1.

Theories of Corporate Personality

As per the law, a corporation is an artificial person. It has the ability to enjoy rights, fulfill its duties and
hold property in its own name.

The law recognizes a company as a legal entity distinct from its members. This legal fiction allows a
company to be treated as a “person” in the eyes of the law allowing it to enter into contracts, sue or be
sued, and own property.

1] Fiction Theory
As per the fiction theory, a corporation exists only as an outcome of fiction and metaphor. So the
personality that is attached to these corporations is done purely by legal fiction.
The legal person is created only in the eyes of the law for a specific purpose. The theory was
propounded by Savigny and backed by Salmond and Holland.

2] Concession Theory
This is similar to the fiction theory. However, it states that the legal entity has been given a corporate
personality or a legal existence by the functions of the State. So as per this theory, only the State can
endow legal personalities, not the law.

3] Realist Theory
As per the realist theory, there is really no distinction between a natural person and an artificial
person. So a corporate entity is as much a person as a natural person. So the corporation does not
owe its existence to the state or the law. It just exists in reality. This is not a very practical theory as it
does not apply in the real world.

4] Bracket Theory
This is one of the more famous and feasible theories of corporate personality. The bracket theory is
also known as the symbolist theory which states that a corporation is created only by its members and
its agents.

5) Purpose theory
The notion is founded on the premise that companies can be recognised like individuals for certain
reasons. It is based on the premise that only living humans may be the subject of rights and
responsibilities, and that companies, as non-living organisations, have no such rights or obligations.
To address this, the theory contends that a corporation's personality was required in order for it to be
viable of possessing rights and obligations.

6) The Organism Theory:

According to this theory, a company is similar to an organism, with (limbs in the form of members), a
head (top authorities), and other organs. Furthermore, an individual has one head, a body, and legs,
which aid in the fulfilment of desires and the performance of functions. As per the theory, a
corporation has its own will and body, and also legal rights and responsibilities

7) Ownership Theory:
Humans, not companies, are said to have legal rights, according to this idea. In addition, it states that
a legal person or company is not a person in any case. These are subjectless property, which is a
legal fabrication, and this fictional identity exists solely for the purpose of owning common property.
Personalities like this are nothing more than a kind of ownership. As a result of their ownership, these
persons may enter into contracts and pursue legal action in the same way that real people can.
 2. Define Company. Merits & Demerits of Incorporation of a
Company
According to Section 2 (20) of the Company Act 2013 "Company means a company incorporated
under this Act or any previous Company Law."
In general, a company is an artificial person, created by law that has a separate legal entity, perpetual
succession, and common seal and has limited liability
Generally, the capital of a company is divided into small parts known as shares, the ownership of
which is transferable subject to certain terms and conditions.
Characteristics of Company-

(i) Incorporated Association : A company comes into existence through the operation of law.
Therefore, its incorporation under the Companies Act is must. Without such registration, no
company can come into existence.

(ii) Separate Legal Entity : A company has a separate legal entity, which is not affected by
changes in the ownership. Therefore being a separate entity, a company can contract, sue
and be sued in its corporate name and capacity.

(iii) Artificial Person: A company is an artificial and juristic person that is created by law.

(iv) Limited Liability : Every shareholder of a company has limited liability. His liability is
limited to the extent of the unpaid value of the shares held by him. If such shares are fully
paid up, he is subject to no further liability.

(v) Perpetual Existence : The existence of company is not affected by the death, retirement,
and insolvency of its members. That is, the life of a company remains unaffected by the life
and the tenure of its members in the company. The life of a company is infinite until it is
properly wound up as per the Companies Act.

(vi) Common Seal : The company is not a natural person and has no physical existence.
Hence, it cannot put its signature. Thus, the common seal acts as an official signature of a
company that validates the official documents.

(vii) Management and Ownership : A company is not managed by all members but by their
elected representatives called Directors. Thus, management and ownership are different.

(viii) Transferability of Shares : Shares of a company are freely transferable, except in case
of private companies. Transfer of shares of private companies is regulated by Articles of
Association.

Advantages of Incorporation of a Company

Incorporating of a company brings many advantages like a company can own property, it can sue and
be sued, it has a Separate legal entity from its members, etc.

1.Separate legal entity

A company is a legal person having a Juristic personality entirely distinct from and independent of its
members.
It means that the creditor of the company can sue only the company to recover their debt not the
members. Similarly, the company is not liable in any way for the individual debts of its members.
With the incorporation of the company, the company is separated or a separate new person is born in
the eyes of law, now for every liability incurred by company, company will be responsible but the
member.
Now the company has right to own and transfer the title of the property, way it likes. No member or
person can claim joint ownership of the company property. It can be sued and can sue in its own
name.
Separate legal entity of the company is also recognized by the Income Tax Act, where a company is
required to pay Income Tax on its profits and when these profits are distributed to shareholders in the
form of dividend, the shareholders have to pay income tax on their dividend income. This proves that
a company and its shareholders are two separate entities.

2.Perpetual existence/ succession

A company has a perpetual succession and is independent of the life of its members. The life of a
company does not depend upon the death, insolvency or retirement of any or exit of any shareholder.
Perpetual succession thus means that in spite of any change in the membership of the company, the
existence of the company is not affected. Since the company is created by law, only law alone can
dissolve it.

3.Common seal
A company being an artificial person cannot sign a document for itself. It cannot act on itself; it acts
through the natural person (directors or board of directors).
But having legal entity it can be bound by those documents which bears its Signature; therefore, law
has provided the provision of using Common Seal with the name of the company engraved on it, is
used as substitute for its Signature.
No document issued by company will be binding on it without the presence of common seal on it.

4.Limited liability
One of the important advantages of a company is that the liability of it is limited to the amount unpaid
on their shares, howsoever heavy losses the company might have suffered, members are liable to the
unpaid amount. However, the Act doesn’t prevent the companies from making liability on their
member unlimited, but such company are rare in existence.

5.Separate Property
A company being a legal person can hold, purchase and sell property in its own name. A member of
the company doesn’t have direct light in the ownership of the property acquired by the company. The
property of a company should be used for the purpose of the company not for the personal use of its
member or directors.

6.Capacity to sue and being sued

With the existence of the company, the company acquire right to sue any person or get sued by any
person on the breach of its legal duties.

7.Ease in control and management

The company law provides for the management of joint stock companies through directors
(collectively known as board of directors); therefore, the shareholders don’t have to worry about their
money.

Disadvantage of Incorporation of company

1.Loss of Privacy
A public company has to publish all its accounts, capital structure, changes in assets, minutes of
meeting, interest of directors, MOA, AOA with Registrar.
2. Wastage and in efficiency in management
Incorporation enables a large number of persons to join hands as member in a joint stock company,
all of whom cannot possibly take active part in the management of the company and as a result
wastage and inefficiently management.
3. Double taxation
Double taxation occurs when the company is taxed on their profit and secondly to shareholder when
they receive dividend.
4. Loss of ownership
In individual Business, the ownership is with one person but once Incorporated the ownership
dissolve, one person doesn’t have complete ownership (public company)
5. Hard to dissolve
A company being artificial person, whose existence is ensured by the law. The law can only dissolve
it, dissolving of a company Incorporated required to follow legal formalities and it is quite expensive.

3. Salomon Vs Salomon Case

Facts of the Case
For many years, Aron Salomon successfully ran a profitable leather business. He decided to change it
into a limited company in 1892. At that point, Salomon & Co. Ltd. was established with Salomon as
the managing director, along with his wife, daughter, four sons, and wife as members.
For £39,000, the corporation bought Salomon’s business. A charge over all of the company’s assets
totalling £10,000 in debentures, £20,000 in fully paid up £1 shares, and the remaining £20,000 in cash
were used to pay the purchase price. Salomon possessed 20,001 out of the 20,0 he 07 shares
issued, and a family member held each of the other six shares.

The business had problems almost immediately, and a year later, the holder of the debentures
(Salomon having sold his shares to another party) hired a receiver, and the business entered
liquidation.

At the time of liquidation, the value of the assets was divided as follows: liabilities received £6,000 (six
thousand pounds), debentures received £10,000, and unsecured obligations received £7,000. Nothing
would be left over for the unsecured creditors once the debenture holders had been paid.

As a result, the liquidator filed a lawsuit against Salomon, holding him responsible for covering the
company’s trade debts.
Issues
● Whether Salomon & Co. Ltd. indeed existed as a company?
● Whether the company, an artificial invention of the law, had actually been properly constituted
under any circumstances.
● Whether Salomon was accountable for the business’s debts?
Arguments Brought Before the Court
Salomon & Co. Ltd. was formed under the Act, but according to the liquidator, the business never
existed independently. Salomon became the undisputed king due to the large majority of shares. The
firm was fake, and the business was run exclusively for and by him.

Judgement
According to the House of Lords, in order to answer the question, it is required to examine the
legislation itself without altering or adding to its provisions. The legislation itself must be the entire
reference point.
In this instance, the Act stated that any seven or more people who are connected for a legitimate
purpose may create a company with or without limited liability by signing their names to a
memorandum of association and otherwise complying with the Act’s registration requirements.

Additionally, the Act stated that “no subscriber shall take less than one share.” There was no question
that seven genuine living people owned the company’s shares. The court determined that the firm had
been legitimately created and was an actual corporation (company) since it complied with the Act’s
criteria.

House of Lords held that the provisions of the Act did not require that the people subscribing shall not
be related to each other or that owning a single share shall not afford a sufficient qualification for
membership, rejecting the liquidator’s argument that Salomon and his family members purchased all
the shares and that the company was nothing more than a one-man show.

A creditor of the firm is unconcerned whether the company’s capital is owned by seven people in
equal shares, each of whom has the right to an equivalent portion of the earnings, or if it is nearly
entirely owned by one person, who gets almost all of the profits.

If one individual controls most of the firm’s capital, the company does not lose its identity. The
company in question and its subscribers are entirely different people. The House of Lords also
claimed that nothing in the Act required the subscribers to be independent, have a say in a significant
amount of the undertaking, or have their own free will.

This case clearly established that company has its own existence and as a result, a shareholder
cannot be held liable for the acts of the company even though he holds virtually the entire share
capital. The whole law of a corporation is in fact based on the principle of the separate legal entity.
The separate legal entity of a company is a statutory privilege that must be used for legitimate
purposes only but with advantages comes the disadvantages as well. Thus, the Doctrine of lifting up
of or piercing of Corporate Veil was introduced to hold the members liable in case of fraudulent or
dishonest use of the separate legal entity.

4. Doctrine of lifting of Corporate Veil

The Corporate Veil is a shield that protects the members from the action of the company. In simple
terms, if a company violates any law or incurs any liability, then the members cannot be held liable.
Thus, shareholders enjoy protection from the acts of the company.

The company, once incorporated, holds a separate legal entity in the eyes of law. The company can
act under its own name, have a seal of its own, can enter into contracts, purchase or sell property,
have a bank account and sue or get sued in the same manner as an individual. Thus, a company is a
juristic person different from the persons who constitute it.
If it is found that the members are misusing the statutory privilege then the individuals concerned will
not be allowed to take shelter behind the corporate personality. The Court will break through the
corporate shell and apply the principle/doctrine of what is called as “lifting of or piercing the corporate
veil”.

“Give example of Salomon Vs Salomon Case where this doctrine was established (Write the facts and
Judgement in short)”

Cases where the court has ordered lifting up of veil-

In case the Company commits a Fraud.

Where the company do not have a physical presence, it is just on instruments.

If the company has an enemy character because of its association with the enemy country.

If the criminal activities are being hidden behind the company’s name.

Further, the lifting of the corporate veil can be Statutory Lifting or Judicial Lifting.

Statutory Lifting: If the company violates the Companies Act, 2013 and the act provides for the lifting
of the veil for the same, then it is termed to be Statutory Lifting.

Judicial Lifting: If the company violates the Companies Act, 2013 and the act does not provide for the
lifting of the veil then the judges can order the lifting of the veil which is known as Judicial Lifting.

5. Distinguish between Private & Public Company

Public limited company

According to the Companies’ Act 2013, a public limited company is not private. This means a public
limited company is a joint-stock company governed by the provision of the Indian Companies’ Act
2013. There is no limit to the number of members, and it is formed by an association where people
are voluntarily paid up to five lakhs rupees capital. There is no restriction in transferability, and in time
of incorporation, the term public limited is added to its name. A public limited company offers shares
to the public. It is more open to the public about its details and also listed in the stock market.

Private limited company

According to the Companies’ Act 2013, private companies are restricted from transferring their share.
In simple words, a private limited company is a joint-stock company governed under the Indian
Companies’ Act 2013. It has limitations in the number of members. Still, the voluntary association of
the company should be paid a minimum of 1 lakh rupees capital. The maximum number of members
should be 200, and it does not include current or ex-employees who are not listed in the employment
term. Employees are allowed to continue as a member after the termination of employment in the
company. There is a restriction in transferring the shares. The term private limited is used in the name
of the company.

Difference between private and public company

The definition of these two types of companies shares a basic difference between private and public
companies. Here is a detailed discussion to elaborate on the differences.
● A public limited company is listed on a recognized stock exchange, and the company’s stocks
are traded publicly. On the other hand, private limited companies are neither listed in the
stock exchange, nor they can be traded. Its members can only hold it.
● A public company requires a minimum of seven members to start a company, whereas a
private limited company can be started with only two members.
● A general meeting is mandatory for public companies, whereas for private companies, it is not
mandatory.
● Transferability of shares is restricted for private companies, but for a public company, the
shares can be transferred to the public.
● There is a tremendous regulatory burden on the public limited company, whereas the private
company has no burden.
● Public companies mandatorily choose a company secretary, but the private companies can
appoint by choice.
● The minimum capital for a public company is 5 lakh rupees, but it is only 1 lakh rupees in a
private company.

● There is no limitation on the membership of a public company, but private companies have

only a 200 members allowance.

6. Distinguish between Holding Company & Subsidiary

Company

What is a Holding Company?

A Holding Company is a Parent Company, Limited Liability Company, or Limited Partnership that
owns a significant number of voting shares in another business. The shareholding is structured in
such a way that the Holding Company has control over the subsidiary’s policies and management
decisions.
Although a Holding Company holds the assets of other companies, it solely retains management
roles, and therefore it remains uninvolved in the organization’s day-to-day activities.

According to Indian Company Law, a Subsidiary is a firm that is owned and controlled by another
company, whereas the latter is referred to as a Holding Company. As a result, the term “control” is
defined in Company Law to determine whether a firm qualifies to be considered a Holding Company.
Management or share ownership can both be used to exert control.

What is a Subsidiary Company?

A Subsidiary Company is a business that is owned by another Company, either partially or entirely. If
the Company has other commercial operations, it is referred to as a parent company or a Holding
Company (if the sole purpose of the company is to own its subsidiaries). There are a variety of
reasons why you might want to start a Subsidiary Company, including diversifying your business,
limiting your financial liability, and distinguishing your firm’s brands.

Difference Between Holding and Subsidiary Company in India

Holding Company Subsidiary Company

A Holding Company is a company that A Subsidiary Company is one in which

owns more than half of another company’s another firm owns more than 50% of the
stock and hence has the capacity to control shares and has complete control over the
its operations. company’s operations.

A Holding Companies in charge of the A subsidiary’s operations have little or no

management and operations of the control over the Company’s operations.
subsidiaries it owns, and it has the power to Even subsidiaries that operate
appoint and remove board members, independently are ultimately financially
directors, and other key management and controlled by their parent firm (Holding
personnel. Company).

The Holding Company has all ownership On the other hand, the Subsidiary Company
rights and duties over its subsidiaries. is dependent on the Holding Company, and
major decisions taken by the Holding
Company

To diversify its investment, minimize risk, When a subsidiary becomes a subsidiary of

and, in some cases, take advantage of another holding company, all of its
shared loss and tax consolidation, a Holding subsidiaries become subsidiaries of the top
Company may invest in subsidiaries in holding company.
many businesses.

By making the company a Subsidiary, the Subsidiary Company, on the other hand,
Holding Company can benefit from its protects themselves from business
enormous capital and limit market uncertainty and provides a safeguard
competition for the company. against business loss.
 7. Memorandum of Association:- Content of Object Clause
The Memorandum of Association is defined in Section 2(56) of the Companies

Act 2013, which designates the term ‘Memorandum’ as a Memorandum of

Association of the company.

TV

It is the charter document of the company and contains the terms of

association with the company, as well as the name, object, and scope of the

company.

The Memorandum of Association is the most important document of the

company. It states the objective for which the company came into existence.

It contains the rights, privileges, and powers of the company. Hence, it is

called ‘the charter of the company.’ It is considered the constitution of a

company.

Section 4 of the Companies Act 2013 requires a company’s Memorandum of

Association to state the purpose for which the company was incorporated and

any matters deemed necessary to facilitate the incorporation of the company.

These objects are specified in the object clause of the company’s

Memorandum of Association.

OBJECT CLAUSE

This clause sets out the purpose for which the company was formed. It is

difficult to change the object clause later. Therefore, it is necessary for the

company to formulate this clause carefully. This clause lists all types of

business that a company may carry out in the future. The object clause must
contain the company’s important goals as well as other goals not listed

above.

This clause must specify the following:

● The company’s main objectives are to be pursued by the company

upon its incorporation;

● Auxiliary or ancillary purposes for achieving the main objjectives;

and

● Other objectives of the company that are not covered by (i) and (ii)

above.

The object clause is the most important clause in the memorandum, as it not

only sets out the objectives of the company’s formation but also defines the

scope and powers that the company can exercise in achieving those

objectives.

CONTENTS OF THE OBJECT CLAUSE

Under the Companies Act 2013, the subject matter related to the registration

of a company must be divided into three sub-clauses, namely:-

● Main object

● Incidental or Ancillary objects

● Other objects

Main object

Under the main object, the company must state the primary purpose pursued

by the company at the time of its formation in accordance with the

Memorandum of Association. It will cover details regarding the business

activities which the company will carry out in future.

Incidental or Ancillary Objects

An ancillary or incidental object is nothing but a part of the main object, and

it must be clearly defined to avoid any kind of ambiguity.

Objects under this category are not independent objects. In reasonable

interpretation, these objects can be considered incidental or conducive to the

main object, but nothing further. These cannot be construed as expanding

the scope of the objects clause but will only be taken into consideration as

necessarily carrying out the main object. In other words, incidental acts have

imminent connections with the main objects.

Other Objects

The third part enumerates those that are neither the main objects nor

ancillary or incidental but nevertheless necessary to enable the company to

engage in all types of business activities that an enterprise expects to be able

to engage in. The company should clearly state its objective and purpose in

unambiguous terms for which its funds will be used.

8. Steps to alter the object clause of MOA

Section 13 of the Companies Act 2013, read with Rule 29 of the Companies
(Incorporation) Rules 2014, sets out the procedure for alteration of the
company’s object clause under the Companies Act 2013. MOA is an important
legal document of the company and, in particular, specifies the scope of
business activities of the company. The MOA also stipulates the relationship
between the company and its shareholders’ rights and interests. It also
establishes the relationship between the company and its shareholders.

Therefore, MOA also has object clauses that define the company’s purpose
and range of activities. After the company’s registration is complete, it may
want to change the object clause. This requires changing the company’s
MOA. Section 13 of the Companies Act, 2013, deals with amendments to the
MOA.

The company’s object clause is usually the third clause of the company’s
Meymorandum of Association. It states an objective related to the business
purpose for which the company was established and any other matters
deemed necessary to facilitate this. Setting up the object clause is one of the
most important terms for registering a company.

1. Approve the target alteration of the object clause of the

Memorandum of Association at the Board Meeting.

2. Pass a special resolution at the Extraordinary General Meeting

(EGM) to amend the object clause of the MOA. Specific clauses in

passing a special resolution if the company raises funds from the

public through the issuance of a prospectus and some unutilized

funds out of those have to be disclosed when the special resolution

is passed.

The special resolution of the members will be obtained by postal ballot. A

notification will be sent to members with details, such as –

● Total funds received (from the public through the offering

prospectus).

● Total money utilized for the objects stated in the prospectus.

● Unutilized funds out of total funds received by issuing a prospectus.

 ● Details of proposed changes to the object.

● Reason for changing the object.

● Amount proposed to be utilized for the new object.

● The estimated financial impact of the proposed changes on the

company’s earnings and cash flows.

● Other important information.

● The special resolution will be published in newspapers (one in

English and one in the local language) at the company’s registered

office.

● SRs are also placed on the company’s website.

● Dissenting shareholders (voting against decisions on dissenting

terms) are offered the opportunity by the promoters and other

shareholders to exit.

If the company has not received any funds from the public or the funds

received have been fully utilized, then the company is not obliged to disclose;

only the special resolution would be enough.

3. Filing of Form MGT-14: The authorized director or company

secretary must also ensure that they file the Form MGT-14 within 30

days of the passing of the special resolution. They must submit this

form to the Registrar of Companies.

4. Receipt of new Certificate of Incorporation: Once the Registrar of

Companies receives the MGT-14 form, they will conduct a

compliance check. When the Registrar is satisfied, he registers the

changes and issues a new certificate of incorporation. Also, an

amendment to the object clause of the Memorandum of Association

is not complete unless a new incorporation certificate is obtained.

 5. Incorporate the change: Once the company receives the new

certificate of incorporation, it must incorporate the amendments into

all copies of the Memorandum of Association.

9. Doctrine of Ultra Vires

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

binding document which describes the scope of the company among other things. If a
company departs from its MOA such an act is ultra vires.

The term Ultra Vires means ‘Beyond Powers’. In legal terms, it is applicable only to the acts
performed in excess of the legal powers of the doer. This works on an assumption that the
powers are limited in nature. Since the Doctrine of Ultra Vires limits the company to the
objects specified in the memorandum, the company can be:

● Restrained from using its funds for purposes other than those specified in the
Memorandum
● Restrained from carrying on tradedifferent from the one authorized.

The company cannot sue on an ultra vires transaction. Further, it cannot be sued too. If a
company supplies goods or offers service or lends money on an ultra vires contract, then it
cannot obtain payment or recover the loan.
For example, a company’s constitution might outline the procedure for appointing directors to
its board. If board members are added or removed without following those procedures, then
those actions would be described as ultra vires.

If individuals within a company make use of resources that go beyond the scope of their
legal purview, this can be called ultra vires.

Case Law for Ultra Vires

Ashbury Railway Carriage and Iron Company Ltd v. Riche, (1875) L.R. 7
H.L. 653.,
Fact of the case:
In this case, the objects of the corporate as expressed within the objects clause of its
memorandum, were to build and sell, or lend on rent railway carriages and wagons, and
every one styles of railway plaint, fittings, machinery and wheeled vehicle to hold on the
business of mechanical engineers and general contractors to get and sell as merchants
timber, coal, metal or different materials; and to shop for and sell any materials on
commissions or as agents.

The administrators of the corporate entered into a contract with material resource for finance
a construction of a railway line in European nation. All the members of the corporate legal
the contract, however in a while the corporate unacknowledged it. Riche sued the corporate
for breach of contract.

Issue of the case

Whether the contract was valid and if not, whether or not it may well be legal by the
members of the company?

According to House of Lords

The contract was on the far side the objects as outlined within the object's clause of its
memorandum and so it absolutely was void. the corporate had no capability to formalise the
contract.

Decision
The House of Lords has control that associate ultra vires act or contract is void in its origin
and its void as a result of the corporate had not the capability to create it and since the
corporate lacks the capability to create such contract, however it will have capability to
formalise it. If the shareholders are allowable to formalise associate ultra vires act or
contract, it'll be nothing however allowing them to try and do the terribly factor that, by the
Act of Parliament, they're prohibited from doing.
The House of Lords has expressed the read that a corporation incorporated beneath the
businesses Act has power to try and do solely those things, that are approved by its objects
clause of its memorandum, and something not therefore approved is ultra vires the corporate
and can't be legal or created effective even by the unanimous agreement of the members.

Summing up the Doctrine of Ultra Vires

1. An act, legal in itself, but not authorized by the object clause of the Memorandum of
Association of a company or statute, is Ultra Vires the company. Hence, it is null and
void.
2. An act ultra vires the company cannot be ratified even by the unanimous consent of
all shareholders.
3. If an act is ultra vires the directors of a company, but intra vires the company itself,
then the members of the company can pass a resolution to ratify it.
4. If an act is Ultra Vires the Articles of Association of a company, then the same can be
ratified by a special resolution at a general meeting.

10. Articles of Association:- Content

The Articles of Association (AOA) of the company contains its rules or
bye-laws and regulations that control or govern the conduct of its business
and manage its internal affairs. The AOA is subordinate to the MOA of a
company and is governed by the MOA. Every company must have an AOA
as it plays a vital role in defining its internal rights, workings, management
and duties. The contents of AOA should be in sync with the MoA and the
Companies Act, 2013.

Contents of AOA

● Details regarding the share capital

● Details of director’s qualification, appointment, powers,

remuneration, duties etc.

● Rules regarding company dividends and reserves

● Details regarding company accounts and audit

● Provisions relating to the company’s borrowing powers

● Provisions relating to conducting meetings

● Process of winding up of the company

12. Difference Between MOA and AOA

Particulars MOA AOA

Description Defines the Defines rules and

company’s regulations of the

constitution, powers, company. It also

objectives, and defines the duties,

constraints of the powers, liabilities and

organisation. rights of individuals

associated with the

organisation.

Contents It contains the five It contains the

mandatory clauses. provisions as per the

requirements of the

organisation.

Area of operation It defines the It defines the

relationship between relationship between

 the company and the company and its

third parties. members and also

amongst members.

Filing at the time of It is a mandatory The drafting of AOA is

registration document that must mandatory. However,

be filed with the ROC the filing of AOA with

at the time of the ROC is optional at

company registration. the time of company

registration.

Importance and MOA is a supreme AOA is subordinate to

position legal document and the MoA and the

subordinate to the Companies Act.

Companies Act.
The relationship MOA is a dominant Any provision in the

between the two document that helps AOA that contradicts

in the drafting of the the MoA is

AoA. considered as null

and void.

Acts done beyond The acts done The acts done

its scope beyond the scope of beyond the scope of

MOA are void and AOA can be ratified

cannot be ratified. by shareholders.

Alteration An alteration can be An alteration in the

made in the MOA AOA can be made by

only after passing a passing a special

special resolution in resolution in the

the Annual General

 Meeting (AGM) and Annual General

after obtaining prior Meeting (AGM).

approval from the

Central Government.

Retrospective The MOA cannot be The AOA can be

amendment amended with amended

retrospective effect. retrospectively.

13. Promoter - Define / Functions & Duties

An individual or a group of people who come up with the concept of starting a business are the
promoters of a company.
The company’s promoters shape the company and thus are moulding blocks of the company.
However, a promoter is not the owner of a company.

The promoter helps to establish and run the company, but the company shareholders are the actual
owners of the company.

According to section 2(69) of the Companies Act, 2013the term ‘Promoter’ can be defined as the
following:
1. A person who has been named as such in a prospectus or is identified by the company in the
annual return in section 92; or
2. A person who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
3. A person who is in agreement with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act.
Functions of Promoter
● who settles the name of the company thus determine the name will be acceptable by the
registered official of the office;
● who decides the content or details as to the Articles of the companies; (here, articles refers to
Articles of association & Memorandum of association);
● who proposes the directors, bankers, auditors and etc.;
● who decides the place where registered office or head office has to be situated;
● who prepares the Memorandum of Association, Prospectus and other essential documents
and file them for the reason of incorporation.
● decides the company’s funding sources and capital requirements.

Duties of a Promoter
(1) Duty To disclose the secret profit. The promotor should not make any secret profits. If in case he
has it is his duty to disclose the same he is empowered to deduct the reasonable expense incurred by
him
2) Duty to must disclose all the material facts and information,
(3) The promoter must make good to the company what he has obtained as a trustee. The promotor
has a fiduciary relationship with the company.
(4) Duty to disclose the private arrangement. It is the duty of the promoter to disclose all the private
arrangements resulting in him profit from the promotion of the company.
(5) Duty of promoter against the future allottees. The promotor has a fiduciary relationship with the
company. In the same way, the promotor also has a fiduciary relationship with the future allottees of
the share.

14. Prospectus Notes

Contents & Requirements ?
What is Prospectus? What are the remedies available for mis-statement in the prospectus?

The Companies Act, 2013 defines a prospectus under section 2(70). Prospectus can be defined as
“any document which is described or issued as a prospectus”. This also includes any notice, circular,
advertisement or any other document acting as an invitation to offers from the public. Such an
invitation to offer should be for the purchase of any securities of a corporate body. Shelf prospectus
and red herring prospectus are also considered as a prospectus.

Types of Prospectus
1. *Deemed Prospectus *- As per Section 25(1) of the Companies Act, 2013, a document will be
deemed to be a prospectus if the company agrees to allot or offer securities to the public.
2. Abridged Prospectus - It is defined as the brief summary of the prospectus, which includes all
useful and materialistic information filed before the registrar. As per Section 33(1) of the
Companies Act, 2013, an abridged prospectus must be included with the documents for the
purchase of securities issued by a company.
3. Red Herring Prospectus - It is the prospectus that is required to be filed before the registrar
prior to the offer. The prospectus generally lacks information such as the particular price or
quantum of securities being offered.
4. Shelf Prospectus - It is defined as the prospectus issued by a company, bank or financial
institution for more than one class of securities.
Prospectus Contents:
1. Name and registered address of the office, its secretary, auditor, legal advisor, bankers,
trustees, etc
2. Date of the opening and closing of the issue.
3. Statements of the Board of Directors about separate bank accounts where receipts of issues
are to be kept.
4. Statement of the Board of Directors about the details of utilization and non-utilisation of
receipts of previous issues.
5. Consent of the directors, auditors, bankers to the issue, expert opinions.
6. Authority for the issue and details of the resolution passed for it.
7. Procedure and time scheduled for the allotment and issue of securities.
8. The capital structure of the in the manner which may be prescribed.
9. The objective of a public offer.
10. The objective of the business and its location.
11. Particulars related to risk factors of the specific project, gestation period of the project, any
pending legal action and other important details related to the project.
12. Minimum subscription and what amount is payable on the premium.
13. Details of directors, their remuneration and extent of their interest in the company.
14. Reports for the purpose of financial information such as auditor's report, report of profit and
loss of the five financial years, business and transaction reports, statement of compliance with
the provisions of the Act and any other report.

What are the remedies available for mis-statement in the prospectus?

MISSLEADING REPRESENTATION INCLUDES

● Any untrue statement
● Statements implicating wrong impression
● Mis-leading statements
● Not disclosing true facts
● Omission of data

REMEDIES FOR MISSTATEMENTS IN PROSPECTUS

● Remedies for civil liability (remedies against company & remedies against
directors/promoters)
There are two remedies available against company:
● Revocation of the Contract- The person who purchased the securities can cancel the
contract. The money will be refunded to him, which he paid to the company.
● Damages for Fraud- After revocation, the shareholders can claim damages from the company
by filing a case in the court.
Remedies against the Directors, promoters and the authorized persons who issued the prospectus:
● Damages for misstatement-Compensation will be given to the shareholders for the loss by the
directors, promoters and the authorized persons.
● Damages for non-disclosure-Fine of Rs. 50000 ad recovering the damages must be given by
the people who mislead the purchasers from the one that is chargeable for the damages.

Remedies for criminal liability

● Imprisonment up to 2 years or Rs. 50000 fine must beard by the people that mislead.
 ● Person who knowingly issued a misstatement is punishable for imprisonment up to 5 years or
with a fine Rs. 100000 or both.

Case Law : New Brunswick Canada Railway V. Muggeridge

In this case, Justice Kindersley laid down the ‘golden rule’ for framing of a prospectus of a company.
In this case it was laid that, those who issue a prospectus withstand to the public great advantages
which will accrue to the persons who will take shares in the proposed undertaking. On the faith of the
details given in the prospectus, the people are invited to take shares. Everything should be accurate
and at its best knowledge in the prospectus. Nothing should be stated in the prospectus which is not
true in nature or is non- existing. In simpler words, the true nature of the company’s venture must be
disclosed in the prospectus.

15. Rule of Majority:- Case law- Foss VS

Harbottle
The rule of majority has put the company's majority equity shareholders in a dominant position as
opposed to the vulnerable minority members

Majority and minority define who has the power to rule. The structure of democracy is as such, where
the majority has the supremacy. In the corporate world, also the rule and decisions of the majority
seem to be fair and justifiable. The power of the majority has greater importance in the company, and
the court tries to avoid interfering with the affairs of the internal administration of the shareholders.

A company stands as an artificial entity. The directors run it but they act according to the wish of the
majority. The directors accept the resolution passed by the majority of the members. Unless it is not
within the powers of the company. The majority members have the power to rule and also have the
supremacy in the company. But there is a limitation in their powers. The following are two limitations:

Limitations
● The powers of the majority of the members are subject to the MoA and AoA of the company.
A company cannot authorise or ratify any act legally outside the memorandum. This will be
regarded as the ultra vires of the company
● The resolution made by the majority should not be inconsistent relating to The Companies Act
or any statutes. It should also not commit fraud on the minority by removing their rights.

Principle of Non-Interference
The general rule states that during a difference among the members, the majority decides the issue. If
the majority crushes the rights of the minority shareholders, then the company law will protect it.
However, if the majority exercises its powers in the matters of a company’s internal administration,
then the courts will not interfere to protect the rights of the majority.

Foss Versus Harbottle

Foss v. Harbottle lays down the basics of the non-interference principle. The reasons for the rule is
that, if there is a complaint on a certain thing which the majority has to do if there is something done
irregularly which the majority has to do regularly or if there is something done illegally which the
majority has to do legally, then there is no use to have a litigation over such thing. As in the end, there
will be a meeting where the majority will fulfil their wishes and make decisions.

Facts of the case

-In September 1835, the "Victoria Park Company" was established. Minority shareholders in the
company Richards Foss and Edward Starkie Turton filed a lawsuit against the promoters and
directors.
The Victoria Park Company was formed in 1835 for purchasing and improve land for public walks and
pleasure grounds. The company had 12 directors, including Harbottle and two minority shareholders,
Foss and Turton.[2] In 1840, the directors sold a valuable piece of property to themselves at an
undervalued price. Foss and Turton filed a suit against the directors alleging that the sale was
fraudulent and that the directors were in breach of their duty to the company. They sought to have the
transaction set aside and the directors held accountable for the loss suffered by the company.
The plaintiffs argued that the directors had breached their duty of care and diligence by selling the
property at an undervalued price. They further argued that the sale had caused a loss to the company
and that they, as minority shareholders, had the right to bring an action on behalf of the company
against the directors. The plaintiffs also argued that the majority of the shareholders had not approved
of the sale and that they were entitled to challenge the decision.
The defendants argued that the plaintiffs did not have the right to bring the action because they were
not the proper plaintiffs. They argued that any loss suffered by the company as a result of the sale
was a direct loss to the company, and not to the shareholders individually. Therefore, any action for
the loss should be brought by the company itself, and not by individual shareholders

Judgement of the case

-Court rejected the claim and declared that only the firm has legal standing to file a lawsuit when its
directors wrong a company.
The court held that the plaintiffs did not have the right to bring the action against the directors since
the alleged wrongdoing had not caused any direct harm to the company. The court further held that
the majority of the shareholders had not supported the lawsuit, and hence it should be dismissed. The
court held that the minority shareholders did not have the right to bring a claim against the directors
for any wrongdoing that did not directly harm the company. The case also established the principle
that the majority of the shareholders must support a lawsuit for it to be valid.[9] In this case, the
majority of the shareholders did not support the lawsuit, and hence it was dismissed.

Exceptions to the Rule

The rule is not absolute for the majority; the minority also have certain protections. The
Non-interference principle does not apply to the following:

Ultra Virus Act

An individual shareholder can take action if they find that the majority has done an illegal act or ultra
virus act. The individual shareholder has the power to restrain the company. This is possible by the
injunction or the order of the court.

Fraud on Minority
If the majority commits fraud on the minority, then the minority can take necessary action. If the
definition of fraud on the minority is unclear, then the court will decide on the case according to the
facts.
Wrongdoer in Control
If the company is in the hands of the wrongdoer, then the minority of the shareholder can take
representation act for fraud. If the minority does not have the right to sue, then their complaint will not
reach the court as the majority will prevent them from suing the company.

Resolution Requiring Special Majority

If the act requires a special majority, but it passes by a simple majority, then an individual shareholder
can take action.

Personal Action
The majority of shareholders always oblige to the rights of the individual membership. The individual
member has the right to insist on the majority on compliance with the statutory provisions and legal
rules.

Breach of Duty
If there is a breach of duty by the majority of shareholders and directors, then the minority shareholder
can take action.

Prevention of Oppression and Mismanagement

To prevent the majority of shareholders from oppression and mismanagement, the minority can take
action against them.