CS EXECUTIVE

COMPANY LAW
CS EXECUTIVE

CS DHEERAJ TYAGI

Topics cover:- introduction, types of company, incorporation of company, MOA & AOA

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CH-1 Introduction
DEFINATION OF A COMPANY

Section- 2(20) It means a company incorporated Under this Act or

Section-2(67) Any of the previous Companies law i.e companies
act,1956/1943/1912/1867/1857/1850.

CHARACTERSTICS OR FEATURES OF A COMPANY (SEC.9)

1. Artificial Person A Company is an artificial person created by law. It is not a human being
but it acts through human beings.
It is considered as a legal person which can enter into contracts, possess
properties in its own name, sue and can be sued by others etc.

Case law:- Union Bank of India v. Khader International Construction

and Other

In this case, the question which arose before the Court was whether a
company is entitled to sue as an indigent (poor) person.
The Court observed that the word person had to be given its meaning
in the context in which it was used and being a benevolent provision, it
was to be given an extended meaning.
Thus a company may also file a suit as an indigent person.

2. Separate Legal Entity A Company is legal person in the eyes of law distinct forms its
members
A company is a separate person having its own rights and obligations

Case laws:-
Salomon v. Salomon & co. Ltd.
Discussed later.
Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath Dass
C In other words, the entity acts like a natural person but only through a
designated person, whose acts are processed within the ambit of law.

New Horizons Ltd. v. Union of India

The experience of a shareholder of a company can be regarded as
experience of a company. The tender of the company, New Horizons
Ltd., for publication of telephone directory was not accepted by the

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Tender Evaluation Committee on the ground that the company had

nothing on record to show that it had the technical experience required
to be possessed to qualify for tender. On appeal the rejection of tender
was upheld by the Delhi High Court.

The judgement of the Delhi High Court was reversed by the Supreme
Court

3. Perpetual Succession An incorporated company never dies, except when it is wound up as per
law.
A company, being a separate legal person is unaffected by death or
departure of any member and it remains the same entity, despite total
change in the membership.
Perpetual succession, means that the membership of a company may
keep changing from time to time, but that shall not affect its continuity.

Professor L.C.B. 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 it.

Separation of ownership The members do not participate in the day to day affairs of the
from Company.
management The management of the Company lies in the hands of elected
representatives of members, commonly called as Board of
Directors. Or directors or simply the board.
The directors are appointed as well as removed by the members
Thus the Act has ensured the ultimate control of members over
the company.
Separate property A Company can own and enjoy property in its own name.
Members are not owners or co-owner of the companys
property
Members have no insurable interest in the property of the
company.
Case law:- Macaura v. Northern Assurance Co. Ltd.

Perumal v. H. John Deavin

held that no member can claim himself to be the owner of the

companys property during its existence or in its winding-up.

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A member does not even have an insurable interest in the property of

the company.
CASE EXAMPLE
Mrs. Bacha F. Guzdar v. The Commissioner of Income Tax, Bombay

The Supreme Court in this case held that, though the income of a tea
company is entitled to be exempted from Income-tax up to 60% being
partly agricultural, the same income when received by a shareholder in
the form of dividend cannot be regarded as agricultural income for the
assessment of income-tax.
It was also observed by the Supreme Court that a shareholder does not,
as is erroneously believed by some people, become the part owner of
the company or its property; he is only given certain rights by law, e.g.,
to receive notice of or to attend or vote at the meetings of the
shareholders.
The court refused to identify the shareholders with the company and
reiterated the distinct personality of the company.
Capacity to A company can sue others and be sued in its own name.
sue and sued
Limitation of actions A company cannot go beyond the power stated in its MOA. The MOA of
the company regulates the powers and fixes the objects of the company.

PRINCIPLE OF SEPARATE LEGAL ENTITY

Meaning A company is a legal entity separate from its members

It is known by its own name & has rights and liabilities of its own.
Transfer of sole proprietorship business to company. Mr. Salomon
Salomon v was carrying on the business of boot manufacturing as a sole
Salomon & Co. proprietor. He incorporated a company named Salomon & Co. Ltd.
Ltd. for the purpose of taking over this business.
Member are in the company- Salomon, his wife, his daughter, and
his four son

Payment of purchase consideration by the company

(a) Total consideration-----------------------------------38,782
Cash paid-----------------------------------------------------8,782
Fully paid shares of 1 each issued to Salmon------20,000
Secured Debentures issued to salmon---------------10,000

Constitution of Salomon & Co. Ltd. The 7 members of the family of

Mr. Salomon were issued one share each. Salomon was the
managing director of Salomon & Co. Ltd. Salomon & Co. Ltd.

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Inability to pay debts by the company in liquidation :In the course

of business ,the company borrowed from unsecured creditors to the
extent of 8,000. due to trade depression the company ran in to
financial difficulties and eventually went into liquidation .The assets
realized only 6,050.
Contention of unsecured creditors. The unsecured creditors
contended that Salomon was carrying on business in the name of
Salomon & Co. Thus Salomon Co. was agent for Salomon only.

Decision of the Court:

a) Was in favour of Salomon.
b) It was held that Salmon & Co. Ltd was a real Company fulfilling
all the legal requirements. It had an identity different from its
members. And therefore the secured debentures were to be
paid in priority to unsecured creditors.

Note*- this case law originate new concept such as:-

One man company, limited liability, company separate from its

members & at one time a person can be member, a creditor, and
employee of the company & as well as a director.
EFFECTS or There can be a transfer of property from a member to the company
Implications of and vice versa
the rule of A company has the rights and duties of its own
Separate legal A company is not an agent of members or directors.
entity
.

SOME IMPORTANT DIFFERENCES

Company and HUF:

1. A company consists of heterogeneous members, whereas a Hindu Undivided Family

Business consists of homogenous members since it consist of members of the joint
family itself.

2. In Hindu Joint Family Business the Karta (manager) has the sole authority to contract
debts for the purpose of the business other coparceners cannot do so. There is no
such system in a company.

3. A person becomes a member of Joint Hindu Family business by virtue of birth. There
is no provision to that effect in the company.

4. Non Registration is compulsory for carrying on business for gain by a Hindu Joint
Family even if the number of members exceeds twenty. Registration of a company is
compulsory.

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DIFFERENCE BETWEEN COMPANY AND A FIRM

BASIS OF DISTINCTION COMPANY PARTNERSHIP FIRM

1. Mode of A company comes into A firm comes into existence by an

creation existence only when it is agreement between the partners.
incorporated under the Registration of a firm is optional.
company Act.
2. Separate A company has an identity of A firm is merely a collection of
Legal entry its own. partners. It has no separate. It has
no separate identity.

3. Management A company is managed by A firm is managed by the partners

the directors. themselves.
4. Liability The liability of the members The liability of the partners is
is generally limited. always unlimited.

Difference between LLP and a COMPANY

A basic difference between an LLP and a company lies in that the internal governance
structure of a company is regulated by statute (i.e. Companies Act) whereas for an LLP it
would be by a contractual agreement between partners.

The management-ownership divide inherent in a company is not there in a limited liability

partnership. LLP have more flexibility as compared to a company. LLP have lesser
compliance requirements as compared to a company.

Detailed difference would be in LLP chapter.

LIFTING OR PIERCING OF CORPORATE VEIL

Meaning of By fiction of law a company is seen as a distinct entity .yet in reality it is an
corporate veil association of person who are in fact the beneficial owners of all the
corporate property .This fiction is created by a fictional veil i.e. the
corporate veil.
Effect of Only a company is liable for the acts and defaults done in the name of the
corporate veil company even though members directors or any officer or employee of the
company had acted on behalf of the company.
Meaning of Lifting of corporate veil means ignoring the separate identity of a
lifting or company.
piercing the Lifting of corporate veil means disregarding the corporate
corporate veil personality and looking behind the real persons who are in the
control of the company.

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Lifting is Lifting of corporate veil is permissible only in following cases:-

permissible It is permitted by the statute.
only in There is a clear evidence of abuse of the device of incorporation.
exceptional The court has the discretion whether or not to lift the corporate veil
cases It is not possible to lay down a specific set of circumstances in which
corporate veil may be lifted.

Lifting of corporate Veil as per judicial pronouncement.

LIFTING OF CORPORATE VEIL UNDER JUDICIAL PRONOUNCEMENTS

Protection of (Re. Sir Dinshaw Maneckjee petition)

Revenue An Assessed was receiving huge dividend and interest income on
certain investment.
He formed four private companies .The whole of the investments were
transferred to these private companies.
The interest and dividend received by these companies were within the
exempted limits under the Income Tax Act of that time.
These companies did not have any business or asset except these
investments.
The income received on investment by these companies was diverted
to the assesse in the form of pretended loans, which were never paid
back by him.
The court held that the only purpose of incorporating these private
companies was to evade taxes. Therefore income earned by all these
private companies was treated as income of the assesses.
Case law:-Gilford Motor Co. v Horne
Prevention An employee entered into a contract with his employer that he will not
of fraud or solicit the customers of the employer after leaving the employment.
improper After leaving the employment, the employee incorporated a company
conduct .He his wife and one other person where the only members of this
company
The company started soliciting the customers of the employer.
The court held that the purpose of formation of the company was to
avoid a legal obligation arising from a contract which was not
permissible
Therefore the company was restrained from soliciting the customers of
employer.
Determining Case law:-Daimler Co. Ltd. Vs Continental Tyre & Rubber Co. Ltd.)
the A company was formed in England for the purpose of selling tyres
character of made by a German company .The German company virtually held
the the entire share capital of the English company. All the directors
Company were German residents.

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whether an During the First World War, the English company commenced an action
enemy to recover a trade debt from another English company.
company It was held that the corporate personality of the company be ignored
and the persons in the ultimate control the company were enemies,
the suit was not maintainable.

NOTE:- However, the shareholders cannot ask for the lifting of the veil for their purposes.
Stated better in below case.

Premlata Bhatia v. Union of India.

Wherein the premises of a shop were allotted on a licence to the individual licensee.
She set up a wholly owned private company and transferred the premises to that company
without Government consent. She could not remove the illegality by saying that she and her
company were virtually the same person.

SOME MORE CASE STUDIES FOR BETTER UNDERSTANDING OF THE CONCEPT

Re. R.G. Films Ltd. (1953)

An American company produced a film in India technically in the name of a British Company,
90% of whose capital was held by the President of the American company which financed
the production of the film.
Board of Trade refused to register the film as a British film which stated that English
company acted merely as the nominee of the American corporation.

CASE EXAMPLE
The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar v. The
Associated Rubber Industries Ltd., Bhavnagar and another

The facts of the case were that a new company was created wholly by the principal
company 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 i.e. only for the purpose of splitting the profits into two hands
and thereby reducing the obligation to pay bonus.
The Supreme Court of India 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 in assessing the gross profit of the principal company.

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Kapila Hingorani v. State of Bihar

In this case, the petitioner had alleged that the State of Bihar had not paid salaries to its
employees in PSUs etc. for long periods resulting in starvation deaths.

But the respondent took the stand that most of the undertakings were incorporated under
the provisions of the Companies Act, 1956, hence the rights etc. of the shareholders should
be governed by the provisions of the Companies Act and the liabilities of the PSUs should
not be passed on to the State Government by resorting to the doctrine of lifting the
corporate veil.
The Court observed that the State may not be liable in relation to the day-to-day
functioning of the PSUs but its liability would arise on its failure to perform the
constitutional duties and the functions of these undertakings.
It is so because, life means something more than mere ordinal existence. The inhibition
against deprivation of life extends to all those limits and faculties by which life is enjoyed.

Lifting the Corporate Veil of Small Scale Industry

Where small scale industries were given certain exemptions and the company owning an
industry was controlled by some group of persons or companies,
it was held that it was permissible to lift the veil of the company to see whether it was the
subsidiary of another company and, therefore, not entitled to the proposed exemptions.

Case law;- Inalsa Ltd. v. Union of India,

Q 1. Under which of the following circumstances does the Court permit the lifting of the
corporate veil?

NATURE OF CORPORATE

Company as person:- Company is an artificial person created by law. It is not a human being
but it acts only through human beings. It is considered as legal person which can enter into
any contracts.

It is termed as Person

Company as citizen: discussed below.

A company is Citizenship under the Citizenship Act, 1955 OR under C.O.I is available only
not a citizen to (natural) individual. Therefore, no Company can be a citizen of India.

No rights of Since a company is not a citizen, the fundamental right which are available
citizens only to a citizen, are not available to a company.

But The Constitution of India grants Certain fundamental rights to

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COMPANY
Example:- Article-14 i.e right to equality

Case law;- R.C. COOPER V. UNION OF INDIA

COMPANY CAN HAVE ITS NATIONALITY, DOMICILE AND RESIDENCE

In general we can say that company is not CITIZEN, Still it has domicile and residence.

Domicile- domicile of company is depends upon the registration of company.

Residence-residence is depends upon where the central control and mgmt. of its business is
exercised.

Note points: Body Corporate have no domicile.

MANDATORY USE OF LIMITED OR PRIVATE LIMITED

Mandatory use of
Limited or private
limited (Sec.4(1) (a)
Prohibition on improper
use of limited (Sec. 453) end of the name or title under which he carries on business, if do
Every company shall use, at the end of its name
The word private Limited if it is a private Limited
company
The word Limited if it is a public Limited company.
This section is not applicable on NPO i.e. sec.8 of
companies act, 2013.
No person shall use the word limited or private limited at the
so then penalty shall be imposed, which is not less than Rs. 500
but may be extended to Rs. 2000 for per day.

ILLEGAL ASSOCIATION (Section 464)

Meaning of illegal An association or partnership is an illegal association if

association It consists of more than 100 PERSON. &
Its object is the acquisition of gain by
The association or partnership; or
The individual members thereof,
If it is not incorporated or registered
As a company under the Companies Act. 2013; or
In pursuance of some other Indian Law.
Than it is termed as illegal associations

Exceptions are as follow:-

However, HUF carrying on business shall not be an illegal

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association.
Association which are governed by special act.

Effect of illegal (a) The members of an illegal association shall be

association personally liable for all the acts and dealings made in
the name of such association.
(b) The association cannot enter into any contract in its
own name.
(c) The association cannot sue or be sued in its own
name.
(d) Every member of illegal association shall be liable to
a penalty of up to Rs. 100,000.
(e) Even a subsequent reduction in number of members
cannot make it legal.
(f) An illegal association cannot be wound-up under the
provisions of the Companies Act. 2013.
*Note:-
If business is carried on by two or more joint families,
while computing the number of persons, all the male
and female members of such joint families shall be
counted, but minor members shall be excluded.

NOTE:- Rule 10 of companies (miscellaneous) rules, 2014 also state that number of person
must not exceed 50.

Q.2 Which of the activities are barred to an association that is considered illegal?

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RELATIVE- SEC.2 (77) READ ALONG WITH RULE-4 OF COMPANIES (SPECIFICATION

OF DEFINITION DETAILS) RULES, 2014.

Specified relationship A person shall be deemed to be a relative of another , if

(a) They are members of a Hindu Undivided family; or
(b) They are husband and wife.
Relationships given in Two persons shall be relatives if one is related to the other:-
RULE-4
Father, include step father.
Mother, include step mother.
Son, include step son.
Son wife.
(8 RELATIONS) Daughter.
Daughter husband.
Brother, include step-brother.
Sister, include step-sister.

PUBLIC FINANCIAL INSTITUIONS (Sec. 2(72)

Specified public The following financial institutions shall be regarded as public

financial institutions financial institutions.
(i) Industrial Credit and Investment Corporation of India
Limited (ICICI)
(ii) Industrial Finance Corporation of India (IFCI)
(iii) Industrial Development Bank of India (IDBI)
(iv) Life Insurance Corporation of India (LIC)
(v) Unit Trust of India (UTI)
Notified Public finance CG may, by notification in the official Gazette, specify such other
institution institution as it may think fit to be a public financial institution, if-
Such institution is established under any Central/state Act. OR
CG Holds 51% or more paid- up share capital of such institution.

Answer keys to question stated earlier

Answer 1.
Where the company has abused its corporate personality for an unjust and
inequitable purpose.
Where the veil has been used for evasion of taxes.
Where the Corporate Veil conflicts with public policy.
Avoidance of welfare legislation by the company

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ANSWER 2.

Entering into any contract.

Suing any member or an outsider by a company.
Sued by a member or an outsider against the company.

PRACTICE QUESTION AND ANSWER

Q1. Two companies are incorporated with the same set of shareholders. Are they same or
distinct under the companies act, 2013? Discuss. (4 marks)

Answer:

By registration a company becomes vested with corporate personality, which is

independent and distinct from its members. Even if two companies are incorporated with
the same set of shareholders, they are distinct and cannot to be treated as same company.

Q2. The entire assets of a company are acquired by another company. Will it constitute
taking over the management of the company. (4 marks)

Answer:

By registration a company becomes with corporate personality, which is independent and

distinct from its members. The advantage of incorporation is that the company never
creases to exist. It has perpetual succession and remains in existence however often its
members change, until it is dissolved by liquidation. The company has an identity and
existence independent of the estate and undertakings owned by it, so that even if the estate
is taken over by the government, that does not constitute a taking over of the management
of the company

Q3. Rani is a wealthy lady enjoying large dividend and interest income. She has formed
three private companies and agreed with each of them 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 her as a pretended loan. This way, she divided her
income in three parts in a bid to reduce her tax liability. Discuss the legality of the purpose
for which the three companies were formed. ( 5 marks)

Answer:

When a company is formed as per provisions of the companies act, 2013 they are clothed
with corporate personality and there association is known by the name of the company.
However, sometime this veil of corporate personality is used for some dishonest and
fraudulent purpose. In such cases court will look into reality and remove the corporate veil.

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As per the facts given in case, rani has formed the four companies to avoiding tax and
company is nothing more than assesses himself.

Thus, applying the above principle Rani and four companies will be treated one and same
person.

Q4. A shareholder who holds 99% of the share capital of a company can be held for the
acts of the company. Comment. (5 marks)

Answer:

The company is vested with a corporate personality quite distinct from individuals who are
its members. A company, being a separate legal entity different from its members, can enter
into contracts for the conduct of the business in its own name. in case of company limited
by shares, liability is limited up to unpaid amount on shares.

In leading case Salomon vs. Salmon & co. Ltd., it was held that company separate distinct
person form its members and it is immaterial whether member has large or small
proportion of share capital. As a separate legal person, a company liable for its own act and
members are not personally liable for the acts of the company, even if held entire share
capital of the company.

June 2014 Q5. In an annual general meeting of Amar Pvt. Ltd. , all the shareholders were
killed in a bomb blast. State, whether the company is still in existence?( 4 marks)

Answer:

By registration under the companies act, 2013 a company becomes vested with corporate
personality, which is independent and distinct from its members.

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
has death or he ceases to be a member. Thus, perpetual succession denotes the ability of a
company to maintain its existence by the constant succession of new individuals who step
into the shoes of those who cease to be members of the company. Professor L.C.B. Gower
rightly mentions, members may come and go, but and 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 it.

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CH-2 PROMOTION AND INCORPORATION OF COMPANIES

Introduction:-For incorporating a company, initially promoter plays the important role.

PROMOTION AND PROMOTER

As per Section 2(69) of Companies Act, 2013 promoter means a person

(a) Who has been named as such in a prospectus or is identified by the company in the
annual return referred to in section 92; or
(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:

Note:- person who is acting merely in a professional capacity IS NOT CONSIDERED as

promoter ex. Cs, advocate etc.

As per SEBI (ICDR), 2009:- PROMOTER INCLUDES:-

The person who are in control of the issuer.
The person named in the offer document as a promoter.

in Twycross v. Grant,
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".

Phosphate Sewage Co. v. Hartmount

Promoter is a person who as principle procures or aids in procuring the incorporation of a
company.

But 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.

Meaning of (a) Promotion means the preliminary steps undertaken by the promoter to
promotion bring a company into existence.
(b) The term promotion also includes such steps as are required after
incorporation of the company until company is entitled to commence its
business.
(c) In other words, promotion continues until the Board of directors assumes
the management of the company.
Stages in promotion involves the following 3 stages:
promotion Generation of idea of starting a new company
Registration of the company
Floatation, i.e. raising of capital or arranging the financial resources so as

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to carry on its business operations.

Legal Position A promoter is neither an agent nor a trustee of the company, since the
of promoters company has not yet come into existence. However, his position is similar
to that of an agent and trustee
A promoter stands in a fiduciary capacity towards the company.
Duties of 1.Not to Nature of profit make is to be disclosed. The promoters
Promoters make should not make a secret profit from the company. The law
Secret profit does not prohibit making of a profit by the promoters or
paying any remuneration to promoters. What the law
prohibits is making of secret profit by promoters.
In other words, a promoter can make a profit in respect of
any transaction with the company, only if he makes a full
and fair disclosure of such profit.
Disclosure to whom?
1. To an independent directors
2. In the articles of association
3. In the prospectus
4. To existing shareholders

2.Full and A promoter must make full and fair disclosure of his interest in
fair every transaction or contract with the company in which he is,
disclosure of directly or indirectly interested.
interest
In Gluckstein v. Barnes,
it was held that where a promoter makes some 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.

(b) A promoter is not allowed to derive a profit from the sale of

his own property to the company unless all material facts are
disclosed.

Remedies Where a promoter makes a secret profit, and afterwards this fact becomes
available to known to the company the company will have the following remedies:
the company The company may rescind the contract, even though the
against the Rescission company had adopted the contract and communication the
promoters fact of adoption to the other party to the contract. However,
rescission must be made within a reasonable time.

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Recovery of The company may recover the secret profit made by the
secret profit promoters.
Suit for breach The company may sue the promoters for breach of trust.
of trust
Liabilities of Incorporation of company by furnishing false information:-
promoter As per section 7(6), where, at any time after the incorporation of a
company, it is proved that the company has been got incorporated by
furnishing any false or incorrect information. The promoters, the
persons named as the first directors of the company and the persons
making declaration shall be liable for fraud under section 447.

Others liabilities are set out in prospectus chapter.

Sec.26,
Sec36,
Sec38

Right of a) The promoters shall have no right to-

promoters to Receive any remuneration from the company; or
receive Recover the PRELIMINARY expenses properly incurred by them for
Remuneration. incorporation of the company,
Unless the company after incorporation has contracted the same.
(no right) b) Even where the articles provide that the company shall pay remuneration
to the promoters or reimburse expenses incurred by them, such a provision
is not binding on the company.

Mode of Remuneration may be paid to the promoters in any of the following ways:
payment of Issue of shares at face value
remuneration Earlier in the previous Act, the shares can be issued at Discount as well
to promoters Right to subscribe the companys shares in future at a fixed price.
Purchase of property of promoters at a higher price.
Paying any lump sum remission to promoters on the purchase price of
any property purchased by the company.
Payment of commission to promoters on shares sold by the promoters.

Q.1 Is a director/officer/employee of the issuer a promoter?

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PROCEDURE FOR INCORPORATION OF COMPANY

1. To incorporate a company, promoters have to take initial steps:-

As per Section.3(1) Some requirements for promoters are given in corporation of company:-

seven or more persons, where the company to be formed is to be a public company;

two or more persons, where the company to be formed is to be a private company;
one person, where the company to be formed is to be One Person Company

Procedures are:

Obtain DIN NO.

Acquire DSC and registered it with MCA.

Selecting the name of the company:-

At least 1 promoter shall apply to ROC with

a) E-from INC 1 along with fee of Rs. 1000 (at present).

b) Six proposed name along with proper justification of the proposed name should
be given.
c) Proposed name should not be identical with any existing company/trade mark.
d) And person authorized to file application shall sign through (DSC)

REVALIDATION OF NAME AVAILABILITY

1. After receiving the application, ROC shall check the given names are:-

OR

Desirable Undesirable

Than name will be available for He may reject the applications and then ask for
adoption for next 60 days resubmission.

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DRAFTING & PRINTING OF MOA & AOA

1. It is desirable to take suggestion from ROC& than gets printed as per (Section 4 and
Section 5).
2. Prepare a draft of MOA. A model of MOA is given in Table A, B, C, D & E of schedule I
of companies Act, 2013.
3. Prepare a draft of AOA. A model of AOA is given in Table F, G, H, I & J of schedule I of
companies Act, 2013.

A For Limited by shares

For MOA B For Limited by guarantee & not having share capital
(Section 4(6)) C For Limited by guarantee having Share capital.
D For unlimited companies & not having Share Capital
E For unlimited companies & having Share Capital

TABLE GIVEN BELOW:-

Table of AOA F For Limited by shares

Of Section 5(6) G For Limited by guarantee having Share capital
H For Limited by guarantee & not having share capital
I For unlimited companies & having Share Capital
J For unlimited companies & not having Share Capital

STAMPING & SIGNING OF MOA & AOA

(i) Stamping as per Indian stamp Act, 1899.

(ii) Should be signed by at least 7 subscribers (public co.)

2 subscribers (pvt co.)
1 Subscriber (opc)
(iii) And signing also witnessed by 1 and should also be signed. (Preferred
two)

Q. WHO IS RESPOSIBILE FOR CHARGING /COLLECTING STAMP DUTY?

ANSWER:- S.G

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DATING OF MOA & AOA

Date may be a date of stamping or date later than date of stamping.

But is no case, date cannot be prior to the stamping.

FILINGS OF DOCUMENTS AND FORMS OF REGISTRATION

Document Required:-

E-form- INC 7 Application for incorporation and (In case of incorporation of OPC, E-form-
INC-2 will be used)

statutory declaration, signed by a practicing CS, CA, or director of company.

E-form-INC 22 Notice of Registered office

Tell us about where registered office of company is situated.

E-form-DIR 12 Particulars of Directors

An affidavit from each subscriber and from each person named as first director in
the articles

Content of such affidavit:-

He is not convicted if any offence in connection with promotion, formation or

management of any company,
He is not been found guilty of any fraud or misfeasance or of any breach of duty to
any company during preceding five years, and
All the documents filed with the registrar contain correct, complete and true
information to the best of his knowledge and belief.

Where AOA appoints any person to acts as a director, then information regarding director is
required to be filed to ROC

Now if registrar satisfies that all the aforesaid requirements have been complied with, he
will register the company and place its name on the register of company.

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CS EXECUTIVE

CERTIFICATE OF INCORPORATION SECTION 7(2)

On registration, the registrar will issue a certificate of incorporation in E-FORM-INC-11 ,

registrar of company issue a certificate of incorporation bearing a corporate identity
number(CIN) consisting of 21 digits.

Format of Corporate identity number

1st Digit Listing Status

Next 5 digits Economic Activity (industry)

Next 2 digits State

Next 4 digits Year of Incorporation.

Next 3 digits Ownership

Next 6 digits Sequential number assigned by ROC(Registered Number).

LEGAL EFFECT OF INCORPORATION IS:-

Same as characteristics of the Company

SIMPLIFIED PROFORMA FOR INCORPORATING COMPANY ELECTRONICALLY (SPICe)-

For the purpose of simplifying the filing of forms for incorporation of a company, rule 38
introduced this system under companies act, 2013.
the application for allotment of Director Identification Number upto three Directors,
reservation of a name, incorporation of company , application for PAN and
appointment of Directors of the proposed company shall be filed in Integrated Form
No. INC 32, For One Person Company , private company, public company and
producer company, with the Registrar within whose jurisdiction the registered office
of the company is proposed to be situated.
The promoter or applicant of the proposed company shall propose only one name in
e-form No. INC-32. The promoter or applicant of the proposed company may
prepare Memorandum of Association(e-MOA) as per templates in Form INC 33 and
may opt for templates of Articles of association(e-AOA) in Form INC-34 in
accordance with the provisions. But in case of section 8 companies for filing of MOA,
e-form-INC-13 and for AOA e-form-INC-31 will be used.
Where the Registrar, on examining e-form INC-32, finds that it is necessary to call
for further information he shall give intimation to the applicant to remove the

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CS EXECUTIVE

defects and re-submit the e form within fifteen days from the date of such
intimation given by the registrar.
After the resubmission of the document , if the registrar still finds that the
document is defective he shall give one more opportunity of fifteen days to remove
such defects or deficiencies.
In case, the registrar is of the opinion that the document is defective or incomplete
in any respect after giving such two opportunities, the e-form INC-32 of the
proposed company shall be rejected.
The certificate of Incorporation shall be issued by the registrar in Form No. INC 11.

PROVISION SPECIFICALLY RELATED TO THE INCORPORATION OF:-

ONE PERSON COMPANY.

Nomination by the subscriber or member of One Person Company

the memorandum of One Person Company shall indicate the name of the other person, with
his prior written consent in the prescribed form (INC-3), who shall, in the event of the
subscribers death or his incapacity to contract become the member of the company and
the written consent of such person shall also be filed with the Registrar at the time of
incorporation of the One Person Company along with its memorandum and articles.

company shall nominate such person in form INC 2 along with the nominees consent
obtained in INC 3.

COMPANIES WITH CHARITABLE OBJECTS UNDER SECTION 8

Rule 19-20 of Companies (Incorporation) Rules, 2014.

Rule 19.
License under section 8 for new companies with charitable objects etc.-

(1) A person or an association of persons shall make an application in Form No.INC.12 along
with the fee to the Registrar for a license.

(2) The memorandum of association of the proposed company shall be in Form No.INC.13.

The application shall be accompanied by the following documents, namely:

The draft memorandum and articles of association of the proposed company;

The declaration in Form No.INC.14 by Company Secretary in practice,

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CS EXECUTIVE

An estimate of the future annual income and expenditure of the company for next
three years, specifying the sources of the income and the objects of the
expenditure;
the declaration by each of the persons making the application in Form No. INC.15.

Rule 20
License for existing companies.-

(1) A limited company registered under this Act shall make an application in Form
No.INC.12.

(2) The application shall be accompanied by the following documents, namely:-

the memorandum and articles of association of the company;

the declaration as given in Form No.INC.14 by Company Secretary in Practice.

a statement showing in detail the assets and the liabilities of the company, as on
the date of the application or within thirty days preceding that date.
an estimate of the future annual income and expenditure of the company for next
three years, specifying the sources of the income and the objects of the expenditure;
the certified copy of the resolutions passed in general/ board meetings approving
registration of the company under section 8; and
a declaration by each of the persons making the application in Form No.INC.15.

The company shall, within a week from the date of making the application to the Registrar,
publish a notice at his own expense, and a copy of the notice, as published, shall be sent
forthwith to the Registrar and the said notice shall be in Form No. INC.26 and shall be
published-

(a) at least once in a vernacular newspaper in the principal vernacular language of the
district in which the registered office of the proposed company is to be situated.
(b) on the websites as may be notified by the Central Government.

The Registrar shall, after considering the objections, if any, received by it within thirty days
from the date of publication of notice decide whether the license should or should not be
granted.

The license shall be in Form No.INC.16. or Form No.INC.17, as the case may be.

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CS EXECUTIVE

Proposed name is identical or resembles with other guidelines:-

Rule 8 Companies (Incorporation) Rules, 2014 (As updated on 26th January, 2016)

1. In determining whether a proposed name is identical with another, the differences on

account of the following shall be disregarded-

(a) The words like Private, Pvt., (P) Ltd, Ltd., LLP, Limited Liability Partnership

(b) words appearing at the end of the names company, and company, co., co, corporation,
corp, corpn, corp.;

(c) plural version of any of the words appearing in the name;

(d) type and case of letters, spacing between letters and punctuation marks;

(e) joining words together or separating the words does not make a name distinguishable
from a name that uses the similar, separated or joined words.

(f) the addition of an internet related designation, such as .com, .net, .edu, .gov, .org, .in
does not make a name distinguishable from another, even where (.) is written as dot.

(g) the addition of words like New, Modern, Nav, Shri, Sri, Shree, Sree, Om, Jai, Sai, The, etc.
does not make a name distinguishable from an existing name and similarly, if it is different
from the name of the existing company only to the extent of adding the name of the place,
the same shall not be allowed; such names may be allowed only if no objection from the
existing company by way of Board resolution is submitted.

(2) The name shall also be considered undesirable, if-

(i) The proposed name is identical with or too nearly resembles the name of a limited
liability partnership;

(ii) The companys main business is financing, leasing, chit fund, investments, securities or
Combination thereof, such name shall not be allowed unless the name is indicative of such
Related financial activities, viz., Chit Fund or Investment or Loan, etc.;

(iii) it resembles closely the popular or abbreviated description of an existing company or

limited liability partnership.

(3) the proposed name contains the words British India.

(4) the proposed name is identical to the name of a company dissolved as a result of
liquidation proceeding and a period of two years have not elapsed from the date of such
dissolution.

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CS EXECUTIVE

(5) it is identical with or too nearly resembles the name of a limited liability partnership in
liquidation or the name of a limited liability partnership which is struck off up to a period of
five years.

(6) the proposed name includes the word State, the same shall be allowed only in case the
company is a government company.

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CONCLUSIVENESS OF CERTIFICATE OF INCORPORATION

Certificate of A certificate of incorporation issued by the registrar shall be conclusive

incorporation evidence that
to be 1. All the requirements of the companies Act have been complied with in
respect of registration and matters precedent and incidental thereto
conclusive
2. The association has been duly register under companies Act
evidence

The term conclusive evidence means that

no inquiry shall be allowed to be made regarding the correctness or
incorrectness of any particulars contained in the certificate of
incorporation
Meaning In other words issued, the certificate of incorporation cannot be
of Conclusive challenged in any court of Tribunal on any grounds whatsoever.
evidence The certificate of incorporation shall remain valid even in the following
cases :
(a) Where one person has signed on behalf of all the subscribers.
(b) Where all the signatories to memorandum are minors.
(c) What all the signatures on the memorandum are forged
(d) Where the memorandum was already after signing by subscribers, but
before its registration.
(e) Where illegal objects are incorporated in the object clause. (in this case
only remedy is winding up of company)

Jubilee Cotton Mills Ltd. v. Lewis,

The validity of the registration cannot be questioned after the issue of the
certificate.

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 under his hand a Certificate of
Incorporation.
IT WAS HELD THAT CERTIFICATE IS VALID

PRE-INCORPORATION CONTRACTS

Meaning of pre-incorporation/preliminary/promoters contract

Pre-incorporation Contracts are contracts purported to be made on behalf of a company

before its incorporation.

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CS EXECUTIVE

Before incorporation, a company is non-existent and has no capacity to contract.

Hence a contract, by a promoter purporting to act on behalf of a company prior to its

incorporation, never binds the company because at the time the contract was concluded,
the company was not in existence.

The promoters alone, therefore, remain personally liable for any contract they purport to
make on behalf of the company.

Case law:- D.R. Patil v. A.S. Dimilov,

It was held that a promoter is personally liable to third parties upon all contracts made on
behalf of the intended company, until with their consent; the company takes over this
liability.
Ratification of pre-incorporation contract?

Even a company cannot ratify a pre-incorporation contract. However, it is always open for a
company to enter into a new contract after its incorporation to give effect to a contract
made before its formation. This is called novation of contracts.

Since the pre- incorporation contract is a nullity, even the Company cannot sue the vendor
of property, if he fails to carry out such contract.

Exception to pre-incorporation

Section 15(h) provides that where a pre- incorporation contract is warranted by the terms
of incorporation of company, the Company may, if it has accepted the contract and has
communicated such acceptance to the other party to the contract, obtain specific
performance of the contract.

Section 19(e) provides that specific performance may be enforced against the Company by
other party to the contract under similar circumstances.

CASE LAW:- Kelner v. Baxter

The company could not ratify contract made by a promoter before its incorporation.
Specific performance of a contract may be enforced against a company in respect of
contracts entered into by promoters on behalf of the company, if such a contract is
warranted by the terms of incorporation and the company has accepted the contract and
communicated the acceptance to the other party. (Section 15 of the Specific Relief
Act,1963).
Section 19 of the same Act provides that the other party can also enforce the contract if the
company has adopted it after incorporation and the contract is within the terms of
incorporation.
As long as the company does not ratify, as required by the Specific Relief Act, 1963 the
position remains the same as under the common law.

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CS EXECUTIVE

ANSWER KEY

ANSWER 1.

A director/officer/employee who has control over the affairs of the company, directly or
indirectly whether as a shareholder, director or otherwise is considered as a promoter.

As per section 2 (27),

Control shall include the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person individually or in concert, directly
or indirectly, including by virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner.

However, a director or officer or employee of the issuer or a person, if acting as such merely
in his professional capacity, shall not be deemed as a promoter.

PRACTICE QUESTION AND ANSWER

Q1. The promoters of a new company have decided to start their company with the name
i2 Technologies Ltd.. However, the jurisdictional registrar of companies (ROC) has
declined to allow the name starting with small alphabets. Is the ROCs contention valid
under company law as prevalent in India? ( 4 marks)

Answer:

For deciding the availability of names, the ministry of corporate affairs has issued name
availability guidelines, 2011 w.e.f. 24/7/2011. The guidelines are issued in supersession of all
the previous circulars and instructions regarding name availability, issued by the ministry of
corporate affairs from time to time.

As per the same guideline currently there is no restriction as to use of small letter at the
starting of the name. Hence, the ROCs contention is not valid.

Q2. A,B,C&D Developed a nosiness plan. To implement the plan, it was decided that A and
B will incorporate a company and C, chartered accountant, will provide them his
professional services for the same. It was also decided that D will provided loan to the
company. The loan to be regarded as a promoter of the company.

Answer:

The term promoter is defined in section 2(69) of the companies act, 2013. Considering the
definition of promoter and facts given in the problem, answer is as follows:

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(a) C is not a promoter because a person who is acting merely in a professional capacity
cannot be treated as promoter.
(b) D is promoter and he was involved in developing a business plan and the loan
provided by him was essential for starting the business.

Q3. Based on the information given in the memorandum of association, smart Ltd. was
incorporated and the certificate of incorporation was issued by the registrar of companies,
new delhi. The memorandum of association was duly signed, except that X, Y and Z signed
it on behalf of five minors. Examine the validity of the certificate of incorporation issued
by the registrar of companies.( 4 marks)

Answer:

A certificate of incorporation given by the registrar in respect of any association shall be

conclusive evidence that all the requirements of the act have been complied with in respect
of registration and matters precedent and incidental thereto, and that the association is a
company authorized to be registered and duly registered under the act.

The facts of the given case are similar to Moosa vs. Ebrahim , wherein it was held that the
certificate is conclusive for all-purpose. The certificate prevents anyone from alleging that
the company does not exist.

Thus, the validity of the registration cannot be questioned after the issue of the certificate.

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CH-3 TYPES OF COMPANIES

CLASSIFICATION OF COMPANIES

Classification of companies is to be done through various ways. But, if we try to classified

them then they can classified on basis of:-
a) Incorporation.
b) Liability.
c) Miscellaneous.

CLASSIFICATION OF COMPANIES ON BASIS OF ITS INCORPORATION

Here companies are classified into 3 further types:-

Statutory company:- These companies are created through special act of parliament/
state legislature. The provisions of Companies Act, 2013 do not apply on them.
Ex. LIC, RBI.

Registered companies:- These companies are incorporated under provision of

companies Act, 2013 by getting themselves registered with authority( R.O.C).
Ex. Private company, public company and one person Company.

Chartered companies :- a company created by the grant of charter by the crown is

called a chartered company and is regulated by that charter. Charter is document
like MOA . ex. Standard chartered bank.

PRIVATE COMPANY u/s 2 (68)

Definition of Private company means a company having a minimum paid-up share capital
Private as may be prescribed, and which by its articles,
Company (i) Restricts the right to transfer its shares;
(ii) Limits the number of its members to two hundred, Except opc

while calculating number of members, exclude following:-

a) Persons who are in the employment of the company; and
b) Persons who, having been formerly in the employment of the
company, were members of the company while in that employment
and have continued to be members after the employment ceased,
shall not be included in the number of members; and

(iii) Prohibits any invitation to the public to subscribe for any securities of the
company;

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*Note:-Provided that where two or more persons hold one or more shares in
a company jointly, they shall, for the purposes of this clause, be treated as a
single member:

NOTE:-
It must be noted that it is only the number of members that is limited to two
hundred. A private company may issue debentures to any number of persons, the
only condition being that an invitation to the public to subscribe for debentures is
prohibited.

A private company can only accept deposit from its members up to a particular limit
in accordance with section 73 of the Companies Act, 2013.

The words Private Limited must be added at the end of its name by a private
limited company.

As per section 3 (1), a private company may be formed for any lawful purpose by two
or more persons, by subscribing their names to a memorandum and complying with
the requirements of this act in respect of registration.

Private company shall have minimum number of director two and only two member
may also be the two directors of the private company.

PUBLIC COMPANY {Sec2 (71)}

Public Company means a Company which

Definition of a) Is not a private company.
Public Company b) Has a minimum paid up capital, as may be prescribed.
c) A private company which is subsidiary of a public company is not a
private company.

As per section 3 (1) (a), a public company may be formed for any lawful purpose by
seven or more persons, by subscribing their names or his name to a memorandum.

The securities of a public company may be quoted on a Stock Exchange.

The number of members is not limited to two hundred.

As per section 58(2), the securities or other interest of any member in a public
company shall be freely transferable.

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CS EXECUTIVE

Western Maharashtra Development Corpn. Ltd. V. Bajaj Auto Ltd

It was held that the Companies Act, makes a clear distinction in regard to the transferability
of shares relating to private and public companies. By definition, a private company is a
company which restricts the right to transfer its shares. In the case of a public company,
the Act provides that the shares or debentures and any interest therein, of a company, shall
be freely transferable.

CLASSIFICATION OF COMPANIES ON BASIS OF LIABILITY.

As per sec 3(2), a company formed under this act either

a) A company limited by shares
b) company limited by guarantee
c) Unlimited company

Here, companies are classified into further three types:-

Unlimited company:-members of such company are liable for the company debt in
proportion to their respective interest and liability is unlimited. Such company can be
public or private and may or may not have share capital. Sec2(92)
These companies are rare these days.

Note:- Under Section 18, a company registered as an unlimited company may subsequently
re-register itself as a limited company, by altering its memorandum and articles of the
company.

Company limited by guarantee:- Liability of member is limited to that amount only

which he undertake to give to contribute to assets of company in event of winding-up
of company. Here, members are placed like guarantor. These companies are further
classified into having a share capital or not having a share capital company. Sec2 (21)
Ex. Clubs, trader associations and societies.

Company limited by shares:- Liability of such member limited to amount unpaid up on

share capital. These are most common form of company. Sec 2(22)

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Some more types of companies as classified under companies and various acts.

GOVERNMENT COMPANIES

Section 2(45) defines a Government Company as any company in which not less than fifty
one per cent Of the paid-up share capital is held by
the Central Government,
or by any State Government
or Governments,
or partly by the Central Government and partly by one or more State Governments,

and includes a company which is a subsidiary company of such a Government company.

Hindustan Steel Works Construction Co. Ltd. v. State of Kerala

The Government company is neither a Government department nor a Government
establishment
A.K. Bindal v. Union of India
Since employees of Government companies are not Government servants, they have no
legal right to claim that the Government should pay their salary or that the additional
expenditure incurred on account of revision of their pay scales should be met by the
Government. It is the responsibility of the company to pay them the salaries.

Andhra Pradesh Road Transport Corporation v. ITO

The Andhra Pradesh State Road Transport Corporation claimed exemption from taxation by
invoking Articles 289 of the Constitution of India according to which the property and
income of the State are exempted from the Union taxation.
The Supreme Court, while rejecting the Corporations claim, held that though it was wholly
controlled by the State Government, it had a separate entity and its income was not the
income of the State Government.

The Court observed that the companies which are incorporated under the Companies Act,
have a corporate personality of their own, distinct from that of the Government of India.
The land and buildings are vested in and owned by the companies, the Government of India
only owns the share capital.

INVESTMENT COMPANY (SEC.186)

Investment company is company whose principal business is to acquiring/ holding/ dealing

in shares and securities. Income of such company is raised through by way of interest or
dividend or purchasing shares on lower rate and sells them on higher rates.

*Note- if this type of company deals in some extent to other business than such company
shall not be treated as Investment Company

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CS EXECUTIVE

FOREIGN COMPANY SEC. 2(42)

A foreign company means any company is which is in incorporated in a country outside India
under the law of that country and has a place of business in India.

Section 379 to section 393 deal with such companies.

Under 379 of Companies Act, 2013:

Foreign Company means a Company, where not less than fifty percent of the paid-up share
capital, (whether equity or preference) of a foreign company is held by one or more citizens
of India or by one or more companies in India,

Under Section 380- Every Foreign Company which has place of business in India must file
the followings details within 30 days to the ROC.

Followings Details Need To Filled.

Certified Copies of MOA, charter or statutes.

Full and complete address of registered office.
List of Directors and Secretary.
Full and completed address of principal office.
Any other information as may be prescribed.

Section 381:- accounts of foreign company.

Every foreign company shall, in every calendar year make out balance sheet/profit
and loss account in such form as prescribed and deliver a copy to ROC.

Tovarishestvo Manufacture Liudvig Rabenek,

It was held that where representatives of a company incorporated outside the country
frequently stayed in a hotel in England for looking after matter of business, it was held that
the company had a place of business in England.

BUT in a certain case, it was held that mere holding of property cannot amount to having a
place of business.

HOLDING, SUBSIDIARY COMPANIES

On the basis of control companies can be classified into holding, subsidiary and associate
companies.

Holding company

As per Section 2 (46), holding company, in relation to one or more other companies, means
a company of which such companies are subsidiary companies.

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CS EXECUTIVE

Subsidiary company

Section 2 (87) provides that subsidiary company or subsidiary, in relation to any other
company (that is to say the holding company), means a company in which the holding
company

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or
together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies, shall not have layers of
subsidiaries beyond the prescribed limit i.e max 2 companies.

(c) the expression company includes any Body corporate;

The MCA has vide its General circular No. 27/2013 dated 27th December 2013 clarified
that the shares held by a company or power exercisable by it in another company in a
fiduciary capacity shall not be counted for the purpose of determining the holding-
subsidiary relationship in terms of the provision of section 2(87) of the Companies Act,
2013.

The Companies (Specification of Definitions details) Rules, 2014

As per 2(1)(r) total Share Capital, for the purposes of sub- sections (6) and (87) of section
2, means aggregate of the:-
(a) paid-up equity share capital and
(b) convertible preference share capital.

Subsidiary company not to hold shares in its holding company [Section 19]

Section 19 (1) seeks to provide that subsidiary company shall not either by itself or
through its nominees hold shares in its holding company. And
No holding company shall allot or transfer its shares to any of its subsidiary
companies and
any such allotment or transfer of shares to its subsidiary company shall be void.

Therefore, no subsidiary company shall hold any interest in its holding company.

Following are the circumstances, where a subsidiary can hold the shares of its holding
company:
where the subsidiary company holds such shares as the legal representative of a
deceased member of the holding company; or
where the subsidiary company holds such shares as a trustee; or

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CS EXECUTIVE

where company is a shareholder even before it became a subsidiary company of the

holding company:

ASSOCIATE COMPANY SEC.2 (6)

A company in relation to another company, means a company in which that other

company has significant influence, but which is not subsidiary company and include joint
venture.

Note:- significant influence means when one company control at least 20% of total share
capital of company.

Total share capital means combination of paid-up equity share capital and convertible
preference share.

NIDHI COMPANIES

The primary object of Nidhis is to carry on the business of accepting deposits and lending
money to member-borrowers only against jewels, etc., and mortgage of property.

The area of operation was local within municipalities and panchayats.

Members are only individuals. Bodies Corporate or Trusts are never to be admitted as
Members.

Prevailing Regulatory Aspects of Nidhi

As per section 406 of the Companies Act, 2013,

Nidhi means a company which has been incorporated as a Nidhi with the object of
cultivating the habit of thrift and savings amongst its members, receiving deposits from, and
lending to, its members only, for their mutual benefit.

Incorporation of Nidhi

A Nidhi to be incorporated under the Companies Act, 2013 shall be a public

company and shall have a minimum paid up equity share capital of five lakh rupees.
Nidhi company shall not issue preference shares.
If preference shares had been issued by a Nidhi before the commencement of the
Companies Act, 2013, such preference shares shall be redeemed in accordance with
the terms of issue of such shares.
No Nidhi shall have any object in its Memorandum of Association other than the
object of cultivating the habit of thrift and savings amongst its members, receiving
deposits from, and lending to, its members only, for their mutual benefit.
Every Company incorporated as a Nidhi shall have the last words Nidhi Limited as
part of its name.

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CS EXECUTIVE

Requirements for minimum number of members and net owned funds

Rule 5(1) of the Nidhi Rules, 2014 deals with requirements for minimum number of
members, net owned fund etc. It provides that:

Every Nidhi shall, within a period of one year from the commencement of these rules,
ensure that it has
not less than two hundred members;
Net Owned Funds of ten lakh rupees or more;
unencumbered term deposits of not less than ten per cent of the outstanding
deposits and
ratio of Net Owned Funds to deposits of not more than 1:20.

It may be noted that Net Owned Funds means the aggregate of paid up equity share
capital and free reserves as reduced by accumulated losses and intangible assets appearing
in the last audited balance sheet.

Further, the amount representing the proceeds of issue of preference shares shall not be
included for calculating Net Owned Funds .

Return of statutory compliances by Nidhi Companies

Within ninety days from the close of the first financial year after its incorporation and
where applicable, the second financial year, Nidhi shall file a return of statutory compliances
in Form NDH-1 with the Registrar duly certified by a company secretary in practice.

General restrictions or prohibitions on Nidhi companies.

In terms of Rule 6, Nidhi shall not

(a) carry on the business of chit fund, hire purchase finance, leasing finance, insurance or
acquisition of securities issued by any body corporate;

(b) issue preference shares, debentures or any other debt instrument

(c) open any current account with its members;

(d) acquire another company by purchase of securities or control the composition of the
Board of Directors of any other company

(e) carry on any business other than the business of borrowing or lending in its own name.

(f) accept deposits from or lend to any person, other than its members.

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Membership of Nidhi

(1) A Nidhi shall not admit a body corporate or trust as a member.

(2) Every Nidhi shall ensure that its membership is not reduced to less than two hundred
members at any time.
(3) A minor shall not be admitted as a member of Nidhi.

Rate of interest on any loan given by a Nidhi

The rate of interest to be charged on any loan given by a Nidhi shall not exceed seven and
half per cent above the highest rate of interest offered on deposits by Nidhi and shall be
calculated on reducing balance method.

Directors in a Nidhi Company

The Director shall be a member of Nidhi. The Director of a Nidhi shall hold office for a term
up to ten consecutive years on the Board of Nidhi.
The Director shall be eligible for re-appointment only after the expiration of two years of
ceasing to be a Director.

Appointment of Auditor

Nidhi shall not appoint or re-appoint an individual as auditor for more than one term of five
consecutive years and Nidhi shall not appoint or re-appoint an audit firm as auditor for
more than two terms of five consecutive years.

Filing of half yearly return

As per Rule 21 of the Nidhi Rules, 2014, every Nidhi company required file half yearly return
with the Registrar in Form NDH-3 within thirty days from the conclusion of each half year
duly certified by a company secretary in practice.

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NON- PROFIT MAKING ORGANIZATION OR SECTION 8 COMPANY

(a) CG may grant a license u/s 8, if a company with limited liability is

License to proposed to be incorporated satisfying all the conditions specified u/s
whom? 8.
(b) CG may grant a license u/s 8, if a company, after incorporation under
the Companies Act, 1956 complies with all the conditions specified u/s
8.
(a) The objects of the company are to promote commerce, art, science,
religion, charity or any other useful object.
Condition for Key :-SAARCC
obtaining (b) The company shall apply its income in promoting the objects of the
license u/s 8 company.
(c) The company shall prohibit payment of dividend to its members.
Effects of A company license u/s 8 is not required to use the word(s) Limited or
license private Limited at the end of its name.

Alteration of Alteration of objects clause of memorandum require approval of

objects shareholder as Special resolution for alteration of object.
Privileges of a A firm may become a member of a license company
licensed However, on dissolution of the firm, it shall cease to be member
company of the company.
Grounds for (a) Alteration of objects without obtaining
Revocation the previous approval of CG; or
Revocation of (b) Violation of any terms and conditions
license by CG subject to which the license u/s 8 was
issued.
Conditions for Opportunity of being heard shall be given to
revocation the company.

Effects of revocation (a) Limited / Private Limited-inserted at the

end of name.
(b) Exemptions by CGCease to be available.

Rule 21:- Conditions for conversation of a company registered under section 8 into
company of any other kind

(1) A Company registered under section 8 which intends to convert itself into a company of
any other kind shall pass a special resolution at a general meeting for approving such
conversion.

Rule 23:- Intimation to Registrar of revocation of license issued under section 8

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CS EXECUTIVE

Where the license granted to a company registered under section 8 has been revoked the
company shall apply to the Registrar in Form No.INC.20 along with the fee to convert as
status and change of name accordingly.

SMALL COMPANY SEC.2 (85)

Small company means a company other than public company,

Paid-up share capital of which does not exceed Rs. 50 lac or such higher amount as
may be prescribed which shall not be more than Rs.5 crore. AND
Turnover of which does not exceed Rs. 2 crore or such higher amount as may be
prescribed which shall not be more than Rs. 20 crore.

Note:- Small company is new form of private company under companies act, 2013

Privileges of a Small Company

Section Nature of exemptions/privileges

2(40) The financial statement, with respect to Small Company may not include
the cash flow statement
121(1) Need not prepare a report on Annual General Meeting
149(1) Small company need not have more than two directors in its Board.
149(4) Need not appoint Independent directors on its Board

ONE PERSON COMPANY SEC.2 (62)

OPC is private company in which there is only 1 member.

OPC shall have a minimum of one director.

Read rule- 3,5,6,7 of Companies (incorporation)rules,2014 in companies rule, 2014. For OPC

RULE-3

(1) Only a natural person who is an Indian citizen and resident in India:-
(a) Shall be eligible to incorporate a one Person Company:
(b) Shall be a nominee for the sole member of a one Person Company.

Resident in india means a person who has stayed in India for a period of not less than 180
days during immediately preceding calendar year.

(2) No person shall be eligible to incorporate more than a One Person Company or
become nominee in more than one such company.

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CS EXECUTIVE

(3) No minor shall become member or nominee of the One Person Company or hold-
share with beneficial interest.

(4) Such company cannot be incorporated or converted into a (NPO) under Section 8 of
the act.

(5) Such company cannot carry out Non-Banking Financial Investment activities including
investment in securities of anybody corporate.

(6) No such company can convert voluntarily into any kind of company unless two years
have expired from the date of the incorporation One Person Company, expect
threshold limit (paid up share capital) is increases beyond fifty lakh rupees or its
average annual turnover during the relevant period exceeds two crore rupees.

RULE-5 Penalty

1. If one Person company or any officer of such company contravenes the

provisions of these rules. One Person Company or any officer of the One Person
Company shall be punishable with fine which may extend to ten thousand rupees
and with a further fine which may extend to one thousand rupees for every day.

Note:-As per section 152 (1), in case of a One Person Company an individual being its
member shall be deemed to be its first director until a director or directors are duly
appointed by the member in accordance with the provisions of that section.

One Person company to convert itself into a public company or a private in certain
cases (Rule 6)
1. Where the paid up share capital of an Person Company exceeds fifty lakh rupees or
its average annual turnover during the relevant period exceeds two crore rupees, it
shall case to be entitled to a continue as a One Person Company.

2. Such one Person Company shall be required to convert itself, within six months of
the date on which its paid up share capital is increased beyond fifty lakh rupees or
the relevant period during which its average turnover exceeds two crore rupees as
the case may be into either a private company with minimum of two members and
three directors.

3. The One Person Company shall within period of sixty days from the date of the
applicability of sub-rule (1) give a notice to the Registrar in Form No, INC-5Informing
that it has ceased in be a one Person Company.

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CS EXECUTIVE

PRIVATE COMPANY INTO ONE PERSON COMPANY RULE-7

1. A private company other than NPO registered under section 8 of the Act having paid
up share capital of fifty lakhs rupees or less or average annual turnover during the
passing a special resolution in the general meeting.

2. Before passing such resolution, the company shall obtain No objection in writing
from the members and creditors.

3. The one Person company shall file copy of the special resolution with the Registrar of
Companies within thirty days from the days from the date of the passing such
resolution in Form No MGT, 14

Privileges of a One Person Company

The privileges enjoyed by an OPC over other companies are as follows:

Section Nature of Privileges

2(40) The financial statement, with respect to One Person Company, may
not include the cash flow statement;

67(2) Financial assistance can be taken by the member from the OPC for
purchase of or subscribing to its own shares

92(1) The annual return shall be signed by the company secretary, or where
there is no company secretary, by the director of the company. In other
words it need not be signed by a company secretary in practice.

96(1) Need not hold annual general meeting

121(1) Need not prepare a report on Annual General Meeting

134(1) Financial statement and Boards report can be signed only by one director
149(1) One person company need not to have more than one director on its
Board.
149(4) Need not to appoint Independent directors on its Board

Difference between a Sole Proprietorship and an OPC

The fundamental difference between a sole proprietorship and an OPC is the way liability is
treated in the latter.

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A one-person company is different from a sole proprietorship because it is a separate legal

entity that distinguishes between the promoter and the company.

The promoters liability is limited in an OPC in the event of a default or legal issues. On the
other hand, in sole proprietorships, the liability is not restricted and extends to the
individual and his or her entire assets.

PROVISIONS OF COMPANIES ACT 2013 RELATING TO DORMANT COMPANIES

MEANING OF DORMANT COMPANY

Section 455(1) of the Act defines that when a company is formed and registered under this
act for
a future project or
to hold an asset or intellectual property
and has no significant accounting transaction,

such a company or an inactive company may make an application to the Registrar in such
manner as may be prescribed in form no. MSC. 1

a) Meaning of inactive company - means a company which has not been

carrying on any business or operation , or
has not made any significant accounting transaction during the last two
financial years, or
has not filed financial statements and annual returns during the last two
financial years
b) Significant Accounting Transaction -means any transaction other than
(i) Payment of fees by a company to the Registrar;
(ii) Payment made by it to fulfill the requirements of this Act
(iii) Allotment of shares to fulfill the requirements of this Act;
(iv) Payments for maintenance of its office and records

Section and Nature of exemptions/privileges

Sec 2(40) The financial statement, with respect to a dormant company, may not
include the cash flow statement;
Sec 173 (5) It is required to hold at least one meeting of the Board of Directors in
each half of a calendar year and the gap between the two meetings should not be
less than ninety days.

STATUTORY CORPORATIONS

A Company formed under an Act of Parliament or State Legislature is called a

Statutory Company/ Corporation.
Change in its structure is possible only by a legislative amendment.

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Such companies do not use the word limited as part of their names, e.g., Reserve
Bank of India, LIC, etc.
Principal Characteristics of Statutory Corporations

It is owned by the State.

It is created by a special law of Parliament or State Legislature defining its objects,
powers and Privileges.

Immunity from Parliamentary Scrutiny: A basic and fundamental characteristic of a

statutory corporation is its immunity from Parliamentary enquiry into its day-to-day
working, as distinct from matters of policy.
Freedom in regard to personnel: Another distinguishing characteristic of a public
corporation is that excluding the officers taken from the Government department on
deputation.
A body corporate: Each statutory corporation is a body corporate and can sue and be
sued, enter into contracts and acquire property in its own name.
Distinct relation with the Government: The most important provision which regulate
the relationship of public corporation and Government is the latters power to issue
directions.

Q. WHETHER CORPORATIONS ARE STATE?

The Courts in India until Raman Dayaram Shetty v. International Airport Authority,
considered the statutory character of the corporation as a definitive criterion to identify it
with STATE withinthe meaning of Article 12 of the Constitution of India.

Some of the test which will identify corporation as a STATE are given below:-

The source of the share capital,

The extent of state control over the corporation,
Whether the corporation has monopoly status,
Whether functions of the corporation are of public importance and closely related to
Governmental functions, and
Whether what belonged to a department of government formerly was transferred to
the corporation.
Neither of these is a conclusive test, nor is an exhaustive list of operational indices.

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PRACTICE QUESTION AND ANSWER

Q1.A body corporate cannot be a member of a company which is its holding company
and any allotment or transfer of shares in a company to its subsidiary shall be void.

Explain the statement and comment on the exception to the said general clause.

(4 marks)

Answer:

Subsidiary company not to hold shares in its holding company [section 19]: subsidiary
company shall not either by itself or through its nominees hold shares in its holding
company and no holding company shall allot or transfer its shares to any of its subsidiary
companies and any such allotment or transfer of shares of a company to its subsidiary
company shall be void.

Therefore, no company shall hold any interest in its holding company.

Exceptions: in following circumstances, a subsidiary can hold the shares of its holding
company:

(a) Where the subsidiary company holds such shares as the legal representative of a
deceased member of the holding company.
(b) Where the subsidiary company holds such shares as a trustee.
(c) Where the subsidiary company is a shareholder even before it became a subsidiary
company of the holding company
(d) However, the subsidiary company referred above shall have voting right only in
respect of the shares held by it as a legal representative or as a trustee.

Q2. To consider a body corporate as a foreign company, a place of business in India is to

be established. State the activities that do not constitute carrying of business in India. (4
marks)

Answer:

Foreign company means a company which is incorporated outside India under the law of
that other country and has a place of business in India.

The following activities are held as not constituting carrying on of business:

(a) Carrying small transactions

(b) Conducting meetings of shareholders or even directors
(c) Operating bank accounts
(d) Transferring of shares or other securities
(e) Operating through independent contractors

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(f) Procuring orders

(g) Creating or financing of debts, charges, etc. on property
(h) Securing or collecting debts or enforcing claims to property of any kind.

Q3. Grow more ltd. is a government company in which the central government and many
state governments in India are members. The company has recently convened its annual
general meeting at its registered office. Does the legislature have any access to the annual
reports of such a company? Give your advice. (4 marks)

Answer:

As per sections 394 & 395, in case of government companies, the central government must
place before both the houses of parliament an annual general meeting together with a copy
of the audit report and any comments upon or supplement to such report made by the
comptroller and auditor general of India. Where a state government is a member of a
government company, the annual report is likewise to be placed before the state
legislature.

Q4. Mahesh is a creditor of an unlimited company. The company was wound-up. Mahesh,
therefore, wants to sue the members of the company to recover the dues. Advise Mahesh
regarding the remedy available to him. (4 marks)

Answer:

Unlimited company [section 2(92)]: unlimited company means a company not having any
limit on the liability of its members. Thus, the maximum liability of the member of such a
company, in the event of its being wound up, might stretch up to the full extent of their
assets to meet the obligations of the company by contributing to its assets.

The members of an unlimited company are not liable directly to the creditors of the
company. The liability of the members is only towards the company and in the event of its
being wound up only the liquidator can ask the members to contribute to the assets of the
company which will be used in the discharge of the debts of the company.

Thus, Mahesh cannot directly sue the members of the company for recovery of his dues. He
can file a claim to the liquidator of the company.

Q5. Masons Pvt. Ltd. is a private limited company as per the article of association of the
company. However, a public company acquired shares in masons Pvt. Ltd. thereby making
the masons Pvt. Ltd., a subsidiary of that public company. State the impact of such
acquisition of shares by the public company on masons Pvt. Ltd. (4 marks)

Answer:

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As per section 3(1)(iv), a company which is a subsidiary of a company, not being a private
company, shall be deemed to be public company even where such subsidiary company
continues to be a private company in its articles. This means, if private company is
subsidiary of public company then it will be treated as public company.

Thus, if a public company acquires shares in masons Pvt. Ltd making it subsidiary of that
public company, the masons Pvt. Ltd. will be treated as public company under the
companies act, 2013 even though masons Pvt. Ltd continues to be a private company in its
articles.

Q6. ABC Ltd. is a company incorporated under the companies act, 2013. The paid-up share
capital of the company is held as under:

- Government of India 20%

- Government of Andhra Pradesh 20%
- Government of Tamil Nadu 10%
- Government of Maharashtra 10%

Explaining the provisions of the companies act, 2013, state whether the said company be
called a government company and also state whether the employees of a government
company can claim their salaries from the government of India. (4 marks)

Answer:

As per section 2(45), government company means any company in which not less than 51%
of the paid-up share capital is held by the central government, or by and state government
or governments, or partly by the central government and partly by one or more state
governments and includes a company which is a subsidiary company of such a government
company.

As per the facts given in case, more than 51% capital is held in ABC ltd. by the central
government and state government; hence it is a government company.

Claiming of salary by the government employee from the government : employees of

government companies are not government servants, they have no legal right to claim that
the government should pay their salary or that the additional expenditure incurred on
account of revision of their pay scales should be met by the government. It is the
responsibility of the company to pay them the salaries.

Q7. Referring to the provisions of the companies act, 2013, state as to when shall a
company incorporated outside India be considered as a foreign company within the
meaning of the companies act, 2103. Also examining the provisions of the act, state
whether in the following cases, the company shall be considered as a foreign company:
(4 marks)

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(i) A company incorporated outside India has a representative in India, who on behalf
of the company merely receives orders from the customers.
(j) A company incorporated outside India holds its board meetings and general
meetings in India.

Answer:

As per section 2(42), foreign company means any company or body corporate incorporated
outside India which-

(a) Has a place of business in India whether by itself or through an agent, physically or
through electronic mode and
(b) Conducts any business activity in India in any other manner.

In simple words, foreign company means a company which is incorporated outside India
under the law of that other country and has a place of business in India. A foreign company
has to comply the provision of sections 379 to 393 of the companies act, 2013.

If a representative of a foreign company in India merely receives the orders from customers
it cannot be said that it has place of business in India. Hence, sections 379 to 393 of the
companies act, 2013 relating to foreign companies are not applicable and need not be
complied.

Similarly, conducting board meeting and general meeting in India by a foreign company has
held to be not carrying on of business.

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CH-4 MEMORANDUM OF ASSOCIATION AND

ARTICLES OF ASSOCIATION

MEMORANDUM OF ASSOCIATION

The memorandum of association is a document which sets out the constitution of a

company it defines the scope of the companys activities and its relations with the outside
world.

According to Section 2(56) of the Companies Act, 2013 memorandum means the
memorandum of association of a company as originally framed and altered from time to
time in pursuance of any previous company law or this Act.

FORM OF MEMORANDUM OF ASSOCIATION

Section 4(6) of the Companies Act, 2013 Provides that the memorandum of Association
should be in any one of the forms specified in tables A,B,C,D, or E of schedule I to the Act.

CONTENTS OF MEMORANDUM

The above clause are compulsory and are designated as designated as conditions
prescribed by the Act, on the basis of which a company is incorporated.

NAME CLAUSE

A Company being a legal entity must have a name of its own to establish its separate
identity. The name of the company is a symbol of its independent corporate existence. The
company may adopt any suitable name provided it is not undesirable.

According to section 4(2), the name stated in the memorandum shall not
Be identical with or resemble too nearly to the name of an existing company
registered under this Act.
Be such that its use by the company:-
Is undesirable in the opinion of the Central Government.

The Registrar must make preliminary enquiries to ensure that the name is not misleading
with reference to the Objects Clause of the memorandum.
The Registrar is not, however, required to carry out any elaborate investigation at the time
of registration of the company.

CASE LAW
Ewing v. Buttercup Margarine Co. Ltd. the plaintiff, who carried on business underthe name
of the Buttercup Dairy Co., obtained an injunction against the defendant (Buttercup
Margarine Co.Ltd.), on the grounds that the public might think that the two businesses were
connected, the wordButtercup being a fancy one.

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The rule will apply also to foreign companies or traders, whose goods are imported into the
country.
CASE LAW
Atlas Cycles (Haryana) Ltd. v. Atlas Products Pvt. Ltd. use of the brand name as corporate
name was settled. Both the plaintiff and the defendant companies belong to the same
family. The Appellant-plaintiff was the proprietor of the trade mark in the name Atlas. The
Respondent-defendant company containing the name Atlas in its corporate name started
dealing in
bicycles. The plaintiff objected to the use of the name Atlas by the defendant company.
Were restrained from using the word Atlas in their corporate/trade name in respect of
bicycles and bicycle parts.

But mere similarity of name is not in itself enough to give a right to an injunction. the law
does not give a person a right to prevent the use of a name by another person. In the case
of companies, however, registration will be refused only if there is likelihood of deception or
confusion.
A person cannot be permitted to name a company even after his personal name if that
name resembles the name of an existing company.
PUBLICATION OF NAME
The name of the company and the address of its registered office must be painted or
displayed outside every office or place at which its business is carried on, in a conspicuous
position and in legible letters in English and in the language in general use in that locality.
The name must also be engraved on the companys common seal.
However, where a company has changed its name during the last two years, it shall paint or
display or print, as the case may be, along with its name, the former name so changed
during the last two years as required above.
Further in case of One Person Company, the words One Person Company shall be
mentioned in brackets below the name of such company.

SITUATION CLAUSE
The name of the State in which the registered office of the company is to be situated must
be given in the memorandum. But the exact address of the registered office is not required
to be stated therein. Within 15days of its incorporation, and at all times thereafter, the
company must have a registered office The company must also furnish to the Registrar
verification of its registered office within a period of thirty days of its incorporation.
OBJECTS CLAUSE

Under section 4(1)(c) of the Companies Act, 2013, all companies must state in their
memorandum the objects for which the company is proposed to be incorporated The
objects clause is of great importance because it determines the purpose and the capacity of
the company. The purpose of the objects clause is to enable the persons dealing with the
company to know its permitted range of activities. The acts beyond this ambit are ultra vires
and hence void. Even the entire body of shareholders cannot ratify such acts.

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CS EXECUTIVE

The subscribers to the memorandum of association enjoy almost unrestricted freedom to

choose the objects. The only restriction is that objects should not be illegal and against the
provisions of the Companies Act,2013.

LABILITY CLAUSE
Section 4 1(d) of the Companies Act, states that the liability of members of the company,
whether limited or unlimited, and also state,
1. In the case of a company limited by shares, that liability of its members is limited to
the amount unpaid, if any, on the shares held by them.
2. In the case of a company limited by guarantee, the amount up to which each
member undertakes to contribute
a) To the assets of the company in the event of its being wound-up while he is
a member one year after he ceases to be a member, for payment of the
debts and liabilities of the company.
b) To the costs, charges and expenses of winding-up.
CAPITAL CLAUSE
This is the fifth compulsory clause which must state the amount of the capital with which
the company is registered. The shares into which the capital is divided must be of fixed
value, which is commonly known as the nominal value of the share. The capital is variously
described as nominal, authorised or registered.

The amount of nominal capital is determined having regard to the present as well as future
requirements of the company with reference to its objects. The usual way to state the
capital in the memorandum is: The capital of the company is ` 10,00,000 divided into
1,00,000 equity shares of ` 10 each.

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.

According to Section 60 of the Act, if the amount of the authorised capital (nominal capital),
of the company is stated in any notice, advertisement, official publication, business it shall
also contain a statement in an equally prominent position and in equally conspicuous terms
the amount of capital which has been subscribed and the amount paid-up.

DECLARATION FOR SUBSCRIPTION

The statutory requirements regarding subscription of memorandum are that:
Each subscriber must take at least one share;
Each subscriber must write opposite his name the number of shares which he agrees
to take.

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SIGNING OF MEMORANDUM

RULE 13 COMPANIES (INCORPORATION) RULES 2014

The Memorandum and Articles of Association of the company shall be signed in the
following manner, namely:-
(1) The memorandum and articles of association of the company shall be signed by each
subscriber.
(2) Where a subscriber to the memorandum is illiterate, he shall affix his thumb
impression.
(3) Where the subscriber to the memorandum is a body corporate, the memorandum
and articles of association shall be signed by director, officer or employee of the
body corporate.

SUBSCRIPTION INDUCED BY MISREPRESENTATION

A subscriber to the memorandum cannot, after the issue of the certificate of incorporation,
repudiate his subscription on the ground that he was induced to sign by misrepresentation.

ALTERATION OF MEMORANDUM OF ASSOCIATION

Section 13(1) of the Companies Act, 2013
(1) By changing its name
(2) By altering it in regard to the State in which the registered office is to be situated.
(3) By altering its objects.
(4) By altering its share capital.
(5) By reorganizing its share capital.
(6) By reducing its capital.

ALTERATION OF NAME CLAUSE

The name of the company can be altered by a special resolution and with the approval of
the Central Government in writing. Approval of the Central Government is not necessary if
the change relates to the addition/deletion of the word Private to the name of the
company consequent to the conversion of a private company into a public company and
vice versa.
RECTIFICATION OF NAME:-
Section 16 provides that if a name has been registered which is identical too nearly
resembles the name of an existing company whether registered under this Act. The Central
Government may direct the company to change its name. The company shall change its
name within a period of 3 months from the issue of the above direction after passing an
ordinary resolution for the purpose. If a company is so directed by the Central Government,
it must change the name within 3 months of the direction after passing an ordinary
resolution.

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This section also gives enhanced power to the Central Government to order rectification of
name where such name in its opinion constitutes an infringement of a registered trademark.
The proprietor of the registered trade mark may make an application to the Central
Government for an order for rectification of name because it is identical to or too nearly
resembles the applicants registered trademarks. Such application must be made within
three years from the date of incorporation or the registration. In such a case the Central
Government may direct the company to change its name and the company shall change its
name, within a period of six months from the issue of such direction, after passing an
ordinary resolution for the purpose.
Where a company changes its name or obtains a new name, it shall within a period of
fifteen days from the date of such change, give notice of the change to the Registrar along
with the order of the Central Government.

EFFECT OF CHANGE

The change of name shall not affect any rights or obligations of the company,
However, where a company changes its name and the new name has been registered by the
Registrar, the commencing of legal proceedings in the former name is not valid In spite of a
change in name the entity of the company continues. The company is not dissolved nor
does any new company come into existence. If any legal proceeding is commenced, after
change in the name, against the company in its old name, the company should be treated as
if it is not in existence. It is not an incurable defect and the plaint can be amended to
substitute the new name.

ALTERATION OF REGISTERED OFFICE CLAUSE

a) Change within the local limits of same town:

According to Section 12(5), a company can change its registered office from one
place to another within the local limits of the city, town or village, where it is
situated, by merely passing a Board resolution. A notice of the change is required to
be given to the Registrar in Form no INC 22, within 15 days of such change.

b) Change from one city to another within the same State:

if the registered office is to be shifted from one city, town or village to another city,
town or village within the same State, a special resolution has to be passed in the
general meeting of the company. A notice of the change is required to be given to
the Registrar in Form no INC 22, within 15 days of such change along with Form no
MGT 14, towards special resolution passed...
c) Change within the same State from the jurisdiction of one Registrar of Companies
to the jurisdiction of another Registrar of Companies:
Section 12(5) provides that confirmation by the Regional Director will be necessary
for changing registered office of a company from one place to another if the change
of registered office is from the jurisdiction of one Registrar to the jurisdiction of
another within the same State.

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Section 12(6) states that the Regional Director, after hearing the parties shall pass
necessary orders within a period of thirty days from the date of the receipt of the
application. Thereafter, the company concerned shall file a copy of the said order
with the Registrar of Companies (ROC) within a period of sixty days from the date of
the confirmation order by Regional Director. The said ROC shall record the ordered
changes in its records.

RULE 28 OF COMPANIES (INCORPORATION) RULES 2014 STATES THAT

An application seeking confirmation from the Regional Director for shifting the registered
office within the same State from the jurisdiction of one Registrar of Companies to the
jurisdiction of another Registrar of Companies, shall be filed by the company with the
Regional Director in Form no. INC. 23.

d) Change of registered office from one state to another

The change of registered office from one State to another State involves alteration of
memorandum, and the change can be effected by a special resolution of the
company which must be confirmed by the Central Government on an application
made to it.
The Central Government shall dispose of the application within a period of sixty days
and before passing its order may satisfy itself that the alteration has the consent of
the creditors, debenture holders and other persons concerned with the company
that a sufficient provision has been made by the company either for the due
discharge of all its debts and obligations or that adequate security has been provided
for such discharge.
A company shall, in relation to any alteration of its memorandum involving change of
registered office from one State to another, file with the Registrar the special
resolution passed by it in MGT 14.
A certified copy of the order of the Central Government approving the alteration
shall be filed by the company with the Registrar of each of the States and the
Registrar of the State where the registered office is being shifted to, shall issue a
fresh certificate of incorporation indicating the alteration.
RULE 30-31 OF COMPANIES (INCORPORATION) RULES 2014

Rule 30 states that

An application for the purpose of seeking approval for alteration of memorandum with
regard to the change of place of the registered office from one State Government or Union
territory to another, shall be filed with the Central Government in Form No. INC.23.
Rule 31. The certified copy of the order of the Central Government, approving the alteration
of the memorandum for transfer of registered office of the company from one State to
another, shall be filed in Form No.INC.28 along with the Registrar of the State within thirty
days from the date of receipt of certified copy of the order.

Where the alteration is affected by changing the registered office from one State to another
State, the loss of revenue in one State would be accompanied by increase in revenue in the

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other and in such a case the interest of a particular State ought not to be considered but it is
the interest of the country as a whole which should be considered.

A company was allowed to shift its registered office from Bihar to West Bengal in spite of
the fact that Bihar Government had granted lease of land for the companys factory on the
condition that it would not shift its registered office. The CLB also held that interest free
loans, sales tax, electricity and other subsidies would have no bearing on the shifting.

EMPLOYEES RIGHT TO OBJECT IN CASE OF SHIFTING OF REGISTERED OFFICE FROM

ONE STATE TO ANOTHER SOME LEGAL CASES
In the case of Bharat Commerce and Industries Ltd. it was held that employees union,
which was a registered body and which represented quite a number of the employees atthe
registered office of the company, would have the legal standing to appear before the court
and oppose the application on the ground that their interests are likely to be prejudicially
affected if the resolution for shifting the registered office of the company from one state to
another is confirmed by the court. However, it was held that the employees union cannot
oppose on the ground that there would be loss of revenue or unemployment in the State.

Where the shifting of the registered office was in accordance with a scheme approved by
the BIFR, it was held that the workers had no right of objection because their continuation
in the companys employment was ensured unless, of course, a worker preferred voluntary
retirement.

ALTERATION OF OBJECTS CLAUSE OF THE COMPANY

According to section 13(1), a company may, by a special resolution and after complying with
the procedure specified in this section, alter the provisions of its memorandum.
Further in case of a listed company, the special resolution for alteration in the objects clause
of the Memorandum of Association needs to be passed through Postal Ballot in terms of
section 110.
Further, section 13(8) lays down that a company, which has raised money from public
through prospectus and has any unutilized amount out of the money so raised, shall not
change its objects for which it raised the money through prospectus unless a special
resolution is passed by the company and

The dissenting shareholders shall be given an opportunity to exit by the promoters and
shareholders having control.

REGISTRATION OF ALTERATION
Section 13(6)(a) provides that a company shall, in relation to any alteration of its
memorandum, file with the Registrar :
a) The special resolution passed by the company
b) The approval of the Central Government if the alteration involves any change inthe
name of the company.
The special resolution shall be filed with the Registrar within thirty days.

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ALTERATION OF LIABILITY CLAUSE

According to section 13(1), a company may, by a special resolution alter the provisions of its
memorandum. It means that a company can change the liability clause of its memorandum
of association by passing a special resolution. Further section 13(6)(a)provides that a
company shall, in relation to any alteration of its memorandum, file with the Registrar the
special resolution passed by the company under section 13(1).

ALTERATION OF CAPITAL CLAUSE

A limited company having a share capital may make the following types of alterations in its
memorandum by an ordinary resolution, if so authorised by its articles,
a) Increase its authorised share capital
b) Consolidate and divide all or any of its share capital into shares of a larger amount
than its existing shares:
c) Convert all or any of its fully paid-up shares into stock, and reconvert that stock into
fully paid-up shares
d) Sub-divide its shares, into shares of smaller amount than is fixed by the
memorandum,
e) Cancel shares which, at the date of the passing of the resolution in that behalf, have
not been taken or agreed to be taken by any person, and diminish the amount of its
share capital by the amount of the shares so cancelled.
All the above alterations do not require the confirmation by the Tribunal except that
alteration relating to consolidation and division which results in changes in the voting
percentage of shareholders shall not take effect unless it is approved by the Tribunal on an
application made in the prescribed manner.

ALTERATION OF MEMORANDUM OF ASSOCIATION

Name Change Pass Special Resolution

Clause Approval of Central Government
To delete the word private approval from Central Government is
not required in case of conversion of private company to public
company.
Change in Change within local Change of state Change in jurisdiction of
Registered limits Registrar
office
Pass Board Approval of Get confirmation
Resolution and Central Govt. In by Regional
Special Resolution INC 23 The Approval Director Communication
Notice of change to should be registered of
registrar in INC 22 with Registrar for confirmation by
within 15 days of Incorporation Regional Director
such change Certificate to the company
within 30 days
Change in Pass Special Resolution
Object From the date of filing Special Resolution the Registrar should within

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30 days, certify the same.

Change in Needs Special Resolution to be passed.
Liability File the same with Registrar in form MGT. 14
Change in alteration of capital clause to be authorised by the Articles of
Capital Association [section 61]; Ordinary Resolution
If by division or consolidation in capital the voting % gets affected
then a confirmation from Tribunal is mandatory.
Notify the alterations made and a copy of Resolutions passed shall be
filed with Registrar within 30 days.
Registrar shall record the notice and make alterations required.

ARTICLES OF ASSOCIATION

NATURE OF ARTICLES
According to Section 2(5) of the Companies Act, 2013, articles means the articles of
association of a company as originally framed or as altered from time to time The articles of
association of a company are its bye-laws or rules and regulations that govern the
management of its internal affairs and the conduct of its business. The articles play a very
important role in the affairs of a company.

The articles play a part that is subsidiary to the memorandum of association.

The articles regulate the internal management of the affairs of the company by way of
defining the powers of its officers and establishing a contract between the company and the
members and between the members inter se.

Articles Subordinate to Memorandum

The articles of a company are subordinate to and subject to the memorandum of

association and any clause in the Articles going beyond the memorandum will be ultra vires.
But the articles are only internal regulations, over which the members of the company have
full control and may alter them according to what they think fit.

But neither the articles nor the memorandum can authorise the company to do anything so
as to contravene any of the provisions of the Act.

REGISTRATION OF ARTICLES

Section 7(1) provides that at the time of incorporation of a company there shall be filed with
the Registrar within whose jurisdiction the registered office of a company is proposed to be
situated, the memorandum and articles of the company duly signed by all the subscribers to
the memorandum in the prescribed manner.

Every type of company whether public or private must register their articles of association.

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The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in

Schedule I as may be applicable to such company. [Section 5(6)].

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

The entrenchment provisions allow for certain clauses in the articles to be amended upon
satisfaction of certain conditions or restrictions (such as obtaining a 100% consent) greater
than those prescribed under the Act. This provision acts as a protection to the minority
shareholders and is of specific interest to the investment community.

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

Where the articles contain provisions for entrenchment, the company shall give notice to
the Registrar of such provisions.

STATUTORY REQUIREMENTS
The articles must be printed, divided into paragraphs, numbered consecutively, stamped
adequately, signed by each subscriber to the memorandum and duly witnessed and filed
along with the memorandum. The articles must not contain anything illegal or ultra vires the
memorandum, nor should it be contrary to the provisions of the Companies Act, 2013.

CONTENTS OF ARTICLES

The articles should contain generally the following matters:

1. Adoption of preliminary contracts.

2. Number and value of shares.
3. Issue of preference shares.
4. Allotment of shares.
5. Calls on shares.
6. Transfer and transmission of shares.
7. Nomination.
8. Forfeiture of shares.
9. Alteration of capital.
10. Buy back.
11. Share certificates.
12. Nominee directors.
13. Additional directors.
14. Seal.

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15. General meetings.

16. Directors meetings.
17. Winding up.

Utmost caution must be exercised in the preparation of the articles of association of a

company. At the same time, certain provisions of the Act are applicable to the company
"notwithstanding anything to the contrary in the articles". Therefore, the articles must
contain provisions in respect of all matters which are required to be contained therein so as
not to hamper the working of the company later.

ALTERATION OF ARTICLES OF ASSOCIATION

A company may, by a special resolution, alter its articles any alteration having the effect of
conversion of a public company into a private company shall not take effect except with the
approval of the Tribunal. Every alteration of the articles under this section and a copy of the
order of the Tribunal approving the Alteration shall be filed with the Registrar, within a
period of fifteen days who shall register the same.

However, in spite of the power to alter its articles, a company can exercise this power
subject only to certain limitations. These are:
1. The alteration must not exceed the powers given by the memorandum.
2. The alteration must not be inconsistent with any provisions of the Companies Act
3. The Articles must not include anything which is illegal or opposed to public policy.
4. The alteration must be bona fide for the benefit of the company as a whole.
5. The alteration must not constitute a fraud on the minority by a majority.
6. The Articles of Association cannot be altered so as to have retrospective effects.
7. The alteration must not be inconsistent with an order of the Court.

EFFECT OF ALTERED ARTICLES

Alteration binds members in the same way as original articles.

SECTION 8 COMPANY CANNOT ALTER ARTICLE EXCEPT WITH THE APPROVAL OF

CENTRAL GOVERNMENT

A company registered under section 8 i.e. companies with charitable objects shall not alter
the provisions of its memorandum or articles except with the previous approval of the
Central Government.

BINDING AND LEGAL EFFECTS OF AOA (SEC. 10)

Effect of memorandum and articles

Meaning of (1) Subject to the provisions of this Act ,the memorandum and articles
Sec.10 shall when registered ,bind the company and the members thereof to
the same extent as if they respectively had been signed by the

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company and by each member ,and contained convents on its and his
part to absolve all the all the provisions of the articles .
(2) All money payable by any member to the company under the
memorandum or articles shall be a debt due from him to the
company.-------( very important).
(a) Every member is given some individual rights under the Act and the
Company is articles .if a company deprives any of its members of such rights .such
bound to a member can sue the company for enforcement of his rights .
members
(b) The company is bound to comply with all the terms and conditions
contained in the memorandum and articles. Therefore the following
conclusions may be drawn :
If a company is about to commit a breach of any terms and
conditions of memorandum and articles, any member can obtain an
injunction order from the Court thereby restraining the company
from committing such breach.
If a company has already committed a breach of any terms and
conditions of memorandum and articles, any members can sue the
company, directors and the persons responsible for such breach.
Members are When memorandum and articles are registered .it shall be deemed
bound to that these documents were signed by every member of the
company company individually.
Every member shall be bound to comply with the provisions
contained in the memorandum and articles.
In case of non-compliance, the company may sue a member.

Members are There are no privity of contract between the members.

bound to each However a member any enforce his rights against another member
other through the company, but not directly.
(i.e. with each
other )
The memorandum and the articles do not bind a company to the
Company is outsiders .This is based on the general rule of the law that a
not bound to stranger to a conduct does not acquire any rights under the
outsiders contract.

DISTINCTION BETWEEN MEMORANDUM & ARTICLES

BASIS MEMORANDUM ARTICLES

Meaning The memorandum contains the
fundamental conditions upon
which alone the company is
allowed to be incorporated.
Nature of document Memorandum is fundamental
document.
The Articles are the rules for
the management of the
internal affairs of the company.
Articles are subordinate to
memorandum.

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Powers and rules Memorandum contains the objects Articles contain the rules and
and power of the company. regulation for the internal
management of the company.
Hierarchy In case of any inconsistency .the The articles subordinate to the
memorandum shall prevail over memorandum.
the articles.
Retrospective The memorandum cannot be The articles can be amended
amendment amended retrospectively. retrospectively

DOCTRINE OF ULTRA VIRES

Meaning and Ultra means beyond or in excess of and vires means powers
effect of the Thus ultra vires means an act or transaction beyond or in excess of the
doctrine powers of the company
An act or transaction shall be ultra vires if-
It is not permitted or authorized by the Companies Act ,1956
It fails outside the object clause of memorandum and
Its falls outside the provision of AOA.
Ashbury Railway Effect of object clause. The object clause of an industrial company
Carriage & Iron contained the following objects besides some other objects
Company Ltd. v. (a) To make ,sell or lend or hire ,railway carriage and wagons
Richie (b) To carry on the business of mechanical engineers and general
contractors
(c) To purchase ,lease ,work and sell mine minerals land and
buildings
Nature of contract made by the company. The company entered into a
contract with Richie for the financing of a construction of a railway line in
Belgium.

Decision of the court .The court held that the word general contractors
had to be given a restricted meaning.
Only such contracts could be covered in the term general contractors
as are in some way related or connected with mechanical
engineering.
Therefore the company could not finance the construction of a
railway line by alleging that such a business falls under the business
of general contractors.

Effect of ultra vires transactions

The transaction is An act which ultra vires the company is void and has no legal effect.
void ab-inito Neither the company nor the other contracting party derives any
(as per general rule) right under an ultra vires contract.

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Even ratification of an ultra vires contract by the whole body of

shareholders does not make an ultra vires contract valid or
enforceable.
No ratification or An ultra vires contract cannot become valid by estoppels or
estoppel ratification

Injunction against Any member may obtain an injunction order from the Court.
the company
Personal liability of If funds of the company are misapplied or wasted by entering into
directors ultra vires transactions the directors shall be personally liable to the
company for breach of trust.
Ultra vires property If the company acquires some property under an ultra vires
transaction, the company has the right to hold that property and
protect it against damage by other parties.
Right of third Sue the directors The lender may sue the directors for breach of
parties in respect of warranty of authority and recover any loss
ultra vires sustained by him
transactions Injunction If the money is in specie (i.e. in the same form)
the lender can obtain a tracing order from the
Court and the company shall be liable to repay
such money.
Charge on assets If the company purchased an asset out of such
purchased money, the lender shall have a first charge on
such asset.

Effect of acts ultra vires the directors or articles

Acts ultra vires the directors or articles means those acts which are beyond the
powers of the directors or powers given under the articles.

Such acts are not altogether void and inoperative .such acts may be ratified by the
members.

DOCTRINE OF CONSTRUCTIVE NOTICE

Applicability of The doctrine operates in favor of the company i.e. it creates a

doctrine presumption in favor of the company .It operates against the persons
dealing with the company.
Effect of the Once MOA and AOA is registered with ROC than it will become public
doctrine documents.
It is always presumed that the person contracting with company has
read it and also correctly interpret it.
If person sign the contract, than in case of default, he cant enforced
the contract against the company.
Example KotlaVenakataswamy v C. Ramamurthy
The articles of a company required that all the documents and debts

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of the company shall be signed by MD the secretary and a working

director of the company.
A mortgage deed was signed by the secretary and a working director
only.
It was held that the mortgage deed was invalid even though the
plaintiff had acted in good faith and money was utilized for benefit
of the company.
DOCTRINE OF INDOOR MANAGEMENT OR TURQUAND S RULE

Purpose of The doctrine of indoor management operates in favour of the outsiders

doctrine i.e. this doctrine creates a presumption in favour of the outsiders
Meaning of the As per this doctrine, outsiders dealing with the company are not
doctrine required to enquire into the internal management of the company.
Outsiders dealing with the company are entitled to assume that as
far as internal proceeding of the company are concerned everything
has been done regularly.
Thus the doctrine protects an innocent outsider from any irregularity
present in the working of the company
Effect of the If a contract is entered into on behalf of the company by any director or
doctrine officer of the company .it is enforceable against the company.

Example Royal British v. Turquand

The articles of a company stated that the directors could borrow money
on behalf of the company, if they are so authorized by a resolution
passed by the shareholders in G.M.
The directors borrowed money from Turquand without obtained any
authorization from shareholders .
Turquand had lent the money to the company assuming that the
shareholders had authorized the directors to borrow money as per the
requirements of the articles .
It was held that borrowing of money by the directors without any
authorization from the shareholders amounted to a mere internal
irregularity and since Turquand had no knowledge of such irregularity
hence have no effect of such internal irregularity.

Conclusion The benefit of doctrine of indoor management can be availed only if the
person dealing with the company:-
Has no knowledge of internal irregularity.

EXCEPTIONS OF DOCTRINE OF INDOOR MANAGEMENT

Knowledge of Where the person dealing with the Company have knowledge of an
Irregularity: irregularity, therefore the benefit of doctrine of indoor management, shall
not be available in such a case.
Howard v. Patent lvory manufacturing Company.
The directors of a company could borrow up to 1,000 without the

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sanction of members in G.M.

The consent of the shareholders was required to borrow in excess of
1,000.
The directors themselves lent 3,500 to the company.
It was held that the directors had the notice of the internal
irregularity and therefore the company was liable to them only for
1,000.

If there are suspicious grounds surrounding a transaction but the person

Negligence dealing with the company fails to make reasonable inquiry, the benefit of
doctrine of indoor management will not be available.

Anand BihariLal v. Dinshaw& company

An accountant of the company entered into a contract on behalf of the
company with a third party to sell the property of the company.
It was held that the third party could not assume that the accountant
was authorized by the company to sell the property of the company.
Therefore the third-party could not enforce such a contract against the
company even though the third party had acted bonafide.

Ruben v Great Fing all Consolidated Company

A share certificate was issued under the common seal of the
company.
The secretary of the company had signed on the share certificate.
Forgery However, the signatures of two directors were also required on it,
which were forged by the secretary.
The holder of the share certificate contended that he was not aware
of the fact of forgery .it was not possible for him to determine
whether the signatures were genuine or forged and therefore, the
certificate issued to him should be held as valid .
The court held that in case of forgery, there is not a defect in consent,
but absence of consent and therefore the certificate issued by way of
forgery is void .Thus, the certificate was held to be invalid.

DOCTRINE OF ALTER EGO

It is used by the courts to ignore the status of shareholders, officers, and directors of a
company in referenceto their liability in their respective capacity so that they may be held
personally liable for their actions whenthey have acted fraudulently or unjustly.

In Lennards Carying Co. Ltd. v. Asiatic Petroleum Co. Ltd

The House of Lords stated that the default ofthe managing director who is the directing
mind and will of the company, would be attributed to him and hebe held for the wrong
doing of the company.

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PRACTICE QUESTION AND ANSWER

Q1. Can the state government opposes shifting of the registered office contending that
they would be deprived of the revenue? Decide wit case law. (4 marks)

Answer:

Central government may direct notice to be served on the state if it is of the view that the
interest of the state will be affected by the alteration. Where the alteration is affected by
changing the registered office from one state to another state, the loss of revenue in one
state would be accompanied buy increase in revenue in the other and in such a case the
interest of a particular state ought not to be considered but it is the interest if the country
as a whole which should be considered.

The decision to shift the registered office of the company to another state being a domestic
matter rests with shareholders and the company is the best judge of how to run its business
more economically, efficiently or conveniently, even though it would result in loss of
revenue to the state.

A company was allowed to shift its registered office from Bihar to west Bengal in spite of the
fact that Bihar government had granted lease of land for the companys factory on the
condition that it would not shift its registered office. The CLB also held that interest free
loans, sales tax, electricity and other subsidies would have no bearing on the shifting.

Q2. Can a listed company change its name as and when necessary? Give reasons in
support of your answer. ( 4 marks) extra question for practice.

Answer:

Name change requirement under clause 32 of Listing Agreement: all listed companies which
decide to change their names shall be required to comply with the following conditions:

1. A time period of at least 1 year should have elapsed from the last name change.
2. At least 50% of its total revenue in the preceding 1 year period should have been
accounted for by the new activity suggested by the new name, or the amount
invested in the new activity/project (fixed assets + advances + work in progress) is at
least 50% of the assets of the company. The advances shall include only those
extended to contractors and suppliers towards execution of project, specific to new
activity as reflected in the new name. To confirm the compliance, the company have
to submit auditor certificate to the exchange.
3. The new name along with the old name shall be disclosed through the websites of
the respective stock exchanges where the company is listed for a continuous period
of one year, from the date of the last name change.

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CS EXECUTIVE

Q3. A registered office was shifted from one state to another. A labour litigation was
pending before the Tribunal. So, the employees objected to transfer. Whether the
objection of the employee is sustainable. (4 marks)

Answer:

It was held that employees union, which was a registered body, would have the legal
standing to appear before the court and oppose the application on the ground that their
interests would be likely to be prejudicially affected if the resolution for shifting the
registered office of the company from one state to another is confirmed by the court.
However, the employees union cannot oppose on the ground that there would be loss of
revenue or unemployment in the state or that the meeting at which the special resolution
was passed was not itself valid. [Bharat Commerce & Industries Ltd.]

If the shifting of the registered office was in accordance with a scheme approved by the
BIFR, it was held that the workers had no right of objection because their continuation in
the companys employment was ensured unless, of course, a worker preferred voluntary
retirement. [Metal Box India Ltd.]

A different dimension to the employees right can be seen in the case of Kwality Ice Creams
(India). In that case, the companys petition for carrying its registered office from west
Bengal to Delhi was opposed by two employees of the head office on the ground that their
action against the company would be prejudiced. The CLB said that the facility for litigation
is not a valid ground to stall shifting. There was no restraint order from any court against the
proposed shifting. The CLB allowed shifting subject to the condition that the interest of
none of the employees at the registered office would be prejudiced by retrenchment or
otherwise.

Dec. 2009 Q4. With the approval of the board, an amount of rs. 50 croreswas spent by
speed jet ltd., in producing a commercial film, not covered under its objects clause. The
film was a complete flop and the company lost an amount of rs. 40 crores. Some of the
members of the company objected to such investments not covered by the objects clause
of the company. They filed a suit making the directors personally responsible and to make
good the loss. Will they succeed? Support your answer with reasons. (6 marks)

Answer:

An act which is ultra vires is void, and does not bind the company. Neither the company nor
the other contracting party can use on it. The company cannot make it valid, even if every
member assents to it.

It is one of the duties of directors to ensure that the corporate capital is used only for the
legitimate business of the company and hence if such capital is diverted to purposes foreign
to companys memorandum, the director will be personally liable to replace it.

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In Jehangir R. Modi v. ShamjiLadha , the Bombay High Court held that a shareholder can
maintain an action against the directors to compel them to restore to the companys funds
that have by them been employed in transactions that directors have no authority to enter
into.

Thus, members of the speed jet ltd. will succeed in their claim making directors personally
responsible and to make good the loss.

Dec. 2014 Q5. Abha ltd. was incorporated on 15th march, 2012. A company with identical
name and similar objects was incorporated on 5thaugust, 2013. On account of similarity of
name, Abha ltd., i.e., the company which was previously registered, filed a petition on
15thapril, 2014 with the central government seeking issue of direction for change of name
by the later company sent an order to the later company to change its name. examine the
aforesaid case and the validity of the order of the central government. ( 4 marks)

Answer:

According to the section 16(1)(a), if by inadvertence or otherwise a name has been

registered which is identical to or too nearly resembles the name of an existing company,
the central government may direct the company to change its name. the company shall
change its name within a period of 3 months from the issue of the above direction after
passing an ordinary resolution.

Thus, Abha ltd. (first registered company) can make an application to central government to
direct second company to change its name. second company shall change its name within a
period of 3 months from the issue of direction by passing an ordinary resolution.

Dec. 2015 Q6. Surprise ltd. was incorporated under the companies act, 2013. The
memorandum of association of the company in its objects clause stated that the company
was established to make and sell or to carry on the business of mechanical engineers and
general contractors. The company entered into a contract with prominent ltd., a firm of
railway contractors to finance the construction of a railway line in Mumbai. The contract
was ratified by the shareholders in general meeting. Subsequently, the contract was
repudiated by the company on the ground that the contract was ultra vires the objects
clause. Prominent Ltd. filed a suit claiming damages for the breach of contract. Explaining
the meaning of doctrine of ultra vires, decide whether prominent ltd. will succeed. ( 4
marks)

Answer:

The facts of the given case are similar to Ashbury Railway Carriage and Iron Co. ltd. v. Riche (
which dales with doctrine of ultra vires.

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In the case of a company whatever is not stated in the memorandum 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. Also, the company cannot make it valid, even if every member assents to it.
Contract entered by the surprise ltd. with prominent ltd. is to finance the construction of a
railway line which is not covered by the MOA of surprise Ltd. as its object is to make and sell
or to carry on the business of mechanical engineers and general contractors. Thus,
prominent ltd. will not succeed in claiming damages from surprise Ltd.

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