Department of Commerce B.

Com
COURSE MATERIAL
SEMESTER - IV
COMPANY LAW AND SECRETARIAL PRACTICE

UNIT-I
Formation of Companies – promotion – Meaning – Promoters – their
functions – Duties of Promoters – Incorporation – Meaning – certification of
Incorporation – Memorandum of Association – Meaning – Purpose –
Alteration of Memorandum – Doctrine of Ultravires– Articles of Association -
Meaning – Forms – Contents – Alteration of Article – Relationship between
Articles and Memorandum – Doctrine of Indoor Management – Exceptions to
Doctrine of Indoor Management – Prospectus – Definitions – Contents.

Formation of a Company
The formation of a company is a lengthy process. For convenience the whole
process of company formation may be divided into the following four stages:
1. Promotion Stage
2. Incorporation or Registration Stage
3. Capital Subscription Stage
4. Commencement of Business Stage.

1. Promotion of a Company:
A business enterprise does not come into existence on its own. It comes into
existence as a result of the efforts of an individual or group of people or an
institution. That is, it has to be promoted by some person or persons. The
process of business promotion begins with the conceiving of an idea and ends
when that idea is translated into action i.e., the establishment of the business
enterprise and commencement of its business.
Who is a Promoter in a Company?
A successful promoter is a creator of wealth and an economic prophet. The
person who is concerned with the promotion of business enterprise is known as
the Promoter. He conceives the idea of starting a business and takes all the
measures required for bringing the enterprise into existence.

For example, Dhirubhai Ambani is the promoter of Reliance Industries.

The promoters find out the ways to collect money, investigate business ideas
arrange for finance, assemble resources and establishes a going concern.

The company law has not given any legal status to promoters. He stands in a
fiduciary position.

Types of Promoters
Promoters are different types such as professional promoters, occasional
promoters, promoter companies, financial promoters, entrepreneurs, lawyers
and engineers.

Promoter | Meaning | Functions | Legal Position

Promotion is the primary stage in any business in which an individual or a group
of people conceive an idea and is put into practice with the help of his or their
own resources, influence and skill. The term generally refers to the sum total of
all the activities connected with the formation of a company. The person who
undertakes all these activities is known as the promoter.
Meaning and Definition of a Promoter
We have already noted that the person who takes all necessary steps to create a
company and set it going is known as a promoter. He takes an active part in the
formation of a company. The Promoter need not be an individual. A firm, a
company or an association can be the promoter of a company. Even two or three
persons can also act as the promoters of the same company.

Thus, anyone can become the promoter of a company provided he performs all
the acts necessary to the formation of a company. The question as to whether a
person is a promoter or not, is not a question of law but a question of fact.

In this context, Bower, L.J., in Whaley Bridge Co. V. Green rightly observed as
follows:

“It is not a term of law but of business operations familiar to the commercial
world by which a company generally brought into existence”.
Therefore, the Act does not define the term promoter. But a number of judicial
decisions have tried to explain the term.

Definition of Haney:

“Promoter is a person who conceives the idea, studies the prospects of the
business critically, chalks out an at tentative scheme of organisation, brings
together the requisite men, materials, machinery, money and managerial ability
and float the enterprise”.
Functions of a Promoter
The definitions cited above clearly bring out the peculiar functions of a typical
promoter. They are as follows:

1. Promotion of an Idea: It is the promoter who has to conceive the idea of

forming a company. This is the first step towards the formation of a company. 2.
Detailed Investigation: The promoter, after forming an idea should make a
thorough and detailed investigation of the prospects of the business. It should be
done with reference to the sources of supply, nature of demand, extent of
competition, capital requirements of the present and future etc. He can also take
the help of technical experts.
3. Verification: The promoter should also verify whether the advises or
comments or reports made by the experts are free from bias. He should also
consult with other impartial and disinterested experts and should see whether the
idea is commercially viable.
4. Assembling: After verification of the idea, the promoter should go ahead
with the promotion of the projected company. He should find out the first
directors and the subscribers to the Memorandum.
5. Financing the Proposition: The promoter, at this stage, has to prepare a plan
setting out the mode of getting the necessary finance. He should arrange for
finance to meet the preliminary expenses. He should negotiate with the vendors
if it proposes to buy an existing business. He should also arrange for
underwriting contracts. He should estimate the required capital and the
availability of bank loan etc., and also the cost of raising the capital.
6. Presentation of the Proposition: Finally, after making necessary
arrangements and modes of raising finance, he gets the necessary documents
such as Memorandum etc. printed, filed with the Registrar and then arranges for
their publication. He should take the aid of legal experts in preparing the
documents and should see that the documents are strictly in accordance with the
provisions of the Companies Act.
Duties of Promoter:
The duties of promoters are as follows:
1. To disclose the secret profit:
The promoter should not make any secret profit. If he has made any secret
profit, it is his duty to disclose all the money secretly obtained by way of profit.
He is empowered to deduct the reasonable expenses incurred by him.

2. To disclose all the material facts:

The promoter should disclose all the material facts. If a promoter contracts to
sell the company a property without making a full disclosure, and the property
was acquired by him at a time when he stood in a fiduciary position towards the
company, the company may either repudiate the sale or affirm the contract and
recover the profit made out of it by the promoters.

3. The promoter must make good to the company what he has obtained as a
trustee:
A promoters stands in fiduciary position towards the company. It is the duty of
the promoter to make good to the company what he has obtained as trustee and
not what he may get at any time.

4. Duty to disclose private arrangements:

It is the duty of the promoter to disclose all the private arrangement resulting
him profit by the promotion of the company.

5. Duty of promoter against the future allottees:

When it is said the promoters stand in a fiduciary position towards the company
then it does not mean that they stand in such relation only to the company or to
the signatories of memorandums of company and they will also stand in this
relation to the future allottees of the shares.

Who can be a Promoter?

Just like the companies Act does not define the term promoter; it does not
specify who can act as promoter. Generally speaking, the first persons who are
desirous of acquiring control over the affairs of a company are its promoters.
They generally appoint themselves as the first directors. But even a company,
firm or syndicate can act as a promoter.

In many cases, the vendor of the property or business which the company is to
acquire, he acts in the capacity of a promoter. Mere employees or contractors or
a solicitor who prepares the documents are not promoters.

A person may become the promoter even after incorporation of the company if
he does all the acts concerned with the raising of capital or publishing the
prospectus.
Legal Position of the Promoter
The legal status of a promoter is incapable of precise statement because the law
is very silent on this debatable question. Lindley, L.J., while describing his
position in Wigpool Iron Ore Company’s case rightly remarked that

“the promoter is not an agent for the company nor a trustee for it before its
formation…..”.
The reason is obvious. An agent can act only for an existing principal. As the
company is not in existence at the time when the promoter started his work, he
can’t be considered as a trustee of the company. As such, a promoter stands in a
fiduciary relation to it.

Promoters, being in a fiduciary position, may not make, either directly or

indirectly, any profit at the expense of the company he promotes.

2. Registration of a Company
It is registration that brings a company into existence. A company is properly
formed only when it is duly registered under the Companies Act.

Procedure of Registration
In order to get the company registered, the important documents required to be
filed with the Registrar of Companies are as follows.

1. Memorandum of Association: It is to be signed by a minimum of 7 persons

for a public company and by 2 in case of a pvt company. It must be properly
stamped.
2. Articles of Association: This document is signed by all those persons who
have signed the Memorandum of Association.
3. List of Directors: A list of directors with their names, address and occupation
is to be prepared and filed with the Registrar of Companies. 4. Written consent
of the Directors: A written consent of the directors that they have agreed to act
as directors has to be filed with the Registrar along with a written undertaking to
the effect that they will take qualification shares and will pay for them.
5. Notice of the Address of the Registered Office: It is also customary to file
the notice of the address of the company’s registered office at the time of
incorporation. It is to be given within 30 days after the date of incorporation. 6.
Statutory Declaration: A statutory declaration by
a. any advocate of the Supreme Court or
b. of a High Court, or
 c. an attorney or pleader entitled to appear before a High Court or
d. a practicing chartered accountant in India, who engages in the
Company formation or
e. by a person indicated in the articles as director, managing director,
Secretary or manager of the company, mentioning that the requisites
of the Act and the rules there under have been complied with. It is to
be filed with the Registrar of Companies.
When the required documents have been filed with the Registrar along with the
prescribed fee, the Registrar scrutinizes the documents. If the Registrar is
satisfied, the name of the company is entered in the register. Then the Registrar
issues a certificate known as Certificate of Incorporation.

3. Certificate of Incorporation
On the registration of Memorandum of Association, Articles of Association and
other documents, the Registrar will issue a certificate known as the ‘Certificate
of Incorporation‘. The issue of certificate is the evidence of the fact that the
company is incorporated and the requirements of the Companies Act have been
complied with.
4. Certificate of Commencement of Business
As soon as a private company gets the certification of incorporation, it can can
commence its business. A public company can commence its business only after
getting the ‘certificate of commencement of business’. After the company gets
the certificate of incorporation, a public company issues a prospectus for
inviting the public to subscribe to its share capital. It fixes the minimum
subscription. Then it is required to sell the minimum number of shares
mentioned in the prospectus.
After completing the sale of the required number of shares, a certificate is sent
to the Registrar along with a letter from the bank stating that all the money is
received.

The Registrar then scrutinizes the documents. If he is satisfied he issues a

certificate known as ‘Certificate of Commencement of Business’. This is the
conclusive evidence for the Commencement of Business.

Memorandum of Association | Meaning | Contents of MOA

What is a Memorandum of Association?
Memorandum of Association is the most important document of a company. It
states the objects for which the company is formed. It contains the rights,
privileges and powers of the company. Hence it is called a charter of the
company. It is treated as the constitution of the company. It determines the
relationship between the company and the outsiders.
The whole business of the company is built up according to Memorandum of
Association. A company cannot undertake any business or activity not stated in
the Memorandum. It can exercise only those powers which are clearly stated in
the Memorandum.

Definition of Memorandum of Association

Lord Cairns:

“The memorandum of association of a company is the charter and defines the

limitation of the power of the company established under the Act”.
Thus, a Memorandum of Association is a document which sets out the
constitution of the company. It clearly displays the company’s relationship with
outside world. It also defines the scope of its activities. MoA enables the
shareholders, creditors and people who has dealing with the company in one
form or another to know the range of activities.

Contents of Memorandum of Association

According to the Companies Act, the Memorandum of Association of a
company must contain the following clauses:

1. Name Clause of Memorandum of Association

The name of the company should be stated in this clause. A company is free to
select any name it likes. But the name should not be identical or similar to that
of a company already registered. It should not also use words like King, Queen,
Emperor, Government Bodies and names of World Bodies like U.N.O., W.H.O.,
World Bank etc. If it is a Public Limited Company, the name of the company
should end with the word ‘Limited’ and if it is a Private Limited Company, the
name should end with the words ‘Private Limited’.

2. Situation Clause of Memorandum of Association

In this clause, the name of the State where the Company’s registered office is
located should be mentioned. Registered office means a place where the
common seal; statutory books etc., of the company are kept. The company
should intimate the location of registered office to the registrar within thirty
days from the date of incorporation or commencement of business.

The registered office of a company can be shifted from one place to another
within the town with a simple intimation to the Registrar. But in some situation,
the company may want to shift its registered office to another town within the
state. Under such circumstance, a special resolution should be passed. Whereas,
to shift the registered office to other state, Memorandum should be altered
accordingly.
3. Objects Clause of Memorandum of Association
This clause specifies the objects for which the company is formed. It is difficult
to alter the objects clause later on. Hence, it is necessary that the promoters
should draft this clause carefully. This clause mentions all possible types of
business in which a company may engage in future.

The objects clause must contain the important objectives of the company and
the other objectives not included above.

4. Liability Clause of Memorandum of Association

This clause states the liability of the members of the company. The liability may
be limited by shares or by guarantee. This clause may be omitted in case of
unlimited liability.

5. Capital Clause of Memorandum of Association

This clause mentions the maximum amount of capital that can be raised by the
company. The division of capital into shares is also mentioned in this clause.
The company cannot secure more capital than mentioned in this clause. If some
special rights and privileges are conferred on any type of shareholders mention
may also be made in this clause.

6. Subscription Clause of Memorandum of Association

It contains the names and addresses of the first subscribers. The subscribers to
the Memorandum must take at least one share. The minimum number of
members is two in case of a private company and seven in case of a public
company.

Thus the Memorandum of Association of the company is the most important

document. It is the foundation of the company.

Purpose of Memorandum of Association

The main purpose of the memorandum is to explain the scope of activities of the
company. The prospective shareholders know the areas where the company will
invest their money and the risk they are taking in investing the money.
The outsiders will understand the limits of the working of the company, and
their dealings with it should remain within the prescribed scope.
ALTERATION OF MEMORANDUM
As a matter of course Memorandum of Association is not alterable. In fact the
words of the Memorandum cannot be changed that easily. It is said that
“Memorandum of Association is an unalterable document alterable only in
accordance with the provisions of the law”
Alteration of Memorandum of Association under the Common Law Under
the Common Law the Joint Stock Companies Act 1856, which introduced the
Memorandum of Association into company law, made no provisions for the
alteration of a memorandum. Companies Act 1862 permitted a company to
change its name and its authorized share capital, but forbade any other
alteration. Subsequent acts have extended the range of alteration that may be
made. The CA Act 1985 S.2 (7) provides: A company may not alter conditions
contained in the memorandum except in the case in the mode and to that extend,
for which express provision is made by this Act. The court has in Scott v. Scott
Ltd. held that even if inadvertently the memorandum of a company does not
correctly express the wishes of its subscribers, the court doesn’t to have power
to rectify the mistake after the company has been registered.
Alteration of Memorandum of Association under Indian Law Several
restrictions have been imposed as far as the alteration of Memorandum of
Association is concerned. The quantum of such restrictions can be seen under
S.16 of the Companies Act.
Alteration of Name Clause
Alteration of the name of a company can be effected by two methods.
By special Resolutions and Permission of the government: The Law regarding
the change of name of a company is laid down under section 21 of CA. The
section provides that the name of a company may be changed at any time by
passing a special resolution at a general meeting of the company and with the
written approval of the central government. However no such approval is
required if the change of name involves addition or deletion of the word
“private”
By rectification of omission in name: If by oversight or mistake a company is
registered with a name which is the same or similar to the name of an existing
company, the company may change its name by passing an ordinary resolution
and getting a written permission from the Central government. In such a case
the central government within a period of one year of the first registration or
registration under a changed name can direct the company to change its name.
In such a situation, the company must alter its name by passing an ordinary
resolution within three months from the date of such direction.
After the alteration of name of the company, the registrar should write the new
name in the place of old name. Accordingly the certificate of newly incorporated
company should be issued. If and when the certificate of newly incorporated
company is received, then only the company’s name is recognized.
With the change of the name of the company the power and responsibilities are
not changed. Because of this change of the name legal affairs of the company
are not affected. Besides it does not affect the company’s existence. But after the
new name is registered the legal affairs cannot be continued with the old name.
The legal effect of change in name clause can be illustrated by the decision of
the Calcutta High Court in the case of Malhati Tea Syndicate v. Revenue Officer
wherein a company changed its name from Malhati Tea Syndicate Ltd. to
Malhati Tea and Industries Ltd. It filed a writ petition in its former name.
Declaring the petition to be invalid the court said that nothing in the Act
authorized the company to commence legal proceedings in its former name at a
time when it had acquired its new name which has been put on the register of
joint stock companies.
Alteration of Registered Of ice Clause
A company may change the situation of its registered office for the smooth
running of its business and the realization of its objects. Such change in the
situation can be: (a) from one place to another in the same city or town (b) from
one town to another in the same state and (c) from one state to another.
Shifting from one place to another in the same city or town: If the registered
office of the company is to be shifted from one place to another in the same city
or town, the board of directors must pass a resolution to that effect and give the
name address of its registered office to the RoC within 30 days after the date of
the change of address.
Shifting from one town to another in the same state: IF the company wants to
shift its registered office from one town to another in the state, it shall pass a
special resolution to that effect at its general meeting and send the notification to
the registrar within 30 days. It shall give the new address of its registered office
to the registrar.
Shifting from one state to another: This kind of shifting is a much more
complicated affair, as it involves alteration of the memorandum itself. The
alteration of the memorandum for this purpose is subject to the provisions of
Section 17 which requires, in the first place, a special resolution of the company
and in the second, confirmation by the Company Law Board can confirm the
alteration only if the shifting of the registered office from one state to another is
necessary for any of the purpose detailed in section 17. When this condition is
fulfilled, the second stage is reached namely to consider the objections of a
person or class of person whose interest will in the opinion of CLB be affected
the alteration.
 The Supreme Court in Mackinnon v. Mackenzie & Co refused to sustain the
contention of the state and allowed the transfer of the company to another state.
The court said there is no statutory right of the state as a state to intervene in an
application made under section 17 for alteration of the place of the registered
office of a company. To hold that the possibility of the loss of revenue is not
only relevant but of persuasive force in regard to change is to rob the company
of the statutory power conferred on it by section 17. The question of loss of
revenue to one state would have to be considered in the total conspectus of
revenue for the Republic Of India and no parochial considerations should be
allowed to turn the scale in regard to change of registered office.
Alteration of Object Clause
Plainly speaking, it is very difficult to alter the objects clause because the law
has laid down strict limitations on such alteration. Section 17 of the CA defines
the limitations and any alteration must necessarily be within these limitations.
The limits imposed upon the power of alteration are of two kinds, namely
substantive and procedural. The former defines the physical limits of alteration
and the latter the procedure by which it can be effected. The alteration of object
clause involves:
Special Resolution: In the first place, the company has to call a general meeting
of its members and pass a special resolution and file a certified copy of the
resolution with the central government.
Ratification by the central government: After this, the application for proposed
alteration is filed with the central government. The application shall be
scrutinized by the government before confirming the alteration.
Registration of alteration: A certified copy of the order of the central
government shall be filed by the company with the ROC along with the printed
copy of the altered memorandum within three months from the date of the order.
The registrar shall register the same and certify the registration under his hand
within one month of the date of filing such documents.
The Doctrine of Ultra Vires Meaning
The doctrine of ultra vires is a fundamental law of the Indian Companies Act. It
lays down that if any act of the company or any contract entered into by the
directors, on behalf of the company, is beyond the powers vested in the directors
and company by the object clause of the MOA, it is considered null and void.
Such null and void acts/contracts are not legally binding on the company. The
term ‘ultra vires’ applies to those acts that are performed beyond the legal
powers stipulated under the objects clause.
The doctrine of ultra vires limits the acts of the company within the boundaries
set by the objects clause of the MOA. Hence the company
● Must use the funds of the company only for purposes specified in the MOA

● Must carry on a business/ trade that has been specified in the MOA
The doctrine of ultra vires acts as a safeguard for the creditors and investors of
the company as it prevents the company from using the money of the investors
for any purpose other than those mentioned under the objects clause. The
creditors are also assured of the fact that the funds of the company will not be
utilized in any unauthorized trade/business or activity. It also acts as a check on
the activities of the directors who must act within the scope of powers given to
them by the MOA.

Legal Binding on the Company as per the Ultra Vires Law

Any acts or contracts that are ultra vires cannot be held legally binding for the
company. The company cannot pursue legal recourse to recover any money for
any goods or services offered under an ultra vires contract. An ultra vires
borrowing will not be legally binding upon the company and cannot be enforced
by an outsider in the court of law.
Estoppel, the lapse of time, acquiescence, delay or ratification cannot turn ultra
vires act into ‘intra vires’ in all cases.

Exceptions to the Doctrine of Ultra Vires

● Any act that is done in an irregular manner but is otherwise intra-vires the
company can be validated/ratified by the shareholders of the company.
● Any act which ultra-vires the directors of the company but is otherwise
intra-vires the company can be ratified by the shareholders of the
company.
● If any act is ultra vires the articles of the company, then the articles of
association of the company can be altered by a special resolution to
validate the act.
Case Law: Shuttle worth vs. Cox Brothers and Company, Limited, and
Others
● Even if a property acquisition by the company is ultra-vires, the right of the
company over such property will stay secured.
● Any incidental or consequential effect of the ultra-vires act will not be
 invalid unless explicitly prohibited by the Companies Act.
● If any action is intra vires the Company’s Act, it will not be considered
ultra-vires even if it is not expressly stated in the memorandum.

Types of Ultra Vires Acts and Their Ratifications

There are primarily four Types of Ultra Vires Acts:
1. Acts that are ultra vires to the Companies Act- Such acts are void-ab-initio
and cannot be ratified in any situation.
2. Acts that are ultra vires to the Memorandum of the company- They cannot
be ratified even by shareholders as they are void-ab-initio.
3. Acts that are ultra vires to the Articles of the company but intra-vires the
company- They can be ratified by the shareholders by making alterations
in the articles to that effect.
4. Acts that are ultra vires to the directors of the company but intra-vires the
company- They can be ratified by the company and will then become
binding.

Articles of Association | Meaning | Contents | Alteration of AoA

Understanding Articles of Association
An article of Association is an important document of a Joint Stock Company. It
contains the rules and regulations or bye-laws of the company. They are related
to the internal working or management of the company. It plays a very important
role in the affairs of a company. It deals with the rights of the members of the
company between themselves.

The contents of articles of association should not contradict with the Companies
Act and the MOA. If the document contains anything contrary to the Companies
Act or the Memorandum of Association, it will be inoperative. The pvt concern
that is limited by shares and those limited by guarantee and unlimited
companies must have their articles of association. sxs given in Table A of
Schedule I of Companies Act, 1956. If a public company has only some articles
of its own, for the rest, articles of Table A will be applicable.
Articles that are profound to be registered should be printed, segmented well
and sequenced consecutively. Each subscriber to Memorandum of Association
must sign the articles in the presence of at least one witness.

Contents of Articles of Association

The articles generally deal with the following

1. Classes of shares, their values and the rights attached to each of them.

2. Calls on shares, transfer of shares, forfeiture, conversion of shares and

alteration of capital.

3. Directors, their appointment, powers, duties etc.

4. Meetings and minutes, notices etc.

5. Accounts and Audit

6. Appointment of and remuneration to Auditors.

7. Voting, poll, proxy etc.

8. Dividends and Reserves

9. Procedure for winding up.

10. Borrowing powers of Board of Directors and managers

etc. 11. Minimum subscription.

12. Rules regarding use and custody of common seal.

13. Rules and regulations regarding conversion of fully paid shares into

stock. 14. Lien on shares.

Alteration of Articles of Association

The alteration of the Articles should not sanction anything illegal. They should
be for the benefit of the company. They should not lead to breach of contract
with the third parties. The following are the regulations regarding alteration of
articles:

A company may alter its Articles with a special resolution. Due importance and
care should be given to ensure that the alteration of AOA does not conflict with
the provisions of the Memorandum of Association or the Companies Act. A
copy of every special resolution altering the Articles must be filed with the
Registrar within 30 days of its passing.

1. The proposed alteration should not contravene the provisions of the

Companies Act.

2. The proposed alteration should not contravene the provisions of the

Memorandum of Association.

3. The alteration should not propose anything that is illegal.

4. The alteration should be bonafide for the benefit of the company.

5. The proposed alteration should in no way increase the liability of existing

members.

6. Alteration can be made only by a special resolution.

7. Alteration can be done with retrospective effect.

8. The Court does not have any power to order alteration of the Articles of
Association.

Relationship between the Memorandum and Articles

The following are some of the relation between Memorandum of Association

and Articles of Association
1. Charter of the company, and defines Bye law or internal regulation of
and also confines the fundamental the company.
conditions and objects for which
company is granted incorporation.
2. Subordinate to the Companies Act. Subordinate to the Memorandum.
3. Principal document. Secondary Document.
4. Specifies the scope of authority and Specifics the procedures to be
the objectives. followed to carry out the objectives
stated in the Memorandum.

5. Defines the relationship between company and outsiders.

 Defines the relationship between the between the members inter se.
company and its members and
6. Alteration is difficult. Alteration is comparatively easy.
7. Memorandum is compulsory for all The company need not have its
companies. own Articles. Instead, it can adopt
Table A as its Articles.
8. Acts to Memorandum cannot be Acts ultra viresto Articles can be
ratified and outsiders have no remedy ratified by suitable legal
against the company. formalities. Outsiders have a
remedy even if the act is ultra vires
the Articles.
9. It is not easy to alter the The Articles can be altered easily
Memorandum. In some cases, the by a Special resolution provided
alteration requires a special resolution the changes are lawful and within
and confirmation by the National the limits of the company.
Company Law Tribunal.

1. Both these documents are subordinate to the Companies Act.

2. Both these documents are public documents. Members of the company and
outsiders can inspect them and can purchase a copy of them by paying the
prescribed fee in the office of the Registrar.

3. The Articles cannot modify the terms of the Memorandum.

4. The Memorandum must always be read together with the Articles while
clarifying certain things
Doctrine of Indoor Management
Section 399 of the Companies Act, 2013, specifies the rules and regulations
governing the inspection, production, and evidence of documents with the
Registrar. In this article, we will look at the doctrine of constructive notice, the
doctrine of indoor management, and exceptions to the indoor management rule.

Doctrine of Constructive Notice

Section 399 allows any person to electronically inspect, make a record, or get a
copy/extracts of any document of any company which the Registrar maintains.
There is a fee applicable for the same. The documents include the certificate of
incorporation of the company.

By now we know that the Memorandum and Articles of Association are public
documents. This section confers the right of inspection to all.
Before any person deals with a company he must inspect its documents and
establish conformity with the provisions. However, even if a person fails to read
them, the law assumes that he is aware of the contents of the documents. Such
an implied or presumed notice is called Constructive Notice.

In simpler words, if a person enters into a contract which is beyond the powers
of a company, then he has no right under the said contract against the company.
The Memorandum of Association defines the powers of the company. Also, if
the contract is beyond the authority of the directors as defined in the Articles,
the person has no rights.

Doctrine of Indoor Management

The doctrine of indoor management is an exception to the earlier doctrine of

constructive notice. It is important to note that the doctrine of constructive
notice does not allow outsiders to have notice of the internal affairs of the
company.

Hence, if an act is authorized by the Memorandum or Articles of Association,

then the outsider can assume that all detailed formalities are observed in doing
the act. This is the Doctrine of Indoor Management or the Turquand Rule. This
is based on the landmark case between The Royal British Bank and Turquand. In
simple words, the doctrine of indoor management means that a company’s
indoor affairs are the company’s problem.

Therefore, this rule of indoor management is important to people dealing with a

company through its directors or other persons. They can assume that the
members of the company are performing their acts within the scope of their
apparent authority. Hence, if an act which is valid under the Articles is done in a
particular manner, then the outsider dealing with the company can assume that
the director/other officers have worked within their authority.

Exceptions to the Doctrine of Indoor Management

The Turquand rule or the law of indoor management is not applicable to the
following cases:

The outsider has actual or constructive knowledge of an irregularity

In such cases, the rule of indoor management does not offer protection to the
outsider dealing with the said company.
The outsider behaves negligently
The rule of Indoor management does not protect a person dealing with a
company if he does not initiate an inquiry despite suspecting an irregularity.
Further, this rule does not offer protection if the circumstances surrounding the
contract are suspicious. For example, the outsider should get suspicious if an
officer purports to act in a manner outside the scope of his authority.

Forgery
The doctrine of indoor management is applicable to irregularities that affect a
transaction except for forgery. In case of a forgery, the transaction is deemed
null and void.

Solved Question on Doctrine of Indoor Management

Q: Peter receives a share certificate of ABC Limited issued under the seal of the
company. The company’s secretary issues the certificate after affixing the seal
and forging the signature of the two directors. Peter files a lawsuit claiming that
the forging of signatures is a part of the internal management of the company.
Further, he requests the court to estop the company from denying the
genuineness of the document. Is Peter’s claim valid?

Answer: According to the exceptions to the doctrine of indoor management, a

transaction involving forgery is null and void. Hence, the court holds the
document null. Peter’s claim is not valid.

Prospectus

Prospectus meaning

1. The prospectus is a legal document, which outlines the company’s

financial securities for sale to the investors.
2. According to the companies act 2013, there are four types of the
 prospectus, abridged prospectus, deemed prospectus, red herring
prospectus, and shelf prospectus.

Prospectus Definition
The prospectus is a legal document for market participants and investors to
pursue, detailing the features, prospects, and promise of a financial product.
It is mandated by the law to be supplied to prospective customers.
Prospectus Example
In an IPO, the prospectus tells potential shareholders about the company’s plans
and business model.
For insurance and investment fund customers, a prospectus lists out the
objective of the product, inclusions, and exclusions, fees, etc.
For an ETF, a prospectus informs likely investors of the fund’s goals, history,
portfolio, fees and costs, and other financial details.

What is a Prospectus and its importance?

The company provides prospectus with capital raising intention. Prospectus
helps the investors to make a well-informed decision because of the prospectus
all the required information of the securities which are offered to the public for
sale.
Whenever the company issues the prospectus, the company must file it with the
regulator. The prospectus includes the details of the company’s business,
financial statements.

1. To notify the public of the issue

2. To put the company on record with regards to the terms of the issue and
allotment process
3. To establish accountability on the part of the directors and promoters of
the company

Types of prospectus
According to Companies Act 2013, there are four types of prospectus.
Deemed Prospectus – Deemed prospectus has mentioned under Companies
Act, 2013 Section 25 (1). When a company allows or agrees to allot any
securities of the company, the document is considered as a deemed prospectus
via which the offer is made to investors. Any document which offers the sale of
securities to the public is deemed to be a prospectus by implication of law.
Red Herring Prospectus – Red herring prospectus does not contain all
information about the prices of securities offered and the number of securities to
be issued. According to the act, the firm should issue this prospectus to the
registrar at least three before the opening of the offer and subscription list.
Shelf prospectus – Shelf prospectus is stated under section 31 of the
Companies Act, 2013. Shelf prospectus is issued when a company or any public
financial institution offers one or more securities to the public. A company shall
provide a validity period of the prospectus, which should not be more than one
year. The validity period starts with the commencement of the first offer. There
is no need for a prospectus on further offers. The organization must provide an
information memorandum when filing the shelf prospectus.
Abridged Prospectus – Abridged prospectus is a memorandum, containing all
salient features of the prospectus as specified by SEBI. This type of prospectus
includes all the information in brief, which gives a summary to the investor to
make further decisions. A company cannot issue an application form for the
purchase of securities unless an abridged prospectus accompanies such a form.

What is prospectus and its contents?

The prospectus contents are specified in the Companies Act. The prospectus
must touch over the following content points:

1. Details of the company, such as name, registered office address, and

objects
2. Details of signatories to the Memorandum and their shareholding
particulars
3. Details of the directors
4. Details of shares offered and the class of the issue as well as voting rights
5. Minimum subscription amount
6. The amount payable on application, on allotment, and on further calls
7. Underwriters of the issue
8. Auditors of the company
9. Audited reports regarded profit and losses of the company