the incorporation of the
company; however, for a public limited company, the commencement of business occurs only
after obtaining a certificate of commencement of business. The term Provisional Contract applies
only to companies with share capital.
3. IMPORTANCE OF MEMORANDUM OF ASSOCIATION (SEC 4).
Answer:
Memorandum of association is the charter of the company and defines the scope of its
activities. An article of association of the company is a document which regulates the
internal management of the company.
Memorandum of association defines the relation of the company with the rights of the
members of the company interest and also establishes the relationship of the company
with the members.
Definition- Memorandum:
As per Section 2(56) of the Companies Act,2013 “memorandum” means the memorandum
of association of a company as originally framed or as altered from time to time in
pursuance of any previous company law or of this Act .

As per Section 4 of the Companies Act, 2013, a memorandum covers the following
essentials:

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A. Name Clause
• Is usually written in the opening paragraph of the article.
• States the name under which the company functions.
• States whether the company is a private limited or a public limited.
Now, there are certain key points to keep in mind while choosing the name of the
company. They are;
(i). having a unique name and not identical to an existing company.
(ii). Not having any offensive words, connotations, or “sensitive” expressions that may
offend any cultural or religious community.
(iii). Not indicating a connection with the government or local authorities unless you have
permission to do so.
B. Situation clause
This clause mentions the State in which a company has its registered office. If the future
demands changing of registered office address, then the same must be updated in it.
C. Object Clause
This clause defines the purpose of company formation. This is usually not altered or
changed. Hence drafting of this clause is very crucial and should be done with precision
and expertise. The company cannot carry on any activity that is not part of the object
clause of MOA. Such activities are called Ultra Virus (beyond powers) and cannot be
ratified even by members.
D. Liability clause
This clause states the liability of members of the company. It can be limited either by
shares or guarantee. This clause is omitted in case of unlimited liability.
E. Capital Clause
This clause specifies the maximum amount of capital a company can raise along with its
distribution into shares. The company can only secure a specified capital amount
mentioned in this clause. Any special rights or privileges are given to shareholders are
mentioned here.
F. Subscription clause
This clause has the names, addresses and the details of its first subscribers. A private
limited company needs at least two members. Public limited companies will have a
minimum of seven members. It is mandatory for these subscribers to take at least one
share.
Importance of Memorandum of Association:
The Memorandum of association is an important document of an organisation, and it is a
very significant and vital document of every company. It is not only important for the
company but also important for shareholders, creditors and every person who deals with
the company. The importance of memorandum is discussed below:-
A. The basis for the company – Memorandum of association is the basic document of
company and company can’t get registered without it.
B. Determines company scope – It lay down the scope of company activities which
they perform, and the company cannot go beyond that.
C. Source of the company’s Power – Memorandum of association also defines the
company powers and help company members in workings.

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D. Guide to directors – It serves as a guide to the directors of the company. It guides

them to work for achieving the objectives of the company and restrains them from
doing anything beyond memorandum.
E. Protects Investors – Memorandum protects the interest of investors because there
is a risk when a person invests money on a company.

4. PROMOTERS STAND IN A FIDUCIARY RELATIONSHIP WITH THE COMPANY.

Answer:
Meaning of ‘Promoter’
The term ‘promoter’ is not defined in law. Al the business operations necessary to bring a
company into existence is called promotion. Promoter is the first person who controls or influences
a company’s affairs. Thus , persons who initiate the promotion of a company are known as
promoters.

Promoter of a company is a person who employs himself in the preliminary work necessary to the
flotation of a company.

As per Section 2(69) of the Act, 2013 defines the term ‘Promoter’, it means a person-

(a). who has been named as such in a prospectus or is identified by the company in the annual return
to in Section 92, or

(b). who has control over the affairs of the company, 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 accustomed to act:

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

A promoter is not an agent or trustee of the company, because the company before
incorporation is a non-entity. But he is in the situation akin to that of agent or trustee of
the company and his dealings with it must be open and fair. Hence he occupies the
position of a quasi-trustee.

Fiduciary position of a Promoter (Liability):

In Erlanger v. New Sombrero Phosphate Co, Lord Cairns states, “they stand, in my
opinion, undoubtedly in a fiduciary position. They have in their hands the creation and
moulding of the company. They have the power of defining how and when and what
shape and under what supervision it shall come into existence and begin to act as a
trading corporation”.
The fiduciary position of a promoter is as follows:
1. Not to make any profit at the expense of the Company:

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The promoter msut not make, either directly or indirectly, any profit at the expense of the
company which is being promoted. If any secret profit is made in violation of this rule, the
company may, on discovering it, compel him to account for and surrender such profit.
2. To give the benefit of negotiations to the company:
The promoter must when once he has begun to act in the promotion of a company give to
the company the benefit of any negotiations or contracts into which he enters in respect
of the company.
3. To make full disclosure of interest or profit:
Section 26(1)(a) of the Companies Act, 2013 nov requires the promoters’ earnings to be
disclosed in the prospectus itself. It is not the profit by the promoter which the law
forbids, but the non-disclosure of it or the non-disclosure of interest in the transaction. If
full disclosure is made, the profit is permissible.
4. Not to make unfair of position:
The promoter must not make an unfair or unreasonable use of his position and must take
care to avoid anything which has the appearance of undue influence or fraud.
In Enlanger v. New Sombrero Phosphate Co, Enlanger, the head of a syndicate purchase
an island in the West Indies which contained valuable mines of phosphates and formed a
company to buy this island and contracted to sell the island to the company double the
rate of his purchase. The House of Lords held that since there was no disclosure of profits
made by Enlanger and the syndicate, the company was entitled to rescind the contract
and recover the purchase money from him and the syndicate.

5. Doctrine of ultra vires.

Answer:

Meaning of ‘Ultra vires”

The term ‘ultra vires’ means ‘beyond’ and ‘vires’ means ‘power’ or ‘authority’. ‘Ultra vires’ is a
latin word means beyond their power. An act is said to be ultra vires when it is in excess of the
power of the person or authority doing it. The term ultra vires signifies a concept distinct from
illegality.

The trrm ‘ultra vires’ of a company means that the doing of the act is beyond the legal power and
authority of the company. The opposite term of ‘ultra vires’ is ‘intra vires’ which means ‘within
powers’. When a company or its Directors or its executives violate the provisions of the Companies
Act, 2013, or any other law, such an act is unlawful and attracts penal liability. The act cannot be
ratified even with the consent of all the members. When the company has exceeded its powers,
that is to say, when the act done is ultra vires the memorandum, more particularly the object clause
of the Memorandum. Such an act is void and does not bind the company. Ultra vires activities can
be divided into the following divisions:

1. Ultra vires the Companies Act, 2013,

2. Ultra vires the Memorandum of Association,
3. Ultra vires the Articles of Association,
4. Ultra vires the directors.

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A Memorandum of Association of a company is a basic charter of the company. It is a

binding document which describes the scope of the company, among other things. If a
company departs from its MOA, such an act is ultra vires. Let us further understand the
Doctrine of Ultra Vires.
The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the
objects of a company, as specified in its Memorandum of Association, can be departed
from only to the extent permitted by the Act. Hence, if the company does an act, or enters
into a contract beyond the powers of the directors and/or the company itself, then the said
act/contract is void and not legally binding on the company.
The term Ultra Vires means ‘Beyond Powers’. In legal terms, it is applicable only to the
acts performed in excess of the legal powers of the doer. This works on the assumption
that the powers are limited in nature. Since the Doctrine of Ultra Vires limits the company
to the objects specified in the memorandum, the company can be:
A. Restrained from using its funds for purposes other than those specified in the
Memorandum
B. Restrained from carrying on trade different from the one authorized.
The company cannot sue on an ultra vires transaction. Further, it cannot be sued too. If
a company supplies goods or offers service or lends money on an ultra vires contract, then
it cannot obtain payment or recover the loan.
However, if a lender loans money to a company which has not been extended yet, then
he can stop the company from parting with it via an injunction. The lender has this right
because the company does not become the owner of the money as it is ultra vires to the
company, and the lender remains the owner.
Further, if the company borrows money in an ultra vires transaction to repay a legal
loan, then the lender is entitled to recover his loan from the company.
Sometimes an act which is ultra vires can be regularized by the shareholders of the
company. For example,
If an act is ultra vires the power of directors, then the shareholders can ratify it.
If an act is ultra vires the Articles of the company, then the company can alter the Articles.
Remember, you cannot bind a company through an ultra vires contract. Estoppel,
acquiescence, the lapse of time, delay, or ratification cannot make it ‘Intravires’.

Effects of ultra vires transactions:

The following are the effects or consequences of ultra vires transactions.

1. Null and void
2. Injunction,
3. Personal liability of directors,
4. No ratification,
5. Ultra vires contracts,
6. Ultra vires borrowings,
7. Ultra vires torts,
8. Company cannot sue or be sued.

6. DIFFERENT KINDS OF MEETINGS OF THE SHAREHOLDERS.

The meetings of the shareholders can be classified into four kinds namely,

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A. Statutory Meeting,
B. Annual General Meeting,
C. Extraordinary General Meeting, and
D. Class Meeting.
The chart given below gives a classification of company meetings.
1. Statutory Meeting
This is the first meeting of the shareholders conducted after the commencement of the
business of a public company. Companies Act provides that every public company limited
by shares or limited by guarantee and having a share capital should hold a meeting of the
shareholders within 6 months but not earlier than one month from the date of
commencement of business of the company.
Usually, the statutory meeting is the first general meeting of the company. It is conducted
only once in the lifetime of the company. A private company or a public company having
no share capital need not conduct a statutory meeting.

Kinds of Company Meetings

2. Annual General Meeting
The Annual General Meeting is one of the important meetings of a company. It is
usually held once in a year. AGM should be conducted by both private and public limited
companies whether limited by shares or by guarantee; having or not having a share
capital. As the name suggests, the meeting is to be held annually to transact the ordinary
business of the company.
The ordinary business to be transacted at the Annual General Meeting relates to –
A. Consideration of accounts, balance sheet and the reports of the Board of Directors
and auditors,

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B. Declaration of dividend,
C. Appointment or re-appointment of directors in place of retiring directors,
D. Appointment or re-appointment of auditors and deciding their remuneration.
3. Extraordinary General Meetings (EOGM)
Section 100 of the Companies Act, 2013 provides for calling of extra ordinary general
meeting.
Statutory Meeting and Annual General Meetings are called the ordinary meetings of a
company. All other general meetings other than these two are called Extraordinary
General Meetings. As the very name suggests, these meetings are convened to deal with
all the extraordinary matters, which fall outside the usual business of the Annual General
Meetings.
EOGMs are generally called for transacting some urgent or special business, which
cannot be postponed till the next Annual General Meeting. Every business transacted at
these meetings is called Special Business.
Persons Authorized to Convene the Meeting
The following persons are authorized to convene an extraordinary general meeting.
1. The Board of Directors.
2. The Requisitionists.
3. The National Company Law Tribunal (NCLT).
4. Any Director or any two Members.
4. Class Meetings
Class meetings are those meetings, which are held by the shareholders of a particular
class of shares, e.g. preference shareholders or debenture holders.
Class meetings are generally conducted when it is proposed to alter, vary or affect the
rights of a particular class of shareholders. Thus, for effecting such changes, it is necessary
that a separate meeting of the holders of those shares is to be held and the matter is to be
approved at the meeting by a special resolution.
For example, for cancelling the arrears of dividends on cumulative preference shares, it is
necessary to call for a meeting of such shareholders and pass a resolution as required by
the Companies Act. In case of such a class meeting, the holders of other class of shares
have no right to attend and vote.

7. Oppression and Mismanagement.

Answer:
What is oppression? The term oppression relates to the affairs of the company have
been or being conducted in a manner which is prejudicial to the interest of any member or
to the public or members of the company or to the company itself.
The terms ‘oppression’ and ‘mismanagement’ are not defined anywhere in the Act but
for the purposes of company law, they should be used in broad generic sense and not in
strict literal sense. However, according to Halsbury’s Laws of England, oppression means
a burdensome, harsh and wrongful conduct.
The term mismanagement refers to the process or practise of managing ineptly,
incompetently, or dishonestly.
A member who complaints that the affairs of the company are being conducted in a
manner prejudicial to public interest or in a manner oppressive to some of the members,
including himself may apply to court, by petition under Section 241 of the Companies Act,

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2013. He may also apply for appropriate relief on the ground of mismanagement of the
company under Section 241 of the Act.
Common factors for Oppression and Mismanagement: There may be numeral factors
which might be oppressive to the members, but there are certain common incidents we
practically found those are as follows:
1. Change in the composition of the Board of Directors by way of illegal removal from the
position of the Directorship or by way of illegally inducting new Directors in the Board to
get the majority.
2. Alteration of Paid-up capital of the Company by way of illegal allotment of equity share
capital in favour of a particular section of the shareholders to get the controlling power in
the company.
3. Misappropriation of the Company's fund by way of related party transactions or by way
of opening the new bank account without the knowledge of the other Board members etc.
4. Preventing directors from functioning
5. Violations of statutory provisions
6. Violations of provisions of MOA & AOA of the company

However, in addition to the above common factors, there may be several other reasons
which might create oppression and mismanagement.
Remedies available against Oppression and Mismanagement: The aggrieved
shareholder(s) may file an application before the National Company Law Tribunal (NCLT)
under section 241, 242 and other related sections of the Companies Act 2013 to get relief.
In Kolkata National Company Law Tribunal consists with two courts namely court I
which consists of single bench member (Judiciary) and deals with the companies having
paid-up share capital less than Rs.50 lakhs and court II consists two member bench, one
from judiciary and another technical deal in the matters related to companies having paid-
up capital of Rs.50 lakhs or more.
Who can file the application before the NCLT: In case company having share capital any
member(s) holding not less than ten percent of the paid-up share capital of the company
or one hundred members whichever is less and companies not having the share capital
then, at least one-fifth of the total number of members.

Long Answers

1. Define Company and describe its main characteristics.

Answer:
“Company” in the common usage refers to a voluntary association of individuals formed
for the purpose of attaining a common social or economic end. Strictly speaking, the term
“Company” has no technical or legal meaning. In common law, a company is a juristic

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personality or legal person separate from its members. Thus, it exists only in the
contemplation of law.
In other words, a company is an artificial or legal person created and devised by the
laws for a variety of purposes such as the promotion of charity, art, research, religion,
commerce or business. The company, just like a natural person, possesses similar rights
and owes similar obligations, but has neither a mind nor a body of its own.
Eminent scholars and writers have defined the term. Some of the definitions are given
below:
Definition of Yale Law Journal: “A company is an intricate, centralized, economic,
administrative structure run by professional managers who hire capital from the
investors”.
As per Section 2(20) of Companies Act, 2013 ‘company’ means a company incorporated
under this Act or under any previous company law.

CHARACTERISTICS OF A COMPANY
The definitions quoted above illuminate the principal attributes of a company, otherwise
known as a corporation. They are given below:
1. Voluntary Association:
A company is a voluntary association of certain persons registered under the Companies
Act. Law can neither complel a person to become a member or a company not to give up
his membership in a company
2. Legal Personality
The law divides person into two kinds viz.,
Natural persons and legal persons.
Natural persons are human persons such as men, women, children etc. The natural
persons are the creations of nature.
Legal persons or artificial persons, on the other hand, are created and devised by
human laws, i.e. created by a legal process and not through natural birth. An artificial
person, though abstract, invisible and intangible, can do everything like a natural person
except a few acts, which only natural persons can do.
A company is a distinct legal person, existing independent of its members. The
independent corporate existence is the outstanding feature of a company.
3. Limited Liability
The principle of limited liability is a feature as well as a privilege of the corporate form of
enterprise. In other words, the liability of the members is limited. It means that the
shareholders enjoy immunity from liability beyond a certain limit. A shareholder cannot
be called upon to pay anything more than the unpaid value
of the shares that he has undertaken to pay under a contract between himself and the
company.
4. Perpetual Succession
As a juristic person, a company enjoys perpetual succession. In other words, a company
never dies, nor its life depends on the life of its members. Even if all the members die, it
shall not affect the privileges, immunities, estates and possessions of the company.
5. Right to Property
A company, being a legal person, has a right to acquire, possess and dispose of the
property in its own name. Its property is not that of the shareholders. Although the

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members contribute to the capital and assets of the company, the property of the
company will not be considered as the joint property of the members constituting the
company.
6. Common Seal
The common seal is considered as the Official Signature of the company. Its common seal
must authenticate all the acts. When the common seal is affixed on a document, it is
considered as the authoritative document of the company. The secretary of the company
should keep the seal under lock and key. He should make use of it only according to the
directions of the Board of Directors.
7. Transferability of Shares
The capital of a company is divided into several small parts known as shares. The primary
objective of joint-stock companies is that they should be able to transfer shares easily.
The law also considers the share of a company as movable property and hence like any
other movable asset, the shareholder can transfer his title over his share to some other
person.
8. Capacity to Sue and be sued
A company is a legal person can sue other persons in its corporate name. Similarly, others
can also sue the company. It can also be fined for contravening any law, but it cannot be
imprisoned for a criminal offence.
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.
9. Not a Citizen
Although a company is a legal person, it is not a citizen under the Indian Constitution. It
can act only through natural persons.
10. Representative Management:
Shareholders are the real owners of the company. But it is not possible for all the
shareholders to take part in the management of the company. So management of the
company is vested in a representative body known as ‘Board of Directors’. Thus, the
owners of the company have no direct control over the business of the company. There is
separation of ownership from management by a managerial class consisting professional
managers.
11. Finances:
The company can raise capital by public subscriptions either by way of shares or
debentures. Further public financial institutions lend their resources more willingly to
companies than to other forms of business organisation. The facility of borrowing and
giving security by way of a floating charge is also an exclusive privilege of companies.

2. DOCTRINE OF LIFTING THE CORPORATE VEIL.

Answer:
The company enjoys a separate position from that of the position of its owners. It is
artificial but yet a person in the eyes of the 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, still, it cannot act on its own. There has to be some human agency involved so
that the 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

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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 the 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 the judiciary in cracking open the
corporate shell is somewhat cautious and circumspect.

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 to 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 follows:-

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 the prospectus of the company. Through issuing a
prospectus, companies offer securities for sale. A prospectus issued under Section 26
contains keynotes 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 the prospectus, he is subject to penalty or
imprisonment or both prescribed under the aforesaid sections, depending upon the case.
Each of these sections creates 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. Misdescription of Company’s name:-

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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 collect 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 the 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, 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 the 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 another
person with a view to induce him to enter into either of following:-
i. An agreement of acquiring, disposing of, 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, the content of the documents
are sent on the letter-head of the company; Now when this letter is received by any other

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person, he is supposed to be under the 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 its 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:-
Its duty of every earning person to pay respective taxes. Company is no different than a
person in the eyes of the law. If anyone attempts to avoid this duty unlawfully, he is said
to be committing an offence. When strict rules are laid down for human being, why leave
the company? One clear illustration was Dinshaw Maneckjee Petit. 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 the form of a pretended loan. These loans entitled him to have certain tax benefits.
It was rather held that the purpose of founding these new companies was simple as a
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. A 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 the purpose
of enabling Horne to commit a breach of his covenant against solicitation.

C. Determination of enemy character:-

The purpose behind the formation of the company is self-profit. A company will not

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attempt to do good towards society consciously. However, it may opt to cause damage
instead. Similar things were observed in the case of 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 manufactured 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, the 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 UdensScheepvart that, if in such scenarios
where a company is suspected to be of enemy character or is proved to be of an enemy
character, then such granted monetary funds would be used as machinery to destroy the
concerned State itself. That would be monstrous and against the public policy of that
concerned State.

D. Liability for ultra-vires acts:-

Every company is bound to perform in compliance with 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 a 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 might be 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 may be 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 Tirupur 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 public-private participation to build, operate and

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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 the
composition of the 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 the 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 the employee
was employed in its subsidiary company.

The employee was appointed in the year 1959 in the subsidiary company while he had
discovered the fact that he is suffering from asbestosis in the year 2007. When he was
aware of his condition, it was that the subsidiary company was no longer in existence.
Thus, he brought an action against the holding company, which was still in existence. This
matter was held to be maintainable. Rather, the holding company was held guilty and
made liable as it owed a duty of care towards employees. It was for the first time where a
holding company, despite the fact that its a legal entity separate from that of its
subsidiary, is however liable for actions of its subsidiary.

3. CLASSIFICATION OF COMPANIES.
Answer:
I. On the basis of incorporation: companies are broadly classified as
1. Unincorporated Companies
2. Incorporated Companies: The companies which are incorporated by law is
considered as companies. They should be incorporated under The Companies Act,
2013.divided under following categories
A. Chartered Companies,
B. Statutory Companies,
C. Registered Companies,
II. On the basis of Liability:
A. Unlimited Companies.
B. Limited Companies:
1. Company Limited by Guarantee.
2. Companies Limited by shares.
III. On the basis of control.
A. Holding Company,
B. Subsidiary Company.
C.
IV. On the basis of Ownership:
A. Government Company.

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B. Non-Government Company.
V. Foreign Companies.
VI. Other kinds of Companies:
A. Banking Company.
B. One Person Company,
C. Small Company,
D. Listed Company,
E. Dormant Company,
F. Illegal Association or Unlawful Association.

4. DEFINE DIRECTOR. WHAT ARE THE RIGHTS AND DUTIES POWERS OF A DIRECTOR?
Answer: The invisible and intangible nature of a company makes it obligatory for this corporate
body to appoint some living person or persons through whom it may act and carry on its business.
Such persons are usually called ‘directors’ of the company. Section 2 (34) of the Companies Act,
2013 defines the term ‘director’ as any person appointed to the Board of the company.
Section 149 of the Companies Act, 2013 provides that every company shall have a Board of
Directors consisting of individuals like directors and shall have:
a. A minimum of three directors in the case of a public company, two directors in the case of
a private company, and one director in the case of one person company, and
b. A maximum number of fifteen directors (with passing a special resolution, it can have
more than 15 directors).
Kinds of Directors:
1. First Directors,
2. Additional Directors,
3. Alternative Directors,
4. Nominee Director,
5. Director appointed in Casual vacancy,
6. Independent Director,
7. Executive Directors,
8. Whole-time Directors,

Powers –
The Board of Directors is entitled to exercise all such powers and to do all such acts and
things as the company itself are authorized to exercise and do. Generally, the powers of
the Board are delineated in the Articles of Association. These powers can be exercised
subject to the restrictions imposed by the Act (S.292).
The powers to be exercised by the Board are exhaustive in nature, and while some of
these can be exercised by the Board, some other powers can be exercised subject only to
the approval of shareholders, viz. S.293, 293A, 297, etc. Yet again there are certain
powers which can be exercised only with the approval of the Government like Sec.294AA,
295, etc.
Rights –
The Act has conferred various legally enforceable rights on the Directors. These rights can
be classified into two categories, viz. individual rights and collective rights.
Individual rights are –

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a) Right to inspect books of accounts [S.209(4)]

b) Right to receive notices of board meetings [S.286(1)]
c) Right to receive draft circular resolutions [S.289]
d) Right to receive sitting fee [S.309(2)]
e) Right to be heard at the General Meetings [S.284(3)]
f) Right to inspect minutes of board meetings
g) Right to record his dissent [S.193(4)]
h) Right to participate and vote at Board meetings [S.300]
i) Right to claim travel, stay and other expenses
j) Right to summon board meetings
k) Right to ask the board to appoint alternate director [S.283(1)]
Collective rights are –
a) Right to refuse the transfer of shares
b) Right to elect a Chairman
c) Right to appoint a Managing Director
d) Right to recommend Dividend
e) Right to approve investments.
Duties –
In the matter of proceedings for negligence, default, breach of duty, misfeasance and
breach of trust, the Act and the Rules do not make any distinction between whole-time
and part-time Directors. Liability for such acts is equal. However, part-time directors may
be relieved from liability where no evidence of the fact that they exercised control in any
matter is brought forth.
Directors of public companies are their agents as regards strangers, but as regards
shareholders, they are always clothed with a fiduciary character with reference to any
dealings with the property of the company. A director is in a fiduciary position is expected
to protect the company’s interests and not to utilize his position and knowledge
possessed by him by virtue of his office, to the detriment of the company’s interests and
for his personal gain. The directors of the company are trustees in a limited sense. He is
only liable for breach of trust if he misapplies funds or misappropriates assets.
The duties of a director are –
a) Fiduciary duties of loyalty and good faith
b) Duties of care, skill and diligence
c) Collective duties of directors under company law
d) Individual duties of directors under company law.
Fiduciary duties –
The Director occupies a fiduciary position in the company. Fiduciary position refers to a
position of trust and confidence. The fiduciary position of directors requires them to act
honestly and in good faith.
Duties of care, skill and diligence –
In India, there is no specific provision regarding the duties of care and skill of the director
in the Companies Act. Courts have been mostly following the English decisions and the
Common Law rules. A director must take the care which an ordinary man might be
expected to take in conducting the affairs of the company. He is not an insurer of the
success of the company. A Director’s duty has been laid down as requiring him to act with

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such care as is reasonable to be expected from him having regard to his knowledge and
experience.
The directors are not liable for mere errors of judgment. They are not bound to give
continuous attention to the company. A director is liable only for gross and culpable
negligence.
In contrast, a far greater degree of skill and commitment to the company will be expected
from the Managing Director and Executive Directors/Whole-time Directors.
Collective duties of directors under Company Law –
Companies Act, 1956 contains certain specific provisions with regard to duties to be
performed by directors collectively as a Board. Some of these are:
a) Investment of funds (Sec.292 & 372)
b) No misstatement in the prospectus (Sec.56)
c) The holding of Annual General Meeting (Sec.166)
d) Filing certain resolutions like appointment/reappointment of MD (Sec.192)
e) Directors’ Report (Sec.217)
f) Appointment of Auditors (Sec.224)
g) Holding of Board Meetings (Sec.285).
Individual duties of directors under company law –
Some of the individual duties and obligations imposed on every director by the Companies
Act are as under:
a) Duty to attend Board Meetings
b) Duty to file his consent to act as Director (Sec.264 & 266)
c) Duty to take qualification shares (Sec.270)
d) Duty to abstain from discussion and voting in which he may be directly or indirectly
concerned or interested (Sec.300).
Responsibilities of directors-
a) To bring an independent judgment to bear on issues of strategy, performance,
resources, including key appointments, and standards of conduct.
b) To be independent of management and free from any business or other relationship
which could materially interfere with the exercise of their independent judgment .

5. PROSPECTUS, WHAT ARE THE INGREDIENTS TO CONSTITUTE A PROSPECTUS

Answer: A prospectus is a document issued by the company inviting the public and
investors for the subscription of its securities. A prospectus also helps in informing the
investors about the risk of investing in the company. A Prospectus is required to be issued
only after the incorporation of the company. These documents describe stocks, bonds and
other types of securities offered by the company. Mutual fund companies also provide a
prospectus to prospective clients, which includes a report of the money’s strategies, the
manager’s background, the fund’s fee structure and a fund’s financial statements. A
prospectus is always accompanied by performance history and financial information of
the company. The reason for accompanying such information along with the prospectus is
to make sure that, the investors are well aware of the company’s background and overall
performance and the investors do not fall into the prey of investing in a bad company.
Definition of Prospectus under the Companies Act, 2013
Section 2(70) of the Act defines prospectus as, “A prospectus means any document
described or issued as a prospectus and includes a red herring prospectus referred to in

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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 a body corporate.”
Thus, it is clear from the above definition of the prospectus that, a prospectus is just an
invitation to offer securities to the public and not an offer in the contractual sense.
Companies that are required to issue a prospectus
A. A public listed company who intends to offer shares or debentures can issue
prospectus.
B. A private company is prohibited from inviting the public to subscribe to their
shares and thus cannot issue a prospectus. However, a private company which has
converted itself into a public company may issue a prospectus to offer shares to
the public.
Types of Prospectus under the Companies Act, 2013
There are four types of prospectus, which are as under:
A. Abridged Prospectus
According to Section 2(1) of the Act, abridged prospectus means a memorandum
containing such salient features of a prospectus as may be specified by the SEBI by making
regulations in this behalf. It means that a company cannot issue application form for the
purchase of securities unless such form is accompanied by an abridged prospectus.
B. Deemed Prospectus
According to Section 25(1) of the Act, 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 such offer for sale to the public is made is
deemed to be a prospectus by implication of law.
C. Shelf Prospectus
According to Section 31 of the Act, Shelf prospectus is 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. Only the companies
which have been prescribed by the SEBI can issue a Shelf prospectus with the Registrar.
D. Red Herring Prospectus (RHP)
According to Section 32 of the Act, an RHP means a prospectus which does not have
complete particulars on the price of the securities offered and quantum of securities to be
issued. A company may issue an RHP prior to the issue of a prospectus. The company shall
file RHP with Registrar at least three days prior to the opening of the subscription list and
the offer. An RHP carries the same obligations as are applicable to a prospectus and any
variation between the RHP and a prospectus shall be highlighted as variations in the
prospectus
Matters to be stated in a prospectus Under the Companies Act, 2013:
According to Section 26 of the Act, every prospectus issued by or on behalf of a company
must be dated and that date shall unless the contrary is proved, be regarded as the date
of its publication.
1. It shall state such information and set out such reports on financial information as
may be specified by the SEBI in consultation with the Central Government.
2. A copy of the prospectus shall be signed by every director or proposed director or
by his agent must be delivered to the registrar on or before the date of publication.

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3. Every prospectus issued to the public should mention that a copy of the prospectus
along with the specified documents has been filed with the registrar.
4. If prospectus includes a statement made by an expert, the expert must not be
engaged or interested in the formation or promotion or in the management of the
company. Written consent of the expert should also be obtained before the issue
of the prospectus with the statement.
5. A prospectus must not be issued more than 90 days after the date on which a copy
thereof is delivered for registration. If a prospectus is issued, it will be deemed to
be a prospectus a copy of which has not been delivered to the registrar.
6. A prospectus shall make a declaration about the compliance of the provisions of
the act and nothing contained in the prospectus is in contravention of the
provisions of the Companies Act, Securities Contracts (Regulation) Act, 1956 and
Securities Exchange Board of India Act, 1992.
7. Section 27 of the Act states that a company can vary the terms of a contract
referred to in the prospectus or objects for which the prospectus was issued,
subject to the approval of an authority given by the company in general meeting
by way of a special resolution. The details of the notice in respect of such
resolution to shareholders shall also be published in the newspapers in the city
where the registered office of the company is situated.

6. Winding up.
Answer: Winding up is a term commonly associated with the ending of a company’s existence. In
fact, winding up is a process by which the assets of the company are collected and realised, its
liabilities are discharged and the net surplus, if any, is distributed in accordance with the
company’s Articles of Association.
The grower has defined winding up of a company as “a process whereby its life is ended and its
property administered for the benefit of its creditors and members.
It must, however, be pointed out that a company is not dissolved immediately at the
commencement of winding up. Its corporate status and powers continue during the process of
winding up. In fact, “winding up precedes dissolution”.
The object of winding up a company is to realise the assets and pay the debts of the company
expeditiously in a fair manner in accordance with the law.
Modes of Winding Up: Section 270 of the Act relates to modes of winding up, Sub-section
(1) provides that winding up of a company may be either:-
A. By the tribunal:
1. If the company is unable to pay its debts,
2. If the company has by special resolution, resolved that the company be wound
up by the Tribunal,
3. If the company has acted against the interests of the sovereignty and integrity
of India, the security of the State, friendly relations with foreign States, public
order, decency or morality,
4. If the Tribunal has ordered the winding up of the company under Chapter XIX,
5. If on an application made by the Register or any other person authorised by the
Central Government by notification under this Act, the Tribunal is of the

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opinion that the affairs of the company have been conducted in a fraudulent
manner or the company was formed for fraudulent and unlawful purpose or
the persons concerned in the formation or management of its affairs have been
guilty of fraud, misfeasance or misconduct in connection therewith and that it
is proper that the company be wound up,
6. If the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive
financial years,
7. If the Tribunal is of the opinion that it is just and equitable that the company
should be wound up,
8.
B. Voluntary.

7. WHO CAN APPLY FOR WINDING UP? CONSEQUENCES OF COURT'S WINDING UP

ORDER
Answer:
Who may file a petition for Winding-up {Section 272(1)}: Section 272(1) of the Companies
Act, 2013 provides that a petition for the winding-up of a company may be presented to
the Tribunal by any of the following:-
A. The company,
B. Any creditor or creditors, including any contingent or prospective creditor or
creditors,
C. Any contributory or contributories,
D. All or any of the persons specified in clauses (a), (b) and (c) together,
E. The Registrar,
F. Any person authorised by the Central Government in that behalf, or
G. In a case falling under clause (c) of sub-section (1) of Section 271, by the Central
Government or a State Government.

Cases

1. A husband and wife, who were the only two members of a private limited
company, were shot dead by dacoits. Does the company also die with them? (Jan-
17).
A company is an artificial person. It exists only in contemplation of law and is distinct from the
members constituting it. Being distinct from the members, the death, insolvency or retirement
of its members leaves the company unaffected. Members may come and go, but the company
can go forever. It continues even if all its human members are dead. Even where during the
war all the members of a private company, while in general meeting were killed by a bomb,
the company survived. Not even a hydrogen bomb could have destroyed it. Meat Suppliers
(Guildford) Ltd., Re (1996) 1 W.L.R. 1112]. The shares will be registered in the name of the
nominees or legal successors. Thus, the company does not cease to exist.

Common Seal- A Company being an artificial person is not bestowed with a body of natural
being. Therefore, it has to work through its directors, officers and other employees. But, it can
be held bound by only those documents which bear its signatures. The common seal is the
official signature of a company.

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2. ‘A’ is the holder of all shares, except one of a paper Co. A insures the company paper in
his own name the paper is destroyed by fire. Can ‘A’ recover the loss? (Aug-18).
The incorporation of the company makes it an independent entity separate from its shareholders
and consequently, the company has a legal personality of its own. This principle of the
independent corporate existence of a registered company is well illustrated by the House of Lord’s
decision in Salomon & co.
Holding all shares except one will not make the company non-independent, irrespective of the
shareholding the company is a juristic person and independent from its members, and taking
insurance in his own name is against the Insurance Company rules and also against the Company
Law, and the insurance policy, in this case, is of no use since it is taken in his own name. Hence
neither the company nor the member can claim the damage.

3. ‘X’ was a transferee of a share certificate issued under the seal of the defendant company.
The certificate was issued by the company’s Secretary. Who affixed the seal of the
company and forged the signature of the three directors. Advise the ‘X’ on legal action.
(Jan-19).
The position of the Company Secretary has undergone a lot of change over the last 100 years. In
1887, it was said that “a secretary is a mere servant; his position is that he is to do what he is told,
and no person can assume that he has any authority to represent anything at all; nor can anyone
assume that statement made by him is necessary to be accepted as trustworthy without further
inquiry.” Again in 1902, his duties were described as “of a limited and of a somewhat humble
character.” Accordingly, it has in the past been held that a company is not liable for the acts of its
secretary in fraudulently making representations to induce persons to take shares in the company,
or in issuing a forged share certificate. The secretary is, however, the proper official to issue share
certificates, and so the company is estopped or barred from denying the truth of genuine share
certificates issued by him without the authority of the company. He may also, with a director,
validly execute a deed on behalf of the company whether or not that company has a common seal.

4. ‘A’ had subscribed memorandum of a company for 100 shares. The company was duly
registered, but ultimately he took only 10 shares. The company was wound up what is the
extent of ‘A’s liability explain. (Jan-19 & Aug-18).
Issue: Is the member responsible for the remaining unpaid amount? Yes.
Rule: According to Section 2(22) of the Companies Act, 22013, ‘Company limited by shares’ means
a company having the liability of its members limited by the memorandum to the amount, if any,
unpaid on the shares respectively held by them. If he has already paid part of the value of shares,
his liability remains to the extent of the unpaid amount. If shares are fully paid, the liability of the
member in respect of such share is no more there. Even if a company runs into huge losses, a
shareholder cannot be called upon to pay more than the value of the shares agreed to be taken by
him. Thus, the members or shareholders are liable for the face value of the shares only since their
liability is limited.
Application: The main attribute of limited companies which attracts the investors is limited
liability of the shareholders. In other words, the liability of a member, in the event of company’s
winding up, in respect of the shares held by him is limited to the extent of the unpaid value of
such shares. Thus the liability does not fluctuate but remains limited to the extent of the unpaid
amount of the share-holder, whether original or the transferee.
Conclusion: In the given case A has subscribed for 100 shares but paid for 10 shares only and his
liability his limited to the remaining 90 shares.

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5. Mr P who was a minor registered his name as a shareholder. After attaining majority, he
received dividend from the company. Subsequently the company went into liquidation.
“P” denies his liability. Decide. (Jan-19).
Issue: Can a minor become a member of a company? Yes, he can.
Is P, who is a major now, liable to the company? Yes.
Rule: As per Section 56 of Companies Act, 2013.
Application: A minor’s contract is absolutely void under the Indian Law of Contract, but it is
voidable under the English Law, it becomes valid on the attainment of the majority by the minor.
In India also a contract on behalf of a minor and for the minor’s benefit may be entered into by his
natural or legal guardian. Therefore, a transfer of fully paid shares in favour of a minor on the
basis of a transfer deed signed by his natural or legal guardian is perfectly valid, but he shall incur
no liability, whatsoever, during his minority.
In Fazulbhoy Jaffar v. Credit Bank of India Ltd., an infant was registered as a shareholder. After
attaining majority, he continued to accept dividends from the company. The Court held that
under these circumstances he is deemed to have opted for being permitted to continue as a
shareholder of the company. He is, therefore, estopped from denying that he was a shareholder
when the company was being wound up.
Conclusion: In the given case, the shareholder is estopped from denying that he is a shareholder
because after attaining majority he has received dividends.

6. A circus company borrowed a sum of money on the security of all its assets including
machinery. What kind of charge is created by the circus company? (Jan-19).
Issue: What kind of charge is it? It is a fixed charge.
Rule: According to Section 2 (16) of the Companies Act, 2013 a charge means an interest or lien
created on the property or assets of a company or any of its undertakings or both, as security and
includes a mortgage.
Application: Fixed or Specific Charge: a charge is fixed or specific when it is made specifically to
cover assets which are ascertainable and definite at the time of creating the charge, e.g., land,
buildings, heavy machinery etc. A fixed charge is therefore against the security of the certain
ascertainable specific property. The company’s right to dispose of the property is temporarily
suspended during the period it is charged or encumbered. In the event of winding of a company, a
debenture holder or a creditor secured by a fixed or specific charge shall be placed in the highest
class of creditors.
Conclusion: In the given case, the assets, including machinery, are under fixed charge for security
of the loan.

7. Directors of a public limited company accepted a bill of exchange on behalf of the

company. But the word ‘limited’ was omitted from the name of the company at the time
of acceptance. Who can be held liable for the payment of the bill? (Dec-15).
Issue:
Is omission to mention the word ‘limited’ amounts to an offence? Yes.
Is it a deliberate omission of word ‘limited’? No.
Are the directors liable for the omission? No.

Rule:
The omission of the word ‘limited’ makes the name incorrect.
The memorandum of every company shall state the name of the company with ‘Limited’ as the
last word of the name in the case of a public limited company, and with ‘private limited’ as the last
word of the name in the case of a private limited company.
Application:

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Where the word ‘Limited’ forms part of a company’s name, the omission of this word shall
make the name incorrect. If the company makes a contract without the use of the word ‘Limited’,
the officers of the company who make the contract would be deemed to be personally liable. The
omission to use the word ‘Limited’ must have been deliberate and not merely accidental.
In Detrmatine Co. Ltd. V. Ashworth, a bill of exchange was drawn upon a limited company in its
proper name and it was accepted by two directors of the company. The rubber stamp by which
the words of acceptance were impressed on the bill was longer than the paper of the bill and
hence the word ‘limited’ was missed. It was held that the company was liable to pay and the
directors were not personally liable as it was an obvious error of most trifling kind and the
mischief aimed at by the Act did not here exist.
In Nassau Steam Press v. Tyler, the registered name of a company was Bastile Syndicate Ltd.
And the defendants who were two directors and the secretary of the company6 accepted a bill of
exchange on its behalf giving the name of the company as ‘The Old Paris and Bastille Ltd.’ It was
held that the name of the company was not mentioned in accordance with the requirement of the
Act and that the company not having paid the bill, the defendants were personally liable thereon.
Conclusion:
The given case is similar to the case of Detrmatine Co. Ltd. V. Ashworth, and the omission of
word ‘limited’ in the bill of exchange is just accidental and not deliberate hence, the directors are
not personally liable for the bill of exchange, the company is liable for the bill of exchange.

8. “X” company lends to “Y” company on a mortgage of its assets. The procedure laid down
in the Articles for such transactions is not complied with. The directors of the two
companies are the same. Is the mortgage binding upon “Y” company? (Mar-18).
Issue:
Is taking decisions against the Articles of a company valid? No.
Is it amounts to ultra vires? Yes.
Who is responsible for the ultra vires acts? Here the directors are responsible.

Rule:
Exceptions to the doctrine of Indoor Management.
Indoor Management: A transaction may have two aspects, namely, substantive and procedural.
An outsider dealing with a company can only find out the substantive aspect by reading the
Memorandum and Articles. Even though he may find out the procedural aspect, he cannot find
out whether the procedure has been followed or not. For example, a company may have
borrowing powers by passing a resolution according to its Memorandum and Articles. An outsider
can only find out the borrowing powers of the company. But he cannot find out whether the
resolution has in fact been passed or not. So, an outsider who is minded to have any dealings with
a company is bound to read the contents of the registered documents. But, he is not bound to do
anything more.
Under an exception to the Doctrine of Indoor Management, if the party is having knowledge of
the irregularity:
A person, who deals with the company has the knowledge of irregularity regarding the internal
management of the company, cannot claim benefit under the rule “Indoor Management”.
Application:
In T.R. Pratt (Bombay) Ltd. V. E.D. Sarsoon & co. Ltd., a company lent money to another company
on a mortgage of its assets. The procedure laid down in the Articles for such transactions was not
complied with. The directors of the two companies were the same. It has been held that the
lender had notice of the irregularity and hence the mortgage was not binding.
Conclusion:
The given case is similar to the above-discussed case, points under the case are:

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A. The procedure laid down under the Articles is not followed for the loan.
B. Directors of both companies are the same.
C. They are not outsiders to claim the Doctrine of Indoor Management.
D. The directors are aware of all the irregularities while taking the loan.
Hence, the company is not liable for that loan and the directors are liable.

9. The directors of a company bought shares from ‘A’. they disclose to him that negotiations
were conducted for the sale foal l the company’s shares at a higher price than they were to
pay to ‘A’. ‘A’ sued to have the sale set aside. Will he succeed? (Mar-18).

Issue:
Can the director misuse the information for his personal gain? No.
Are the directors committed a wrong? Yes.

Rule:
Prohibition of insider trading of securities Section 195 of the Securities Exchange Board of India.
In order to safeguard companies against insider trading, SEBI has framed regulations in 1992
which makes misuse of secret trade information of the company by its officials, employees etc.
who have access to it in course of business dealings, an offence and the person found guilty of
inside trading may be removed from employment. Thus, the object of SEBI regulations prohibiting
insider trading is to prevent misuse of secret economic information and its unauthorised leakage
as it amounts to a breach of trust and confidentiality.

Application:

In R v. Goodman, where a director in his official capacity has the information and knowledge
that company’s forthcoming public issue will be on a high premium and with the intention of
making huge profit, he himself purchases shares of the company at the existing lower price, he
would be guilty of inside trading.
In Patel Investments v. SEBI, the court said that the directors of a company can carry on
business of their own, but it should not be based on misuse of secret information of the company,
of which they are directors.
Conclusion:
In the given case the directors misused the vital information what they are having for their
personal gain and thereby committed insider trading, hence, the directors are liable for the insider
trading.

10. Ramesh, a shareholder in Mod Ltd, desires to nominate his wife Radha as a nominee in
respect of his shareholdings. Can Mod Ltd, accept the nomination so made? Advice the
company? (May-17).
Issue:
Can Ramesh appoint his wife has his nominee? Yes.
Will the company accept the nomination? Yes, it has to.

Rule:

Section 72 of the Companies Act, 2013 - Power to nominate

(1) Every holder of securities of a company may, at any time, nominate, in the prescribed manner,
any person to whom his securities shall vest in the event of his death.

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(2) Where the securities of a company are held by more than one person jointly, the joint holders
may together nominate, in the prescribed manner, any person to whom all the rights in the
securities shall vest in the event of death of all the joint holders.

(3) Notwithstanding anything contained in any other law for the time being in force or in any
disposition, whether testamentary or otherwise, in respect of the securities of a company, where
a nomination made in the prescribed manner purports to confer on any person the right to vest
the securities of the company, the nominee shall, on the death of the holder of securities or, as
the case may be, on the death of the joint holders, become entitled to all the rights in the
securities, of the holder or, as the case may be, of all the joint holders, in relation to such
securities, to the exclusion of all other persons, unless the nomination is varied or cancelled in the
prescribed manner.

(4) Where the nominee is a minor, it shall be lawful for the holder of the securities, making the
nomination to appoint, in the prescribed manner, any person to become entitled to the securities
of the company, in the event of the death of the nominee during his minority.

Conclusion:
In the given case Mr Ramesh can nominate his wife Mrs Radha in respect of his shareholding in
the company, but the application should be in a prescribed manner and the company should
accept his nomination as per the above-discussed provisions.

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