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1 Company Law

Term Paper

of

Business Legislation

Topic: Company Law

Submitted By:

Praveen Rai

Institute of Business Management,

C. S. J. M. University, Kanpur.



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Company La wQuestion 1: What is company and what are its characteristics?

Company: A company, in common parlance, means a group of persons associated together for the attainment of a common end,social or economic.

According to Lindley, “It is an association of many persons whocontribute money or money’s worth to a common stock, and employs itin some common trade or business, and who share the profit or lossarising there from. The common stock so contributed is denoted inmoney and is the capital of the company. The person who contributesis, or to whom it belongs, are members. The proportion of capital towhich each member is entitled is his share. Shares are always

transferable although the right to transfer them is often more or lessrestricted.”

Characteristics of a Company:

1. Separate Legal Entity: It has an independent corporateexistence. Any of its members can enter into contracts with it in thesame manner as any other individual can and he can’t be held liablefor the acts of the company even if he holds virtually the entire

share capital. The company’s money and property belongs to thecompany & not to shareholders.

2. Limited Liability: In a company limited by shares, the liability of members is limited to the unpaid value of shares. E.g. If the facevalue of a share in a company is Rs. 10 and a member has alreadypaid Rs. 7 per share, he can called upon to pay not more than Rs. 3per share.

3. Perpetual Succession: It means that a company’s existencepersists irrespective of the change in the composition of its

membership. Thus its continued existence is not affected by aconstant change in its membership “in the like manner as the riverThames is still the same river, though the parts which compose itare changing every instant.”

4. Common Seal: Since a company has no physical existence, it mustact through its agents and all such contracts entered into by itsagents must be under the seal of the company and it acts as theofficial signature of the company.

5. Transferability of Shares: The capital of a company is divided

into parts, called shares. These shares are, subject to certainconditions, freely transferable, so that no shareholder ispermanently or necessarily wedded to company. In a joint stock



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company the main object was that the share should be capable of being easily transferable.

6. Separate Property: A company as a whole represents all theproperty and is capable of owning, enjoying and disposing of property in its own name. Although its capital and assets are

contributed by its shareholders, they are not the private and jointowners of its property.

7. Capacity to sue: A company can sue and be used in its corporatename. It may also inflict or suffer wrongs.

Question 2: What is a corporate veil? When is it pierced?

Corporate Veil: A company is a legal person distinct from its

members. This principle is referred to as ‘the veil of incorporation’. Theeffect of this principle is that there is a fictional veil (and not a wall)between the company and its members i.e., the company has acorporate personality which is distinct from its members. In someconditions, it is pierced as follows:

1. Protection of Revenue: The Courts may ignore the corporateentity of a company where it is used for tax evasion. Tax of planningmay be legitimate provided it is within the framework of law.

2. Prevention of Fraud: The legal personality of a company mayalso be disregarded in the interest of justice where the machinery of incorporation has been used for some fraudulent purpose likedefrauding creditors or defeating or circumventing law.

3. Determination of Character of a Company whether it itsEnemy: A company may assume an enemy character when personsin de facto control of its affairs are residents in an enemy country.In this case, the Court may examine the character of persons in realcontrol of the company, and declare the company to be an enemycompany.

4. Where the Company is a Sham: The Court also lifts the veilwhere a company is a mere cloak or sham (hoax).

5. Company Avoiding Legal Obligations: Where the use of anincorporated company is being made to avoid legal obligations, theCourt may disregard the legal personality of the company andproceed on the assumption as if no company existed.

6. Company acting as Agent or Trustee of the Shareholders:Where a company is acting as agent for its shareholders, the

shareholders will be liable for the acts of all company.

7. Avoidance of Welfare Legislation: It is as common asavoidance of taxation and the approach of the Courts in considering



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problems arising out of such avoidance is generally the same asavoidance of taxation.

8. Protecting Public Policy: The Courts invariably lift the corporateveil to protect the public policy and prevent transactions contrary topublic policy. Thus where there is a conflict with public policy, the

Courts ignore the form and take into account the substance.

Question 3: What is Private and Public Limited Companies.

Differentiate between the both?

Private Company: According to Sec. 3 (1) (iii), a ‘private

company’ means a company which has a minimum paid-up capital of Rs. 1,00,000 or such higher paid-up capital as may be prescribed. Somemore conditions are as follows:

(a) Restricts the right to transfer its shares.

(b) Limits the no. of its members to 50 not including the employee-members (present or past)

(c) Prohibits any invitation to the public to subscribe to for anyshares in, or debentures of the company.

(d) Prohibits any invitation or acceptance of deposits from personsother than its members.

Public Company: It means a company which:

(a) has a minimum paid-up capital of Rs. 5 lakh or such higher paid-up capital, as may be prescribed.

(b) is a private company, which is a subsidiary of a company which isnot a private company.

Every public company, existing on the commencement of theCompanies (Amendment) Act, 2000, with a paid-up Capital of less than

Rs. 5, 00,000 shall, within a period of two years from suchcommencement, enhance its paid-up capital of Rs. 5, 00,000.

Difference between Private and PublicCompany:

1. Minimum Capital: A private company must have aminimum paid-up capital of Rs. 1, 00,000 whereas a public limitedcompany must have Rs. 5, 00,000.

2. Minimum No. of Persons: The minimum no. of personsrequired to form a public company is 7. It is 2 in case of a privatecompany [Sec. 12 (1)].



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3. Maximum No. of Members: In public company norestriction is there but in private company no. of members cannotexceed 50.

4. No. of Directors: A public company must have at least 3directors [Sec. 252 (1)].and a private company must have at least 2

directors [Sec. 252 (2)].

5. Appointment of Directors: In public company, thedirectors must file with the Registrar a consent to act as directors orsing an undertaking for their qualification shares. The directors of aprivate company need not do so [Sec. 266].

6. Restriction on Invitation to Subscribe for shares: APublic company invites the general public to subscribe for theshares in, or the debentures of, the company. A private company byits Articles prohibits any such invitation to the public.

7. Transferability of Shares/ Debentures: In a publiccompany, the shares and debentures are freely transferable [Sec.82]. In a private company the right to transfer shares anddebentures is restricted by the Articles.

8. Special Privileges: A private company enjoys somespecial privileges. A public company enjoys no such privileges.

9. Quorum: If the Articles of a company do not provide for alarger quorum, 5 members personally present in the case of a public

company are quorum for a meeting of the company. It is 2 in case of a private company [Sec. 174].

10. Managerial Remuneration: Total managerialremuneration in a public company cannot exceed 11 percent of thenet profits [Sec. 198]. No such restriction applies to a privatecompany.

Question 4:Define Memorandum of Associations, various Clauses

of it. When and how it may be altered?

Memorandum of Association: It is a document of great

importance in relation to the proposed company. It contains thefundamental conditions upon which alone company is allowed to theincorporated. It is the charter of the company and defines its raisond’etre (i.e., reason for existence). It lays down the area of operation of the company. It also regulates the external affairs of the company inrelation to outsiders. Its purpose is to enable shareholders and thosewho deal with the company to know what its permitted range of

enterprise is.

Purpose of Memorandum: The purpose of the Memorandum is two-fold:



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1. The prospective shareholders shall know the field in, or thepurpose for, which their money is going to be used by the companyand what risk they are undertaking in making investment.

2. The outsiders dealing with the company shall know with certaintyas to what the objects of the company are and as to whether thecontractual relation into which they contemplate to enter with thecompany is within the objects of the company.

Clauses: These clauses are considered in detail:

1. The Name Clause [Sec. 20]: The name of a company

establishes its identity and is the symbol of its existence. Acompany may, subject to the following rules, select any suitablename –

I. Undesirable name to be avoided: A company cannot beregistered by a name which, in the opinion of the CentralGovernment, is undesirable. It is rejected if it is either –

(a) too similar to the name of another company; or

(b) Misleading, i.e., suggesting that the company isconnected with a particular business or that it is anassociation of a particular type when this is not the case.

II. Injunction if identical name adopted: If a company getsregistered with a name which resembles the name of an existingcompany, the resembling company can apply to the Court for aninjunction to restrain the new company from adopting theidentical name.

III. ‘Limited’ or ‘Private Limited’ as the last word or words of the name: The omission to use the word ‘Limited’ as

part of the name of a company must have been deliberate andnot merely accidental.

IV. Prohibition of use of certain names: The use of orregistration of a company or firm with, any name or emblemspecified in the Schedule to that Act. The name of Scientific andCultural Organization, the Indian National Flag, the official sealof the Central Government and State Government, emblem orofficial seal or the President of India or Governor of any State.

V. Use of some key words according to authorized

capital: If a company uses any of the following key words in itsname, it must have a minimum authorized capital mentionedagainst the key words as per law:



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Key Words RequiredAuthorized Capital

(a) Corporation Rs. 5crores

(b) International, Globe, Universal, Continental

Asiatic, Asia, being the first words of the name Rs. 1crore

(c) Hindustan, India, Bharat, being the first

word of the name Rs. 50 lakhs

2. The Registered Office Clause [Sec. 146]: Every companyshall have a registered office from the day on which it begins to

carry on business, or as from the 30th

day after the date of itsincorporation, whichever is earlier.

3. The Objects Clause [Sec. 13 (1)]: The objects of a companyshall be clearly set forth in the memorandum, for a company can dowhat is within, or incidental to, the objects stated in thememorandum.

4. The Capital Clause [Sec. 13 (4)]: The memorandum of acompany having a share capital, shall state the amount of the sharecapital which the company is to be registered and the division

thereof into shares of a fixed amount. The capital with which acompany is registered is called registered, authorized or nominalcapital. A company can’t issue more shares than are authorized forthe time being by the memorandum.

5. The Liability Clause [Sec. 13 (2)]: The member can only becalled upon to pay to the company at any time the uncalled orunpaid amount on the shares held by them or up to the maximum of the amount which they have guaranteed.

6. The Association Clause: The memorandum shall be signed by

at least 7 subscribers in the case of public company and by at least2 subscribers in the case of a private company. The signature of each subscriber shall be attested by at least 1 witness who can’t beany of the other subscribers.

Alteration of Memorandum:

Conditions are as follows:

1. Change of Name: A company may change its name by a specialresolution and with the approval of the Central Governmentsignified in writing. But a change of name which merely involves thedeletion or addition of the word ‘Private’ on the conversion of a



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public company into a private company or vice versa does notrequired the approval of Central Government.

2. Change of Registered Office: This may involve:

a. Where there is more than one ROC (Regional Office of Companies) within a state. A company can change the place of

its registered office from one place to another within a state if it is confirmed by the Regional Director. In this case, thecompany has to make an application to the Regional Directorfor confirmation. The confirmation shall be communicated tothe company within 4 weeks. The company shall then file withthe registrar a certified copy of the confirmation by the RDwithin 2 months from the date of confirmation, together withthe printed copy of the Memorandum of Association as altered.

b. A company may by special resolution, change the place of itsregistered office from on state to another for certain purposereferred in Sec. 17.

Procedure of Alteration:

I. A Special resolution shall be passed at a generalmeeting so as to change the place of registered office fromone State to another.

II. The alteration shall not take effect until it is confirmedby the Company Law Board on petition.

III. Before confirmation, the Company Law board shall besatisfied that sufficient notice has been given to everyperson whose interest will be affected by the change, andthat the consent of the creditors of the company has beenobtained.

IV. The Company Law Board shall cause notice of thepetition for confirmation of the change to be served on theRegistrar.

V. Power of Company Law Board to confirm change

discretionary or on such terms and conditions as it think fit.

VI. The CL Board shall have regard to the rights andinterests of every class of the member and creditors of thecompany.

VII. Copy of special resolution and the order of theCompany Law Board to be filed with the registrar as perthe conditions according to law and regulation.

Question 5: Define Article of Association, its clauses and how it is

altered?



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Alteration of Association: It is the rules, regulations and

by-rules for the internal management of the affairs of a company. Theyare meant for the object of carrying out the aims and objectives as setout in the Memorandum of Association.

The Articles are next in importance to the Memorandum of Association

which contains the fundamental conditions upon which alone acompany is allowed to be incorporated.

Alteration of Articles: A company has very wide range to

alter their Articles. Any clause in the Articles that restricts or prohibitsalteration of Articles is invalid.

Procedure of Alteration [Sec. 31]: A company may by passing aspecial resolution, alter its Articles any time. Again any Articles may beadopted which could have been lawfully included originally. A copy of every special resolution altering the Articles shall be filed with theRegistrar within 30 days of its passing and attached to every copy of the Articles issued thereafter.

Limitations to Alteration: There are many limitations as follows –

1. Must not be inconsistent with the Act: The alteration of theArticles must not be inconsistent with, or go beyond, the provisionsof the Companies Act. E.g. the Articles can’t be altered so as to givepower to a company to purchase its own shares.

2. Must no conflict with the Memorandum: The alteration of theArticles must not exceed the power given by the Memorandum, orconflict with the provisions of the Memorandum.

3. Must no sanction anything illegal: The alteration must notpurport to sanction anything which is illegal. But if it is legal and itis not clearly prohibited by the Memorandum. It may be held to bevalid even where it alters the whole structure of company.

4. Must be for the benefit of the company: The alteration must

be made bona fide for the benefit of the company as a whole. Thatthe power of alteration must be “exercised subject to those generalprinciples of law and equity which are applicable to all powersconferred on majorities and enabling them to bind minority.”

5. Must not increase liability of members: The alteration mustnot in any way increase the liability of the existing members tocontribute to the share capital of or otherwise pay money to, thecompany unless they agree in writing before or after the alterationis made.

6. Alteration by special resolution only: The alteration can bemade only by a special resolution. Even clerical errors in the Articlesshould be set right by a special resolution.



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7. Approval of Central Government when a public isconverted into private company: The alteration in the Articleswhich has the effect of converting a public company into privatecompany can be made only if it is approved by the CentralGovernment and paper filed against registrar within 1 month of thedate of receipt of order of the approval.

8. Breach of contract: A company is not prevented from altering itsArticles even if such an alteration would result in breach of somecontract. The affected party may file a suit for damages for thebreach of contract.

9. Must not result in expulsion of a member: An assumption bythe Board of Directors of a company power to expel a member byamending its articles is illegal and void.

10.No power of the Tribunal to amend Articles: The Tribunal has

no power to amend or rectify the Articles even where there is amistake or drafting error which the Tribunal would rectify in thecase of any other contract.

11.Alteration may be with retrospective effect: The Articles maybe altered with retrospective effect and the fact that some memberssuffer a detriment does not make it void.

Question 6: Discuss the Doctrine of Indoor Management?

Doctrine of indoor Management: There is one

limitation to the doctrine of constructive notice of the Memorandumand the Articles of a company. The outsiders dealing with the companyare entitled to assume that as far as the internal proceedings of thecompany are concerned, everything has been regularly done. They are

presumed to have read these documents and to see that the proposeddealing is not inconsistent therewith, but they are not bound to domore; they need not inquire into the regularity of the internalproceedings as required by the Memorandum and the Articles. Theycan presume that all is being done regularly. This limitation of thedoctrine of constructive notice is known as the “Doctrine of IndoorManagement”, or the rule in Royal British Bank v. Turquand, or justTurquand Rule.

Thus, whereas the doctrine of constructive notice protects thecompany against outsiders, the doctrine of indoor management seeks

to protect outsiders against the company.The rule is based on public convenience and justice:



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First, the Memorandum and the Articles are public documents. Theyare open to inspection by everybody. But the details of internalproceedings are not open to public inspection.

Secondly, the lot of creditors of a limited liability company is notparticularly happy one: it would be unhappier still if the company couldescape liability by denying the authority of the officers to act on itsbehalf.

Exceptions to the Doctrine of IndoorManagement:

1. Knowledge of Irregularity: Where a person dealing with acompany has actual or constructive notice of the irregularity asregards internal management, he cannot claim the benefit under therule of indoor management. He may in some cases be himself a partof the internal procedure.

2. Negligence: Where a person dealing with a company coulddiscover the irregularity if he had made proper inquiries, he can’tclaim the benefit of the rule of indoor management.

3. Forgery: The rule in Turquand’s case does not apply where aperson relies upon a document that turns out to be forged sincenothing can validate forgery.

4. Acts outside the scope of apparent authority: If an officerof a company enters into a contract with a third party and if the actof the officer is beyond the scope of his authority, the company isnot bound.

Documents

Company Act by [email protected]