COMPANY LAW

QUESTION 1

The term "ultra vires" literally means "beyond the powers." As a legal concept, it primarily
involves companies in determining whether their actions fall under (intra) or outside (ultra) of
the limited authority provided to them as an artificial legal entity under the law. Therefore,
under company’s act, "ultra vires" refers to acts performed by a corporation that exceed the
legal powers granted to it. 1

The Memorandum of Association, under Section 4 of the Companies Act, is considered a

crucial document defining the core principles and objectives of the company. It acts as the
company's the foundation, including its goals, name, registration office, and other details.
The Supreme Court of India held in the Tata Engineering and Locomotive Co. Ltd. v.
State of Bihar case that a company's Memorandum of Association is a crucial document that
outlines its goals and scope, and that the company operates within its limits that it has
established.

In the instant case, memorandum of association of JTS clearly states that the scope of its
operations is limited to activities directly related to public transportation solutions. The board
of directors of JTS decided to diversify the company's operations due to a temporary
downturn in the public transportation market and enter into a contract with AID to finance
and participate in the construction of a new suspension bridge project led by AID.

In the case of Ashbury Railway carriage and iron co. ltd. Vs Riche, the company's
memorandum stated that the company's objective was to manufacture, sell, lend, or lease a
variety of railway wagons and carriages. However, the company's directors and Riches
negotiated a deal for the financing of a railway line. The court held that the acts of the
company exceed its object mentioned in its memorandum and declared the contract void.

Similar, the act of JTS is ultra vires since it acted beyond the power of the company i.e.,
contract for the construction of a bridge is outside the scope of JTS's objects clause.

To rectify the situation, company can opt for an Alter the Memorandum of Association. As
per section 13 of the company’s act, alterations can be made to the Association's
Memorandum. this section provides for the guidelines for amending the MOA in order to
make specific that these modifications adhere to all applicable laws and procedures. Further,
JTS can approach for the consent of shareholders in order to make the contract valid.

Further, in order to prevent this from happening in future, the company can ensure updating
the MOA periodically under section 13 of the act in order to clarify its objective. In the case

1
Shakti Divyansh, 'Landmark cases on Memorandum of Association' (2019)
<https://www.studocu.com/in/document/guru-gobind-singh-indraprastha-university/corporate-law/
caselawmoa/40695491> Studocu Accessed 06 March 2024
of K. Leela Kumar v. Government of India, The MOA cannot contain any terms that
would be contrary to the Companies Act of 1956.

The decision emphasizes a company should adhere to its MOA therefore the comma should
follow strict adherence to comply with objectives. Also, the shareholder of companies can
seek injunctive relief to prevent the continuation or repetition of such acts
Shareholders can also pursue monetary damages or equitable relief to deter future ultra vires
acts and protect the corporation's interests.

QUESTION 2 (i)

According to the section 166 of the company’s act, it states about the Duties of directors. A
director of a company is recorded to act within the articles of the company and shall act in
good faith in order to promote the objects of the company for the benefit of its members as a
whole, and in the best interests of the company, its employees, the shareholders, the
community and for the protection of environment.
According to section 166 (5), A director of a company shall not achieve or attempt to achieve
any undue gain or advantage either to himself or to his relatives, partners, or associates.

In the 1956 case The Public Prosecutor v. T.P. Kaithan, Director of Oakley Bowden & Co.
Ltd., the court emphasized that directors have an obligation to disclose any potential conflicts
of interest. In this particular case, the director failed to disclose his personal interest in a
contract that the company entered into. 2

In the instant case, Riya Lal breached her fiduciary duty to STI. As per section 166, Riya is
bounded to act for the best interest of the company and its shareholders. Riya with the
interest of getting the profit, buy the patent in her own name and set her own interests ahead
of the company's. after the incorporation of STI, she sells it to STI at a much higher price
without revealing her previous acquisition cost or the markup.

Also, section 166 (4), A director of a company shall not involve in a situation in which he
may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest
of the company. Therefore, Riya is punishable under section 166(7) of the act.

QUESTION 2 (ii)

In the Instant case, when a director is held liable for the breaching the fiduary duty, the
shareholders have certain legal remedies against Riya for her actions in relation to the
purchase and sale of the patent.

2
Tabrez Ahmad, Prateek Kumar Singh, Snigdha Ghatak, Soumita Adhikary, 'The Regulation of Directorial
Conflict of Interest: Efficiency, Morality and Conflicting Values in Indian Perspective' (2009) <
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1473908 > SSRN, Accessed 06 March 2024
Firstly, as per section 166(5) of the company’s Act, A director of a company shall not achieve
or any undue gain or personal and if such director is found guilty of making any undue gain,
he shall be liable to pay an amount equal to that gain to the company.
in the case of Lakshmanaswami Mudaliar v. Life Insurance Corporation3, the court
stated that if a director is found to have obtained undue gain, they are liable to reimburse the
company an amount equal to that gain. Therefore, one such remedy available to the
shareholders is to file a suit under section 241 and 244 of the company’s act.

Second, if a director fails to act in the company's best interests, she may be removed under
sections 167 and 169 of the acts. In the case of Life Insurance Corporation of India v.
Prof. Manubhai D. Shah, the court showed that how shareholders have the option to take
legal action against directors for unethical behaviour or seek their removal from the board. 4 In
this particular issue, shareholders have the option to take legal action against Riya for her
unethical behaviour or to have her removed from the board of directors.

In Re Caremark International Inc. Derivative Litigation is an important case that indicates

shareholder remedies under conditions where company directors violate their fiduciary
duties. These cases established that directors are liable for their failure to sufficiently monitor
and manage corporate activities. 5

QUESTION 3 (i)

A debenture is a kind of long-term, collateral-free company financing. For businesses with

strong resources that choose to proceed refraining from issuing shares and diluting their
equity, it is a funding alternative. 6

A debenture is a legally binding agreement which describes the principal amount contributed
by the investor, the interest rate that will be charged, and the payment schedule. The court
emphasized that debentures may be issued with or without a charge on assets in the case of
Industrial Finance Corporation of India Ltd. vs. Canara Bank & Ors. 7 In essence, they
are contracts that promise interest-bearing payments while also admitting a debt.

3
Melinda D’ Angelus & Nurul Syazwani A, 'THE RIGHT TO SUE DIRECTORS FOR CAUSING
WRONGFUL LOSS TOWARDS THE COMPANY' (2021) AZMI & ASSOCIATES
<Https://Www.Legal500.Com/Developments/Thought-Leadership/The-Right-To-Sue-Directors-For-Causing-
Wrongful-Loss-Towards-The-Company/> Accessed 06 March 2024
4
When are Directors in India Personally Liable? Go for D&O Insurance (2021) Bimakavach
<'https://www.bimakavach.com/blog/when-do-directors-become-personally-liable-in-india/> Accessed 06
March 2024
5
Michael van Vuren "Shareholder recourse for a director’s breach of fiduciary duties” (2022)
fasken<https://www.fasken.com/en/knowledge/2022/03/30-shareholder-recourse-for-a-directors-breach-of-
fiduciary-duties> Accessed 06 March 2024
6
"Debenture” (2022) bdc <https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-
guides/glossary/debenture> Accessed 06 March 2024
7
"Corporate Bonds and Debenture” (2022) ICSI <https://www.icsi.edu/media/filer_public/11/7e/117ee7f0-
acb6-4718-ac28-5a0a2ec8c518/corporate_bond_and_debenture_-_ver_4032021.pdf> Accessed 06 March 2024
Debt securities known as convertible debentures have the ability to be changed into shares at
the holder's option, usually for a specific amount. This feature gives the holder the ability to
have a part in the expansion of the business and maybe profit from its future success. Section
71 of the company’s cat allows companies to issue debentures with an option to convert them
into shares at a later date.

On the other hand, non-convertible debentures are only debt securities that offer the owner a
specific return and without this conversion possibility.

In order to raise capital, PEL may also take into consideration other debenture kinds such
secured, zero-coupon, and market-linked debentures 8. These alternative options will benefit
the PEL by giving the holders of debentures greater security. They also have the potential of
generating higher profits because they are based on the performance of a particular financial
market index or stock basket.

QUESTION 3 (ii)
According to section 71 of the companies act, A company may issue debentures with an
option to convert such debentures into shares, either wholly or partly at the time of
redemption. Section 62 of the companies Act grants holders of convertible debentures the
ability to convert their debentures into equity shares of a company at a certain conversion
ratio. 9Within the framework of convertible debentures, this section states the rights to issue
of shares and includes provisions on the conversion of instruments. in the Instant case, the
holders of convertible debentures can choose not take advantage of their conversion
right, though, as doing so might result in a loss for them considering the sudden drop in the
company's share price.

The situation affects current shareholders in terms of income dilution and share price. The
potential conversion of convertible debentures into equity shares might result in a decrease in
the value of the company's shares, especially if the conversion occurs while the share price is
already low. The investments made by present owners may lose even more value as a result
of this.
Convertible debentures into equity shares would also increase the total number of outstanding
shares of a corporation. Dilution would occur from the present shareholders' decreased
ownership position in this company's assets.

there the convertible debenture holders have the option to convert their debentures into equity
shares, the decision depends on factors, including the current share price, market conditions,
and the outlook for the company's future performance.
8
"Corporate Bonds and Debenture” (2022) ICSI <https://www.icsi.edu/media/filer_public/11/7e/117ee7f0-
acb6-4718-ac28-5a0a2ec8c518/corporate_bond_and_debenture_-_ver_4032021.pdf> Accessed 06 March 2024
9
Tabrez Ahmad, Prateek Kumar Singh, Snigdha Ghatak, Soumita Adhikary, 'The Regulation of Directorial
Conflict of Interest: Efficiency, Morality and Conflicting Values in Indian Perspective' (2009) <
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1473908 > SSRN, Accessed 06 March 2024
QUESTION 4(i) AND 4(ii)

According to section 26 of the companies act, its stats that the companies are required to
disclose all the relevant material facts in their prospectus. concealing any matter which play a
significance role such as pending litigation and supplier dependencies violates this provision.

Section 34 and 35 of the act states about the Criminal liability for mis-statements in
prospectus. Where a prospectus, issued, circulated or distributed includes any statement
which is untrue or misleading in form of any inclusion or omission of any matter is likely to
mislead, every person who authorizes the issue of such prospectus shall be liable under
section 447.

The case of SEBI v. Sahara India Real Estate Corporation Ltd. & Ors. highlighted
that promoters' need to provide investors with all relevant information. The Supreme Court
ruled that there could possibly be legal responsibility and regulatory sanctions for
withholding such information. 10
In the instant matter, ATL deliberately omitted two provisions from the prospectus regarding
their engagement in a patent infringement lawsuit and reliability of the company on a specific
technology component that is sourced from a single supplier. And therefore, violated the
legal provisions of the Companies Act, 2013, by not disclosing the patent lawsuit and the
reliance on a sole supplier in the IPO prospectus.

Further, in the instant case, Investors have the option to file an investment fraud case against
ATL for failing to disclose important information. This kind of litigation claims that the
business and its officials concealed information about the business from investors or
misrepresented it, causing them to base their opinions on misleading or inaccurate data. since,
the concelaing the facts about the pending suit can lead to decres in the revenue of the
company and reliyig on the speciific technology suppliers can lead to the heavy dependency
of suppiers can can signifcnatly impact on the production of the goods. Therefore under
section 26 and 34 of the act legal actions can the investors take against ATL for the non-
disclosure of material information.

QUESTION 5 (i)

Section 399 of the Indians Companies Act 2013, deals with the public documents of a
company like memorandum of association, article of association etc. These are the document
that are presumed to be known by anyone in the public domain. It means that anyone can
have the knowledge about that company especially. It is presumed that the party will know
everything about this company which is in public domain. In section 399 it specifically says
that registrar have the document of these companies which can be avail by anyone by giving

10
https://legalvidhiya.com/sahara-india-real-estate-corporation-limited-and-others-v-security-and-exchange-
board-of-india-sebi-case-no-8643-of-2012/?amp=1
some prescribed fees. Files all these documents are used for public inspection so if anyone
wants to come into a transaction with certain companies can know all the details about it.

In the case of, Satyabrata Ghose v. Mugneeram Bangur & Co. (AIR 1954 SC 44), The
Supreme Court emphasized about the importance that the parties who wants to perform a
transaction with a company should pay attention on those official documents like
memorandum and article of association of the company. 11 If someone is dealing with a
company, they should take time to understand these documents and what they mean this
decision reminds everyone that they need to be careful. Therefore, if Sohan Lal Word to
claim that they were unaware of the ongoing legal dispute over the land they acquired from
BLP builders, this claim may not hold up in court due to the presumption that they should
have known about such matters by virtue of interacting with the company.

QUESTION 5(ii)

Section 131 of the Companies Act 2013 deals with the maintenance of book of account and
financial record by the companies. From this section the principle of transparency and risk
closure is arise and is relevant in this case. The non-disclosure maybe considers as a breach
of trust and of a good faith in transaction between these companies. The importance of
maintaining the accurate financial record and all relevant information regarding that
companies which have to be given to the buyer while while any transaction take place. These
document goes to the registrar so they can be available in the public domain so they have to
be correct.

In the case of Smith vs Jones the court state that Full disclosure of the information is very
important in business transaction This case highlights that there are legal obligation of sellers
to disclose any known issue with the property that they are selling, Which aligns with the
principle described in section 131 of the Companies Act 2013. 12 Similarly in this, BLP
builders by not disclosing the ongoing legal dispute over the land to SLS during the
negotiation and sale, could be seen as withholding Information that could impact SLS’s
decision to acquire the land. It shows the dishonest intention of BLP builders.

QUESTION 6
The Companies Act, 2013, sets out rules and regulations to conduct the meetings to ensure
transparency, fairness, and stick to legal requirements. Shareholders' meetings play an
important role in corporate governance by providing a platform for shareholders to raise their

11
Shakti Divyansh, 'Landmark cases on Memorandum of Association' (2019)
<https://www.studocu.com/in/document/guru-gobind-singh-indraprastha-university/corporate-law/
caselawmoa/40695491> Studocu Accessed 06 March 2024

12
Don Ross "The Significance of Disclosure in a Business Transaction” (2015) Exit Strategies Group
<https://www.exitstrategiesgroup.com/significance-disclosure-business-transaction> Accessed 06 March 2024
concerns, propose resolutions, and actively participate in critical decisions which are
important to the company.

Section 102 of the companies act, 2013, guides about the rules and regulations related that
how meeting should be conducted. It tells about the attendants and agenda that have to be
discussed in that particular meeting with in a time period. Shareholders can put their
suggestions related to the agenda in the meeting. It talks about the nature about that meeting
agenda on which members will discuss. It helps the companies to work properly and in
formal manner. Further, Shareholders can also suggest topics to be discussed at the meeting,
but there are rules they have to follow, which are outlined in Section 100 of the Act.

Its main objective to provide the fair and organized meeting for the benefit of the company.
The agenda and all the sub topics of the meeting should be reached to the shareholders and all
the members. So, they can have a reasonable time to think about it and can discuss about it.
This helps the companies’ members to make the most out of that meeting by discuss
thoroughly and will be better. That’s why it should not be allowed to take out of the whole
different topic which is not listed in the agenda because other members do not have the
knowledge at that time and will not be able to discuss in depth.

In the case of Bhuwalka Steel Industries Ltd. v. Bhaskar Industries Ltd., the Court said
that it is important to follow the rules while submitting the agenda items to shareholder
before the meeting.13 It is compulsory for the shareholders to follow the notice period and the
submission guidelines set by the Companies Act to make sure that the proposals are treated
fairly. It is too important to stick to the legal requirements to keep shareholders meeting fair
and organized

There are certain measures that should be taken to ensure a fair and lawful resolution during
the meeting which have to be beneficial for the Company and at the same point they are
important for the shareholders and other members to have that mutual trust among
themselves. In the instant matter, Company secretary should take to the section 102 of the
Companies Act, 2013. If shareholders will bring out the other topics in the meeting, then it
will be difficult for the other members to discuss on those topics without having any prior
knowledge. It is necessary that every member of the company should stick to the laws which
also stated in the case Bhuwalka Steel Industries Ltd. v. Bhaskar Industries Ltd. It is highly
recommended to stick to the legal framework which helps in decision making fear and
protecting everyone’s interest. 14

13
Shakti Divyansh, 'Landmark cases on Memorandum of Association' (2019)
<https://www.studocu.com/in/document/guru-gobind-singh-indraprastha-university/corporate-law/
caselawmoa/40695491> Studocu Accessed 06 March 2024

14
Shakti Divyansh, 'Landmark cases on Memorandum of Association' (2019)
<https://www.studocu.com/in/document/guru-gobind-singh-indraprastha-university/corporate-law/
caselawmoa/40695491> Studocu Accessed 06 March 2024