‘The most important characteristics of a company ar 1 Com Its Ni ‘A Company, once incorporated, becomes a legal entity and a person, but it is not a natural person, it isan artificial person; Once incorporated, it gets rights, obligations, powers and duties as prescribed under the law; It can, within the limits as prescribed under its Memorandurh of Association, can do all acts as a natural person may do; It has 2 distinct legal personality of its own and capable of enjoying rights and being subject to obligations which are different from those enjoyed or borne by its members. Like a natural person it can enter into contracts, sue and can be sued in its own name, but unlike human being it has no mind. Corporate personality is separate and distinct from its members Upon incorporation, a company gets a corparate personality, quite distinc from its members. Being a separate legal entity it bears its own name and acts under a corporate name. Its assets are separate and distinct from those of its members. It becomes capable of owning property, incurring debts, borrowing money, having @ bank account, empioying people, entering into contracts and suing or being sued in the same manner as an individval, Since, sharehoider and company are different persons, a shareholer cannot be held lable for the acts of the company even if he holds virtually the entre share capita. ‘The shareholders are not the agents ofthe company and so they cannot bind it by their acts The company does not hold its property as an agent or trustee for its members and they cannot sue to enforce its rights, nor can they be sued in respect ofits labiltes, Salomon v. Salomon and Co, Ltd., (1897) A.C. 22, is a landmark judgement which established ‘that once a company is incorporated, it becomes a legal person distinct from its members and It is immaterial whether any member has a large or small shareholding in the Company, and whether he holds those shares henefically or as a mere trustee, In this case, Mr. Salomon was carrying on some business. After some time, he formed a limited ‘company consisting of himself, his wife, his daughter and his four sons as the shareholders, all of ‘them were holding 1 share each and total paid up capital was £ 7, Salomon sold his business to the Company for the sum of £ 38,782. The company’s nominal ‘capital was € 40,000 in € 1 shares. in part payment of the purchase money for the business sold to the company, debentures of the amount of £10,000 secured by a floating charge on the ‘company’s assets were issued to Salomon, who also applied for and received an allotment of 20,000 £ 1 fully paid shares. The remaining amount of £8,782 was paid to Salomon in cash, Salomon was the managing director and two of his sons were other directors.After some time, the company ran into difficulties and the debentureholders appointed a receiver and the company went into liquidation. The total assets of the company amounted to £6050, its liabilities were £10,000 secured by debentures, £8,000 owning to unsecured trade Creditors, who claimed the whole of the company’s assets, viz, £6,050, on the graund that, as, the company was a mere ‘alias’ or agent for Salomon, they were entitled to payment of thelr debts in priority to debentures. ‘They further pleaded that Salomon, as principal beneficiary, was ultimately responsible for the debts incurred by his agent or trustee on his behalf. The trial judge and the Appellate Court agreed with these contentions and decreed against Salomon, But, House of Lords reversed the order of the Appellate Court. The House of Lords held that on registration, the company comes into existence and attains maturity on its birth. There is no period of minority, no interval of incapacity. It has its own existence or personality separate and distinct from its members and, as a result, a shareholder cannot be held lable for its acts even though he holds virtually the entire share capital. Thus, the case also established the legality of what is known as “one-man company’ ‘The case also recognised that subscribers do not have to be independent or strangers to one another. The case also recognised the principle of limited liability. It also established that 2 Person can be at the same time a member, a creditor and an employee of the company, as well as its director. Their Lordships of the House of Lords observed: “When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate capable forthwith of exercising all the functions of an incorporated company. It is difficult to understand how a body corporate thus created by statute can lose its individuality by Issuing the bulk of its capital to one person. The company is at law a different person altogether from the subscribers of the memorandum; and though it may be that after incorporation the business is precisely the same as before, the same persons ‘are managers, and the same hands receive the profits, the company is not in law their agent or ‘trustee. The statute enacts nothing as to the extent or degree of interest which may be held by ‘each of the seven or as to the proportion of interest, or influence possessed by one or majority of the shareholders over others. There Is nothing in the Act requiring that the subscribers to the ‘memorandum should be independent or unconnected, or that they or any of them should take 2 substantial interest in the undertakings, or that they should have a mind or will of their own, or that there should be anything like a balance of power in the constitution of company.” Lee v. Lee's Air Farming Ltd. (1961) A.C. 12 (P.C), In this case, a company was formed by Lee, @ qualified pilot, and he held all but one of the shares in the company. He voted himself the ‘managing director and got himself appointed by the articles as chief pilot at a salary. He was killed in an air crash while working for the company. His widow claimed compensation for the death of her husband in the course of his employment. ‘The company opposed the claim on the ground that Lee was not a worker as the same person could not be the employer and the employee. The Privy Council held that Lee and his company Compiled by Ohio Sinkowere distinct legal persons which had entered into contractual relationships under which he became the chief pilot, a servant of the company. In his capacity of managing director he could, ‘on behalf of the company, give himself orders in his other capacity of pilot, and the relationship between himself, as pilot and the company, was that of servant and master. Lee was a separate person from the company he formed and his widow was held entitled to get the compensation. In Re. Kondoli Tea Co. Ltd, (1886) LR 13 Cal 43, the Calcutta High Court held recognised the principle of separate legal entity even much earlier than the decision in Salomon v. Salomon & Co. Ltd. case. Certain persons transferred a Tea Estate to a company and claimed exemptions from ad valorem duty on the ground that they themselves were the shareholders in the company and, therefore, it was nothing but a transfer from them in one name to themselves under another name. The Calcutta High Court rejected this contention and observed: "The company was a separate Person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as ifthe shareholders had been totally different persons. ‘The members of the Company has limited liability © The privilege of limited liability for business debts Is one of the major advantages of doing business under the corporate form of organisation. © The company, being a separate person, is the owner of its assets and bound by its liabilities. The liability of a member as a shareholder, extends to contribution to the assets of the company up to the nominal value of the shares held and not paid by him. 0 Ashareholder is liable to pay the balance, if any, due on the shares held by him, when called upon to pay and nothing more, even ifthe liabilities of the company far exceed its assets. © For example, if A holds shares of the total nominal value of Rs. 1,000 and has already paid Rs, '500/- as part payment at the time of allotment, he cannot be called upon to pay more than the balance amount of Rs. 500/-. If he holds fully-patd shares, he has no further liability to pay even if the company is deciared insolvent, © In Re, London and Globe Finance Corporation, (1903) 1 Ch.0. 728 at 731, has observed: ‘The statutes relating to limited liability have probably done more than any legislation of the last fifty ‘years to further the commercial prosperity of the country. They have, to the advantage of the investor as well as of the public, allowed and encouraged aggregation of small sums into large capltals which have been employed in undertakings of “great public utility largely increasing the wealth of the country".” Perpetual Succession © Anincorporated company never dies except when itis wound up as per law. © Accompany, being a separate legal person is unaffected by death or departure of any member and remains the same entity, despite total change in the membership, © The membership of an incorporated company may change either because one shareholder has, transferred his shares to another or his shares devolve on his legal representatives on his death cr he ceases to be a member under some other provisions of the Companies Act. semicon ETH An EE ‘Company tow Study ‘Compiled by Dhra sinha5 6 Professor L.C.8. Gower rightly mentions, “Members may come and go, but the company can go ‘on forever. During the war all the members of one private company, while in general meeting, were killed by a bomb, but the company survived — not even a hydrogen bomb could have destroyed I’. Company has separate property than its members ‘A company is capable of owning, enjoying and disposing of property in its own name. The property of the company is not the property of the individual members. ‘The company isthe real person in which allits property is vested, and by which itis controlled, managed and disposed of. In R.F, Perumal v. H. John Deavin, A.L.R. 1960 Mad. 43 held that “no member can claim himself to be the owner of the company's property during its existence or in its winding-up”. [A person was the holder of nearly all the shares except one of a timber company and was also a substantial creditor. He insured the company’s timber in his own name. The timber, having been destroyed by fire, the insurance company was held not liable to him. [See Macaura v. Northern Assurance Co. Ltd., 1925 A.C. 619]. Lord Buckmaster observed in this case that "No shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein’ ‘The property of the company is not the property of its shareholders. [Gramophone and Typewriter Co. v. Stanley, (1906) 2 K.B. 856 at 869} Im RC. Cooper v. Union of India, ALR. 1970 S.C. 564), the Supreme Court observed that a shareholder has merely an interest in the company, arising under the Articles of Association, measured by a sum of money for the purpose of liability, and by a share in the profit. He has merely a right to participate in the profits of the company subject to the contract contained in articles of association {A shareholder does not become the part owner of the company or its property; he is only glven certain rights by law, e.g, to receive or to attead or vote at the meetings of the shareholders, Transferability of Shares ‘The capital of a company Is divided into parts, called shares. The share of a Company is a movable property and, subject to certain conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to a company. ‘A member may sell his shares in the open market and realise the money invested by him. This provides liquidity to a member (as he can freely sell his shares) and ensures stability to the ‘company (as the member Is not withdrawing his money from the company}. For a listed company the shares are transferable through Electrical made Le. through Depository Participants instead of physical transfers. ‘Common Seal (On incorporation, a company acquires legal entity with perpetual succession and a common seal. ‘The company must act through its agents and all such contracts entered into by its agents must be under the seal of the company, ‘The common seal of the company acts as the offical signature of a ‘company. The name of the ‘company must be engraved on its common seal. A document not bearing common seal of the company is not authentic and has no legal force behind it. sos ecarnuimecaee ere ory gna acer ‘Company Law-Study 1 ‘Comptes by OhiralSiho2 10, 11, ‘The person authorised to use the seal should ensure that it is kept under his personal custody and is used very carefully because any deed, Instrument or a document to which seal is improperly or fraudulently affixed will involve the company in legal action and litigation. Capacity to Sue and Be Sued ‘company can sue and be sued in its own name. Al legal proceedings against the company are to be instituted in its own name. Similarly, the ‘company may bring an action against anyone in its own name. ‘A company, as a person separate from its members, may even sue one of its own members for libel Can enter into contracts ‘A company, being a legal entity, can enter into contracts for the conduct of the business in its ‘own name. A shareholder cannot enforce a contract made by his company; he is neither a party to the contract nor entitled tothe benefit of it as a company is nota trustee for its shareholders. ‘A company as a legal person can take action to enforce Its legal rights or be sued for breach of its legal duties. ts rights and duties are distinct from those of ts constituent members Limitation of Action The Memorandum of Association of a company regulates the powers and fixes the objects of the company, ‘A company cannot do certain acts, which is not stated in the Memorandum of Association. Separate Management ‘The members do not have control over the working and management of the Company and itis administered and managed by its managerial personnel. Termination of Existence ‘A company, being an artificial person, does not die a natural death. itis created by law, carries on its affairs according to law throughout its life and its existence Is ‘terminated by means of winding up. ‘Company tow Study Compiled by Bir) SinkCONCEPT OF CORPORATE PERSONALITY Being @ creation of the law, a company has a distinct personality, but in reality itis an association of persons (members) who are the beneficial owners of the property of the company. Also, a company, being an artifical person, cannot act on its own but needs natural persons to run its operations and management, iting of or piercing through the corporate vei ©The separate personality concept of a company Is a statutory privilege and hence must be used {or legitimate business purposes only. © If such privilege is used for fraudulent and dishonest purpose, the members of a company are not allowed to take shelter behind the corporate personality. © The Court breakthrough the corporate shell and apply the principle of what is known as “lf of or piercing through the corporate vel”, © The Court will look behind the corporate entity and take action as though no entity separate from the members existed and make the members or the controlling persons llable for debts and obligations of the company. Circumstances when corporate veil can be lifted ‘The Companies Act, 1956 contains certain provisions in sections 45, 147, 212, 247 and $42, which lift the corporate veil to reach the real forces of action. Taxation Laws have also made deep inroads to crack the corporate shell for efficient administration of tax laws. However, the Courts have found it necessary to disregard the separate personality of a company in the following situations: ©. Where it used for fraud or improper conduct. Gilford Motor Co. v. Home, (1933) 1 Ch. 935; a former employee of a company made a covenant not to solicit its customers. He formed a company which undertook solicitation, The ‘company was restrained by the Court. Jones v, Lipman, (1962) |. W.LR. 832, A agreed to sell certain land to 8. Pending completion of formalities, A sold and transferred the land to a company which he had incorporated with @ nominal capital of £100 and of which he and a clerk were the only shareholders and directors. This was done in arder to escape a decree for specific performance in a suit brought by B. The Court held that the company was the creature of A and a mask to avoid recognition and that in the eyes of equity A must complete the contract, since he had the full control of the limited company in which the property was vested, and was in a position to cause the contract in question to be completed. ‘Company tew-Study! Comite by Dhira Sinha© _Imcases of evasion of taxes and duties Where it was found that the sole purpose for which the company was formed was to evade taxes, the Court will snore the concept of separate entity, and make the individuals liable to pay the taxes Re: Sir Dinshaw Manakjee Petit, ALR. 1927 Bombay 371 ‘The Assessee was a wealthy man enjoying large dividend and interest income. He formed four private companies and agreed with each to hold a block of investment as an agent for it. Income received was credited in the accounts of the company but the company handed back the amount to him as a pretended loan. This way he divided his income in four parts in a bid to reduce his tax liability But it was held “the company was formed by the assessee purely and simply as a means of avoiding super-tax and the company was nothing more than the assessee himself. it did no business, but was created simply as a legal entity to ostensibly receive the dividends and interests and to hand them over to the assessee as pretended loans”. The Court decided to disregard the corporate entity as it was being used for tax evasion. © Where separate corporate personality conflicts with public policy Connors Bros. v. Connors (1940) 4 All E.R. 179, the principle was applied against the managing director who made use of his position contrary to public policy. In this case the House of Lords determined the character of the company as "enemy" company, since the persons who were de facto in control ofits affairs, were residents of Germany, which was at war with England at that ‘time, The alien company was not allowed to proceed with the action, as that would have meant siving money to the enemy, which was considered as monstrous and against “public policy”, © Avoidance of welfare legislation ‘The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar and another, A.L.R. 1986 SC 1. ‘Anew company was created wholly by the principal compainy with no assets of its own except those transferred to It by the principal company, with no business or income of its own except receiving dividends from shares transferred to it by the principal company ie. only for the purpose of splitting the profits into two hands and thereby reducing the obligation to pay bonus. ‘The Supreme Court held that the new company was formed as a device to reduce the gross profits of the principal company and thereby reduce the amount to be paid by way of bonus to workmen, The amount of dividends received by the new company should, therefore, be taken Into account as assessing the gross profit of the principal company. © Where a company abuses its corporate personality for an unjust and inequitable purpose. © When acts of a company are opposed to justice, convenience and interests of revenue or workman or are against public interest. Company LowStudy) "Comed by Ohira Sinha‘Types of, ‘The Companies Act, 1956 provides for many types of companies. However, certain common types of companies are as follows: Private Company Defined u/s section 3(1}{il it means a company, which has a minimum paid-up capital of Rs. 1. Lac, and its Articles of Association: () restricts the right to transfer its shares, if any; {i) limits the number of its members to 50, excluding its employees; and its former employees who were members of the company and continued to be so; (ii) prohibits any Invitation to the public to subscribe for any shares or debentures of the company (iv) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. Such companies have the words ‘Private Limited’ added at the end of its name. ‘A private company can be formed by 2 or more members and shall have minimum 2 directors. A private company enjoys many exemptions and privileges under the Act as compared to a public limited company. Public Compeny Defined u/s 3(1)(iv), a public company means a company which: () isnota private company; (ii) has a minimum paid-up capital of Rs. 5 Lac; (li) isa private company which Is a subsidiary of a company which is not a private company. ‘A public company can be formed by 7 or more persons. The Articles of Association of a public limited company does not contain any restrictions as applicable for a private limited company. ‘The shares of a public company are freely transferable and a public company can im subscribe for its shares or debentures and there is no limitation on number of members. public to Companies limited by Liability Unlimited Companies-The liability of members are unlimited. It means that the members are liable for the company's debts in proportion to their respective interests in the company and their liability is unlimited. Amway is one such company. Companies limited by guarantee-: A company in which the lability of members are limited to such amount as the members guarantee to contribute to the assets of the company in the event of its being wound. ‘Company Law Sty ‘Complted by Oh Sinho© Companies limited by shares: A company in which the liability ofits members are limited to the extent the amount, if any, unpaid on the shares held by them. These companies are common form and can be elther private limited or public limited > ASSOCIATION NOT FOR PROFIT © These companies are also called as section 25 companies as they are registered under section 25 of the Act. © Generally pursue charitable, educational or other purposes of great utility. © Require a licence from the Central Government (Regional Director Office) under section 25 of the Act and of limited lability © Not required to use the word “Limited! or ‘Private Limited” after their names. (©The Central Government grants such licence If: () Such company promotes commerce, art, science, religion, charity or any other useful object; and the company prohibits payment of any dividend to its members but intends to apply its profits or ather income in promotion of its objects. (0 These companies enjoy certain exemptions granted by the Central Government. > GOVERNMENT COMPANIES © Acompany in which atleast 51% of the paid-up share capital Is held by the Central Government, (oF by any State Government(s) or by CG and SG (section 617) © Asubsidiary of @ Government company is also a Government company. © Agovernment company enjoys various exemptions as notified by the CG u/s 620 of the Act. ‘Company Laustct ‘Compiled by Ohio} ahaWho are Promoters? Before a company is formed, there is somebody who conceives the idea of forming a company and takes the necessary steps for that. This person Is commonly known as Promoter of that Company. He provides with the capital and makes the business plans; acquire property or projects to carry out the intended business of the Company. In Twycross v. Grant(1877) it was held that promoter is "one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose’ In Whaley Bridge Calico Printing Co. v. Green (1880) it was observed that the term "promoter" isa term not of law but of business. A person may be a promoter, even if he has undertaken a lesser active role in the formation of a company. Any person who becomes a director, places shares or negotiates preliminary agreements, may be covered by this term, ‘Who constitutes a promoter in a particular case fs, therefore, a question of tac, there being no clear legislative or judicial definition. A company may have several promoters. A promoter may be a natural person or a company. ‘The promoter originates the concept of forming a company; gets together the subscribers to the memorandum, gets the Memorandum and Articles prepared, executed and registered, finds the bankers, brokers and legal advisers, finds the first directors, settles the terms of preliminary contracts with vendors and agreement with underwriters, and makes atrangement for preparation, advertisement and circulation of the prospectus and placement of the capital, However, a person who merely acts in a professional capacity on behalf of the promoter is not a promoter. Definition of Promoter ‘The Companies Act, 1956, does not define ‘promoters’ but SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997 defines ‘promoter’ as: a 0) any person who Is in control of the target company; any person named as promoter in any offer document of the target company or any shareholding pattera filed by the target company with the stock exchange pursuant to the Listing Agreement, whichever is later; and includes any person belonging to the promoter group as mentioned in Explanation I Provided that a director or officer of the target company or any other person shall not be a promoter if he is acting as such merely in his professional capacity. ‘Company taw Compiles by fir sinhaExplanation I: For the purpose of this clause, ‘promoter group’ shall include: in case promoter is a body corporate: (® _asubsidiary or holding company of that body corporate; (i) any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the promoter; (it)_any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital ofthe target company; and Im case the promoter is an individual: () the spouse of that person, or any parent, brother, sister or child ofthat person or of his spouse; (ii) any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter or a firm or HUF in which the promoter or any one or more of his immediate relative is a member; (il) any company in which a company specified in (i) above holds 10% or more, of the share capital; and (jv) any HUF or firm in which the aggregate share of the promoter and his immediate relatives is equal to or more than 10% of the total. Legal position of a promoter Since the company is not in existence, a promoter is neither an agent of, nor a trustee for, the company, But he occupies a fiductary position in relation to the company and therefore requires full disclosure of the relevant facts, including any profit made by him with relation to the Company. A promoter of a company is accountable to it for all moneys secretly obtained by him from the Company, similar to as of the principal and agent or the trustee and beneficiary. In Lagunas Nitrate Co. v. Lagunas Syndicate, it was held that promoters stand in a fiduciary relation to the company they promote and to those persons whom they induce to become shareholders in i ‘The promoters, being in a fiduciary position, shall not make, directly or indirectly, any profit at the expense of the company and that if he does so, the company can compel them to surrender the secret profits [Emma Silver Mining Co, v. Grant] Duties ofa Promoter ‘The promoters are in fiduciary position to the Company and have following duties towards the Company: Not to make, directly or indirectly, any profit at the expense of the company he promotes, without the knowledge and consent of the company. If he does so, in disregard of this rule, the company can compel him to account fori. ‘Company Low Compied by Dir SinhaA promoter is not forbidden to make profit but to make secret profit. He may make a profit ‘out of promotion with the consent of the company in the same way as an agent and principal, In Gluckstein v. Barnes, it was held that where a promoter makes profits in connection with a transaction to which company is a party and does not make full disclosure of his profits; the company has the right to affirm the contracts and promoter should handover his profits to the company. © Duty to make full and complete disclosure for deriving a profit from the sale of his own property to the company. Ifa promoter sells his own property to the company without making a full disclosure, the company may either repudiate the sale or affirm the contract and recover the profit made out of it by the promoter. Either way the dishonest promoter is deprived of his advantage. Such disclosures shall be made to: a. toanindependent Board of directors; or b. inthe articles of association of the company; or © inthe prospectus; or d. tothe existing and intended shareholders directly. © Inaddition to disclosing secret profits, a promoter has the duty to disclose to the company any interest he has in a transaction entered into by him. ‘Company Low ‘Compted by Ohta SinhaIncorporation of a Company According to section 12 of the Act, any 7 or more persons, or in case of a private company, any 2 or ‘more persons, associated for any lawful purpose may, by subscribing their names to the Memorandum of Association and otherwise complying with the requirements of this Act in respect of registration, form {an incorporated company, with or without lr ited liability. Important steps for incorporation of a company are as follows: > Availability of Name of company Acompany is identified by its registered name. Section 13 of the Act says that the Memorandum of Association of a company should state the name of the company. The promoters should decide upon suitable names, and make an application to the ROC in Form {1A alongwith a fees of Rs. 500. ‘A company cannot be registered with a name which is undesirable or which Is identical with or too nearly resembles the name of an existing company. (Section 20) Accompany will not be allowed to use a name which Is prohibited under the Emblems and Names (Prevention of Improper Use) Act, 1950 The ROC in terms of guidelines issued by the Ministry of Corporate AMfalrs make the name available to the Promoters. Where the ROC informs that the concerned name is available, such name is valid for a period of 60 days from the date the name is allowed. Preparation of Memorandum and Articles of Association ‘MoA\is the constitution of a company and defines the area within which the company can act. ‘Mod is required to state the objects for which the company has been formed, the business that would undertake, the liability, the capital which it shall be allowed to raise, the nature of liablity of its members, the name of the State where the registered office of the company shall be located ete. Vetting of, Printing, Stamping and Signing of the Memorandum and Articles ‘The draft of the Memorandum and Articies should be prepared and typed before printing. ‘The ROC Officials vet MoAOA as they may propose some changes, MoAod are required to be stamped as per the state stamp duty rates. Modo should be signed by each subscriber, or by his PoA holder, who should write his address, description and occupation, in the presence of at least one witness who shall attest the signature giving his address, description and occupation. In case of companies having share capital, the subscribers to the MoA should also clearly state the number of shares taken by them. However, it Is not necessary that only the subscribers should sign the Memorandum and Articles. An agent may sign the Memorandum on behalf of a subscriber if he is authorised by 2 Power of Attorney in this behalf. Both the MoA and AoA should be dated entire rst ene ‘Company ow Stayt ‘Compted by Dire Sinhaov Additional Documents Consent of directors-For a public limited company, consent of the proposed appointee 1s required to be filed with the RoC (section 266) Notice of Registered address: In e-Form No. 18, a company is required to have a registered office and required to intimate the RoC within 30 days thereof or any change in the registered office as well Particulars of Directors-In e-form 32, atthe time of incorporation Statutory Declaration in e-Form No. 1, a declaration is required to be filed by an Advocate (of SC or HC], An attorney or pleader (entitled to appear before the HC), PCS, PCA or by @ person hnamed in the Articles @s a director, manager, or secretary of @ company, who is engaged in the formation of a company that all the requirements of the Companies Act, 1956 and the rules thereunder have been complied with in respect of registration and matters precedent and fental thereto to be filed with the Registrar. [Section 33(2)] Italso needs to be stamped as per the applicable stamp duty Payment of Registration Feessto the RoC as prescribed in Schedule X, depends on authorised share capital (max fee payable is Rs. 2 Cr.) Certificate of Incorporation Ifall the requisite documents are filed and the ROC Is satisfied that all the requirements related to incorporation of a company are complied with, RoC registers the Memorandum and Articles of the Company and issues a Certificate of Incorporation. ‘his Certificate certifies that the company is incorporated and, in the case of a limited company ‘that the company Is limited company, From the date of this certificate, the Company becomes a legal entity by its name and the subscribers to the Memorandum become the members of the company. Certificate of incorporation (“Col”) is the conclusive evidence ‘Once a Col is given by ROG, its the conclusive evidence that all the requirements of the Act have been complied with in respect of registration of the Company and itis duly registered under the ‘Act. (Section 35) ‘The Certificate of Incorporation is the conclusive evidence that everything is in order related to registration and that the company Is existing from the date of incorporation mentioned therein with all the rights and liabilities of a natural person and competent to enter into contracts Uubilee Cotton Mills Ltd. v. Lewis, (1924) (A.C. 958)] ‘The validity of the registration cannot be questioned after the issue of Col. ‘Moosa v. Ebrahim, the Memorandum of Association of a company was signed by two adults and by a guardian of the other 5 subscribers, who were minors. The Registrar, however, registered the company and issued the Col. However, It was argued that this Col should be declared void. The judge said that "We assume that the conditions of registration prescribed by the Indian Companies Act were not duly complied with; that there were no seven subscribers to the ‘Memorandum and that the Registrar ought not to have granted the certificate. But the een eR eee (Company Low-Study! Compiled by Ohi} Sinocertificate is conclusive for all-purpose. Thus, the certificate prevents anyone alleging that the company doss not exist’ © Even if the two signatures to a Memorandum were written by one person, or were forged, the certificate would be conclusive that the company was duly incorporated. So too, if the signatories were all minors, the certificate would stil be conclusive [Hammond v. Prentice Bros] However, Col only makes the incorporation conclusive but it does not legalise the illegal objects contained in the Memorandum of the Company [Performing Right Society Ltd. v. London Theatre of Varieties) ee TT Ti ERS (Company law study ‘Comated by Dh SinhaMEMORANDUM OF ASSOCIATION (SECTION 12 70 23) ‘Memorandum of Association (MoA) of a company sets out Its constitution of the company and defines the scope of its activities. MoA enables the shareholders, creditors and those whe deal with the company to know its permitted range of enterprise. “memorandum” means memorandum of association of a company as originally framed or altered from time to time in accordance with the Act. [Section 2(28}] {In case of a public company, seven (7) members and in the case of a private company, any two (2) or more persons, may by subscribing their names to a memorandum and complying with the other requirements of this Act in respect of registration, may form an incorporated company, with or without limited liability (Section 12), In Ashbury Railway Corriage & Iron Co. Ltd. v. Riche, Lord Cairn observed: “The MoA of @ company is Its charter and defines the limitations of the powers of the company..n.m. it contains int both that which i affirmative and that which is negative. It tates affirmatively the ambit and extent of vitality and powers which by law are glven to the corporation, and it states negatively, if It Is necessary to state, that nothing shall be done beyond that ambit...” {ayptian Salt ond Soda Co,Ltd. v. Port Said Salt Association Ltd. (1931) A.C. 677] If the Company enters into a contract or does any trade or business which is beyond the powers conferred on it by the MoA, such a contract or the act will be ultra vires the company and hence void. ‘Contents of MoA (Section 13) ‘The MoA of a limited company must state the following: ° Name Clause-the name of company with ‘Limited’ (for public company} and ‘Private Limited’ (for private Company) Situation Clause-the state in which the registered office of the company is situated; Object Clause (i) the main objects to be pursued by the company on its incorporation ii) objects incidental or ancillary to the attainment of the main objects; (ii) other objects of the company not included above ability Clause-For a company limited by shares or by guarantee shall aso state that the liability, of its members is limited. Capital Clause- the amount of share capital with which the company is regis division thereof into shares ofa fixed amount (for a company having share cay tered and the ) ‘The Subscriber of the MoA shall take atleast one share and shall write opposite to his name the number of shares he takes, ‘Company Law-Study! ‘Comoied by Dire SinhaForm of Moa Schedule | of the Act prescribes certain tables Table B-Companies limited by shares; Table C-Companies limited by guarantee and not having a share capital Table D-Companies limited by guarantee and having a share capital Table E- Unlimited companies ‘A company may either adopt any of the model Forms of the MoA, as may be applicable, or may prepare in any other Form, but it should be as similar as possible. ‘Name Claus > No company shall be registered by a name which, in the opinion of the Central Government, is undesirable. A name which is identical with or too nearly resembles, the name by which a ‘company in existence has been previously registered, will be deemed to be undesirable. (Section 20) > The objective is to prevent the use of name likely to mislead the public. For example, a company will not be allowed to use a name which is prohibited under the Emblems and Names (Prevention of improper Use) Act, 1950, or suggestive of any connection with Government or of State patronage where there is none. > Ifa company, by inadvertence or otherwise, gets registered with a name which is identical with ‘or too nearly resembles the name of an existing company, the company may change it by passing an ordinary resolution and after obtaining previous written approval of the Central Government as to the changed name. > The Central Government is empowered to direct a company, within 12 months of its registration, to rectify its name If by inadvertence it has been registered with a name similar to that of an existing company. Such company must change the name within 3 months of this direction, > Publication of Name-The name of the company and the address of its registered office must be painted or affixed outside every office or place where its business is being carried on (in a ‘conspicuous position and in English and in the local language) > The name of the Company must be engraved on its common seal. Its name and registered office address must be mentioned in the letterheads, bills, ntices and other official publications. > The MoA must have the name of the State in which its registered office is situated. , > Exact address of the registered office is not required in the MoA, it is required to be filed in e-Form No. 18 (within 30 days). > A Company, within 30 days of incorporation or on the day when it commences business, whichever is earlier, must have a registered office to which all communications and.notices may be sent. ‘Company Low Study ‘Complied by Dara SinboObiects Clause v ‘The objects clause is of great importance and indicates the purpose for which the company is setup. It states affirmatively the ambit and extent of powers of the company and its states negatively that nothing should be done beyond that ambit The terms ‘incidental’ or ‘ancillary’ in the same clause mean activity arising out of or directly connected to the main activity. For example, the:production of by-products is incidental to the ‘manufacture of the main products and also the powers of the company to pursue its objects, the power to borrow etc. Whether an activity is incidental or ancillary to the main activity will have to be determined on a case to case basis. Ifa company acts beyond the limits specified in its MoA, it becomes ultra vires and void. Such acts cannot be validated even by all the shareholders of the company. “Ultra vires” means an act or transaction of a:company, which may not be illegal, beyond the ‘company's powers by reason of not being within the objects of the memorandum of association. tt ‘Whatever is not stated in the object clause ofits MoA, as the objects or powers is prohibited by the doctrine of ultra vires. As a result, an act which Is ultra vires is void, and does not bind the company. Neither the company nor the other contracting party can sue on it. The company cannot make it valid, even if every member assents to it. The general rule is that an act which is ultra vires the company Is incapable of ratification. An act which is Intra vires the company but outside the authority of the directors may be ratified by the company in proper form [Rajendra Nath Dutta v. Shilendra Nath Mukherjee] In Ashbury Rallway Carriage and Iron Co. Ltd, v. Riche, the Object Clause of the MoA says “The ‘objects for which the company is established are to make and sell, or lend or hire, reilway Plants... tO Carry on the business of mechanical engineers and general contractors... ‘The company entered into a contract with M/s. Riche, a firm of railway contractors to finance the construction of a railway line in Belgium, Later on the Company cancelled the contract on the ground of its being ultra vires, Riche filed a sult for damages on the ground of breach of contract, as according to him the words “general contractors” in the objects clause gave power to the company to enter into such a contract and within the powers of the company. Also, it was ratified by majority of shareholders. The Court held that the contract was ultra vires the company and, therefore, null and void, The term “general contractor” was interpreted to related to such contracts as connected with the business of mechanical engineers. ‘Company Low Stuay- ‘ompled by Dir sino‘The Court held that if every shareholder of the company had been in the room and had said, “That is a contract which we desire to make, which we authorise the directors to make", still it would be ultra vires, The shareholders cannot ratify such a contract, as the contract was ultra vires the objects clause, which by Act of Parliament, they were prohibited from doing. In A. Lakshmanaswami Mudallar v. LiLC, the directors of the company were authorised “to make payments towards any charitable or any benevolent object, or for any general public or useful object”. In accordance with shareholders’ resolution the directors paid Rs. 2 lacs to a trust formed for the purpose of promoting technical and business knowledge. The company’s business was taken over by L.L.C, it had no business left of its own. The SC held that the payment was ultra vires the company. Directors could not spend company’s money on any charitable or general objects. They could spend for the promotion of only such charitable objects as would be useful for the attainment of the company’s own objects. It is pertinent to add that the powers vested in the Board of directors, e.g., power to borrow money, is not an object of company. The powers must be exercised to promote the company’s objects. Charity is allowed only to the extent to which itis necessary in the reasonable management of the affairs of the company. > Loans, borrowings, guorantees and ultra vires rule-An ultra vires borrowing does not create a relationship of a debtor and creditor. In a case, a company had accepted deposits from outsiders ‘which was outside the scope of the Memorandum, When the company was ordered to be ‘wound up, a question was raised whether the depositors were creditors of the company and whether the contributories could be asked to contribute towards payment of deposits. The Court held that the relationship between the company and the depositors was not that of debtor and creditor. But If the lender had lent the amount for discharging lawful expenses, he ‘may recover the amount, > Effects of ultra vires Transactions 1 Void ab intio~ The ultra vires acts are null and void ab initio. The company is not bound by these acts. Even the company cannot sue or be sued upon, {i) Ultra vies contracts cannot become intra vires by reason of estoppel or ratification, {il) Injunction: The members can get an injunction to restrain the company wherein ultra vires act has been or is about to be undertaken [Attorney General v. Gr. Easter Rly. Co., (1880) 5 A.C, 473]. (iv) Personal Jiability of Directors: It Is one of the duties of directors to erisure that the company funds are used only for the legitimate business of the companiy and hence if such capital is diverted to purposes other than company’s memorandum, the director will be personally able to replace it. In Jehangir R. Modi v. Shamjt tadho, [(1866-67) 4 Bom, HCR (1855)], the Bombay High Court held: "A shareholder can maintain an action against the directors to compel them to restore to the company the funds of the company that have by them been employed in transactions that they have no authority to enter into, without making the company a party to the suit”. {v) Incase of deliberate misapplication, criminal action can also be taken for fraud [vi) Where a company’s money has heen used ultra vires to acquire some property, the company’s right over such property is held secure and the company will be the right Company Law study ‘Camplted by Oh] shaparty to protect the property. This is because, though the property has been acquired for some ultra vires object it represents the money of the company. Liability Clause > The Liability Clause of the MoA must state, in case of company limited by shares/guarantee, that liability of the members is limited. > The liability of each subscriber is equal to the total amount due on the shares subscribed for by im. ‘Capital Clause > The usual way to state the capital in the memorandum is: "The capital of the company is Rs, 10,00,000 divided into 1,00,000 equity shares of Rs. 10 each”, This amount lays down the utmost limit beyond which the company cannot issue shares without altering the memorandum as provided by Section 94 of the Companies Act, 1956. v If there are both equity and preference shares, then the division of the capital is to be shown under these two heads. A company is not authorised to issue capital beyond its authorised/nominal/registered capital. if it receives applications for shares beyond the shares covered by the authorised capital, the amount received on excess number of shares should be returned. > Out of the issued capital, the total amount actually subscribed or agreed to be subscribed is known as subscribed capital, and this subscribed capital again may be wholly paid or partly paid which latter case the balance would be payable on future calls when made. The amount actually paid by the shareholders is called the paid-up capital cep pn ean rene Company Low Study ‘Comte by Dia Sinko