Chapter 2 Formation & Incorporation of the Companies 2.

PM: Explain in brief the mode of incorporation of a company.[IMP]

Chapter 2: Provision: [Section 3(1)(a) of the Companies Act, 2013]
1) Mode of registration/incorporation of company:
Incorporation of the Company a) A public company may be formed for any lawful purpose with 7 or more
persons by subscribing their names to a memorandum and complying with

and the matters thereto. the requirements of the Companies Act for the registration of companies.
b) In exactly the same way, under section 3 (1)(b), 2 or more persons can form
a private company.
Section 3: Formation of Company
c) Under section 3 (1)(c) a one person company may be formed by one person
in which case the company will be a private company.
MTP-II JAN25: Mr. Kaushal is a Chartered and an MBA by profession, has been
2) Persons who conceive the idea of forming the company and form the same
appointed as an Executive Director on the Board of XYZ Limited. His job
under the provisions of the Act are known as promoters. They shall take all
profile includes advising the Board of Directors of the company on various
necessary steps for its registration.
compliance matters, strategies, business plans, and risk matters relating to
3) Points to be considered while Incorporating a company:
the company. Keeping in view of above position whether Mr. Kaushal can be
classified as the Promoter of XYZ Limited? Examine the same under the (i) Lawful purpose: The essence of validly incorporated company is that it
must consist of a particular number of persons and must be set up for a
provisions of the Companies Act, 2013.
lawful purpose. Unless the purpose appears to be unlawful ex facie or is
Provision: [Section 2(69) of the Companies Act, 2013] transparently illegal or prohibited by way of statute, it cannot be regarded
According to section 2(69) of the Companies Act, 2013, Promoter means a as an unlawful purpose.
person: (ii) Applying for the name: The promoters of the company should decide upon
a) Who has been named as such in a prospectus or is identified by the company at least three suitable names in order of preference in order to afford
in the annual return; or flexibility to the Registrar in deciding on the availability of the best possible
b) Who has control over the affairs of the company, directly or indirectly available name.
whether as a shareholder, director or otherwise; or (iii) Documents to be filed: After getting the name approved, certain
c) In accordance with whose advice, directions or instructions the Board of documents along with the application and prescribed fees should be filed
Directors of the Company is accustomed to act. with the Registrar.
Provided that nothing in sub-clause (c) shall apply to a person who is acting (iv) Subscribing their names: Subscribing the names means signing the
merely in a professional capacity. names in the Memorandum signifying their intention to jointly form a
As the job profile of Mr. Kaushal is only limited to advise the Board of Directors company and take up the number of shares mentioned against each.
on various compliance matters, strategies, business plans and risk matters (v) Certificate of incorporation: Upon the registration of the documents
relating to business of the company and that to only in a professional capacity, he mentioned earlier under the head “Documents to be filed for registration
will not be classified as a Promoter of XYZ Limited. of the company” and the payment of the necessary fees, the Registrar of
Companies issues a certificate that the company is incorporated, and in the
case of a limited company that it is limited.

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RTP Sept24: Prashant incorporated a "One Person Company" making his sister M.18 OLD: Mr. A and B are partners in a firm AB & Co. since the last 10 years.
Priya as the nominee. Priya is an Indian citizen. She was born and brought up Now their business has crossed ₹20 crores and they want to form a private
in Kanpur. However, now Priya and her husband are leaving India limited company to take over the firm's business and to expand it at large
permanently to stay with their son who is settled abroad for the last 15 years. scale. They approached their auditor to assist to incorporate a company in the
Due to this fact, she is withdrawing her consent of nomination in the said One name of AB Trading Private Ltd. Explain in brief what documents are required
Person Company. Taking into considerations the provisions of the Companies to be filed with the Registrar of Companies?
Act, 2013 answer the questions given below. Provision: [Section 3(1)(b) of the Companies Act, 2013]
(i) If Priya is leaving India permanently, is it mandatory for her to withdraw 1) As per section 3 (1)(b) of the Companies Act, 2013, a Private company may be
her nomination in the said One Person Company? formed for any lawful purpose with two or more persons by subscribing their
(ii) In case Priya withdraws her nomination as a nominee to the OPC, names to a memorandum and complying with the requirements of this Act in
whether Prashant can appoint his minor son Rushang as the nominee of respect of registration of company.
the OPC? [V.IMP] 2) After getting the name approved, the following documents along with the
Provision: [Section 2(62) & 3 of the Companies Act, 2013] application and prescribed fee, are to be filed with the Registrar:-
(i) According to Rule 3 of the Companies (Incorporation) Rules, 2014, only a a) Memorandum of Association
natural person who is an Indian citizen whether resident in India or otherwise b) Articles of Association
shall be eligible to incorporate a One Person Company. c) The agreement, if any, which the company proposed to enter into with any
In the given question Priya is an Indian citizen and a resident of India. Thus, if individual for appointment as its Managing or Whole Time Director or
Priya is able to maintain her Indian citizenship status in India after moving Manager.
abroad then she can remain as nominee in OPC of Prashant irrespective of d) A declaration that requirements of the Act and the rules framed there
her residential status. under have been complied with. This declaration is required to be signed
(ii) The memorandum of One Person Company shall also indicate the name of by an advocate of the Supreme Court or High Court or an attorney or a
the natural person, other than minor; who is an Indian citizen, whether pleader having the right to appear before High Court / CS/ CA in whole time
resident in India or otherwise (as nominee), along with his prior written practice in India who is engaged in formation of a company, or by person
consent, who shall, in the event of the subscriber’s death or his incapacity to named in the Articles as a Director, Manager or Secretary of the company.
contract become the member of the company. e) A company shall, on and from the 30th day of incorporation and all times
In the light of the above provision, it is clear that a minor cannot be thereafter, have a registered office capable of receiving and acknowledging
appointed as a nominee/ member of OPC. Hence, Prashant cannot appoint all communications and notices as may be addressed to it.
his son Rushang as a nominee to his OPC. f) Apart from the above the company shall furnish to the Registrar a
verification of a registered office under Section 12(2) within 30 days of
incorporation in such manner as prescribed.
Answer:
The above documents are required to be filled with the registrar of companies.

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Sec.3A: Members severally liable in certain cases period of 1 month shall be severally liable for the payment of the whole debts of
the company contracted during that time, and may be severally sued therefor.
N.19 RTP: Red Limited was incorporated on 1st April, 2014 is facing severe
effects of depression of the economy. Owing to its bad financial status most of MTP Nov21: What is the minimum number of persons required to form a
the members have started withdrawing their holding from the company. The Private company and a Public company. Explain the consequences when the
company had 250 members on 10th January, 2019. By 15th January, 2019, 244 number of members falls below the minimum prescribed limit. [V.IMP]
members had withdrawn their holding. No new member has invested in the
Provision: [Section 3A of the Companies Act, 2013]
company after 15th February till date. Now, Mr. A, an existing member has
1) According to section 3 of the Companies Act, 2013, a company may be formed
approached you to advise him regarding his liabilities in such a situation
[LDR IMP] for any lawful purpose by—
Provision: [Section 3A of the Companies Act, 2013] a) 7 or more persons, where the company to be formed is to be a public
1) A public company may be formed for any lawful purpose with 7 or more company;
persons by subscribing their names to a memorandum and complying with b) 2 or more persons, where the company to be formed is to be a private
requirements of the Companies Act for registration of companies. company; or
2) In exactly the same way, under section 3 (1)(b), 2 or more persons can form a c) by subscribing their names or his name to a memorandum and complying
private company. with the requirements of this Act in respect of registration.
3) Under section 3 (1)(c) a one person company may be formed by one person in 2) According to section 3A,
which case the company will be a private company. a) If at any time the number of members of a company is reduced,
4) According to section 3A of the Companies Act, 2013, i) in the case of a public company, below 7,
a) If at any time the number of members of a company is reduced, in the case ii) in the case of a private company, below 2,
of a public company, below seven, in the case of a private company, below iii) and the company carries on business for more than six months while
two. the number of members is so reduced, then
b) and company carries on business for more than 6 months while the b) every person who is a member of company during the time that it so
number of members is so reduced then, carries on business after those 6 months and is cognizant (aware) of fact
c) every person who is a member of the company during the time that it so that it is carrying on business with less than 7 members or 2 members, as
carries on business after those 6 months and is cognisant of the fact that it the case may be,
is carrying on business with less than 7 members or 2 members, as the case c) shall be severally liable for the payment of the whole debts of the company
may be, shall be severally liable for the payment of whole debts of the contracted during that time (after 6 months) and may be severally sued
company contracted during that time, and may be severally sued therefore. therefore.
Explanation & Answer:
Hence, in the given situation, the number of member in the said public company
have fallen below 7 [250-244=6] and these members have continued beyond the
specified limit of 6 months, the reduced members of the company during the

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Section 4: Memorandum of Association and 1) The company has to pass a GM-SR for alteration of MOA. So the same
resolution will be required for alteration of Name as it is part of MOA.
Section 13: Alteration of MOA 2) The company need to take prior CG approval for alteration of its name as it is
required u/s 13(6). So that the name altered will not show any connection
M06: The Directors of "Sunrise Computers Ltd." desire to change the Company's
with government or local authority.
name to "Royal Computers Ltd." and seek your advice. Explain the procedure to 3) But, if such change in name is due to addition or deletion of word “Private”
be followed, for the said purpose, under the Companies Act, 2013. [LDR IMP] due to company’s conversion from one type of company to another then
Provision [Section 13 of the Companies Act, 2013] approval of CG not required. [Sec 16(2)]
1) The company needs to pass a GM-SR for alteration of MOA. So the same 4) Application for change in name will be filed in form INC24,
resolution will be required for alteration of Name as it is part of MOA. 5) When any change in the name of a company is made under sub-section (2),
2) The company needs to take prior CG approval for alteration of its name as it is the Registrar shall enter the new name in the register of companies in place of
required u/s 13(6), so that the name altered will not show any connection with the old name and issue a fresh certificate of incorporation with the new name
government or local authority. and the change in the name shall be complete and effective only on the issue
3) But, if such change in name is due to addition or deletion of word “Private” of such a certificate.
due to company’s conversion from one type of company to another then 6) Fresh Certificate of Incorporation will be issued in Form INC25.
approval of CG not required. [Sec 16(2)] Explanation & Answer:
4) Application for change in name will be filed in form INC24, 1) In the given case, Mars Textile India Ltd., should ascertain from the Registrar
5) When any change in the name of a company is made under sub-section (2), of Companies whether the proposed name viz. National Textiles and Industries
the Registrar shall enter the new name in the register of companies in place of Ltd.is available or not.
the old name and issue a fresh certificate of incorporation with the new name 2) For this purpose, the company should file the prescribed Form No.1A with the
and the change in the name shall be complete and effective only on the issue Registrar along with the necessary fees.
of such a certificate. 3) The Registrar after examination will inform whether the new name is available
6) Fresh Certificate of Incorporation will be issued in Form INC25. or not for registration. Thereafter, Mars Textile India Ltd. should follow the
Explanation & Answer: above-mentioned procedure for changing the name.
In the given case, the Directors of "Sunrise Computers Ltd." should follow above
mentioned procedure in order to change the name to “Royal Computers Ltd." J09: India Cosmetics Limited was a registered company under Indian Companies
Act, 2013. Later on, another company, India Cosmetics and Accessories Limited
M03, PM: The Directors of a company registered and incorporated in the name was formed and registered. There being similarity in the names of both the
"Mars Textile India Ltd." desire to change the name of the company entitled Companies, India Cosmetics Limited lodged a complaint against India Cosmetics
"National Textiles and Industries Ltd." Advise as to what procedure is required and Accessories Limited, with the Registrar of Companies, stating that there is
to be followed under the Companies Act, 2013? [IMP] sufficient similarity between these two names which may mislead or defraud
Provision [Section 13 of the Companies Act, 2013]

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the public. India Cosmetics and Accessories Limited is intending to alter its
name. Advise India Cosmetics and Accessories Limited to alter the name of the J09: Aman an engineer has started a new company with the name of Nuts and
Company according to the provisions of the Companies Act, 2013. [LDR IMP] Bolts Private Limited. He got registered a company with the same name.
Provision [Section 16 of the Companies Act, 2013] However, Nuts and Bolts is a registered trademark. After 5 years when the
1) If the company already registered with the name which is in the opinion of the owner of trademark came to know about the same, it filed an application with
Central Government, is identical with or too nearly resembles the name by relevant authority. Can the company be compelled to change its name by the
which a company in existence had been previously registered, whether under owner of trademark? Can the owner of registered trademark request the
this Act or any previous company law; then company shall change such name company and then company change its name at its discretion?
within 3 months from order of CG by passing GM-OR for such change. Provision [Section 16 of the Companies Act, 2013]
2) If at any point of time before completion of 3 years of incorporation & 1) According to section 16 of the Companies Act, 2013 if a company is registered
registration or change in name of Company an owner/proprietor of trade mark by a name which,:
registered under the Trade Marks Act,1999 finds that name of such company a) in the opinion of the Central Government, is identical with the name by
is already used by him or is too similar to the name used by him then: which a company had been previously registered, it may direct the
a) He can file an appeal with Central Government for the same, and company to change its name. Then the company shall by passing an
b) If Central government is satisfied of his stand then it shall order company ordinary resolution change its name within 3 months.
to change such name and b) is identical with a registered trade mark and owner of that trade mark apply
c) Company shall change name within 3 months of order but change should to the Central Government within three years of incorporation of
be supported by an ordinary resolution of general meeting approving such registration of the company, it may direct the company to change its name.
change in name. Then the company shall change its name by passing an ordinary resolution
3) Once the name is changed as per order of Central Government, Company has within 3 months.
to give notice to registrar within 15 days of such change, Also it has to attach a 2) Company shall give notice to ROC along with the order of Central Government
copy of Order of Central Government stating requirement to change name. within 15 days of change. In case of default company and defaulting officer are
4) If a company is in default in complying with any direction given under sub- punishable.
section (1), the Central Government shall allot a new name to the company in 3) As per section 13, company can anytime change its name by passing a special
such manner as may be prescribed and the Registrar shall enter the new name resolution and taking approval of Central Government. Therefore, if owner of
in the register of companies in place of old name and issue a fresh certificate registered trademark request the company for change of its name and the
of incorporation with the new name, which the company shall use thereafter: company accepts the same then it can change its name voluntarily by
Provided that nothing in this sub-section shall prevent a company from following the provisions of section 13.
subsequently changing its name in accordance with provisions of section 13. Explanation & Answer:
Answer:
India Cosmetics and Accessories Limited is advised to follow the above provisions
for the same.

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 Chapter 2 Formation & Incorporation of the Companies 2.6

a) In the given case, owner of registered trade-mark is filing objection after 5 3) Every person who enters into a contractual relationship with a company on
years of registration of company with a wrong name. While it should have filed any matter is presumed to be aware of its objects and is supposed to have
the same within 3 years. examined the Memorandum of Articles of the company to ensure proper
b) Therefore, the company cannot be compelled to change its name. As per contractual agreement. If a person fails to do so, it is entirely at his own peril.
section 13, company can anytime change its name by passing a special 4) It is also pertinent to note that the objects of a company may be changed by
resolution and taking approval of Central Government. following the provisions for the change of Memorandum as laid out in section
c) Therefore, if owner of registered trademark request the company for change 13 of the said Act.
of its name and the company accepts the same then it can change its name Case Law:
voluntarily by following the provisions of section 13. Ashbury Railway Carriage Company Vs Richee: The acts beyond the powers of a
company are ultra vires and void and cannot be ratified even though every
M07, PM: The object clause of the Memorandum of Association of LSR Private member of the company may give his consent.
Limited Lucknow, authorised to do trading in fruits and vegetables. The Explanation & Answer:
company, however, entered into a Partnership with Mr. J and traded in steel 1) In the given case, M/s LSR Pvt. Ltd is authorised to trade directly on fruits and
and incurred liabilities to Mr. J. The Company, subsequently, refused to admit vegetables. It has no power to enter into a partnership for Iron and steel with
the liability to J on the ground that the deal was 'Ultra Vires' the company. Mr. J. Such act cannot be treated as being within either the ‘express’ or
Examine the validity of the company's refusal to admit the liability to J. Give ‘implied’ powers of the company.
reasons in support of your answer. 2) Mr. J who entered into partnership is deemed to be aware of the lack of
Provision: [Section 4 of the Company Act, 2013] powers of M/s LSR (Pvt) Ltd. In the light of the above, Mr., J cannot enforce
1) In terms of Companies Act, 2013, the powers of the company are limited to: the agreement or liability against M/s LSR Pvt. Ltd under the Companies Act.
a) Powers expressly given in the “Objects Clause” of the Memorandum (which Mr. J should be advised accordingly.
is popularly known as ‘express’ power), or conferred by the Companies Act, 3) However, under the Indian Contract Act, 1872 where a person derives any
or by any other statute and benefit either in the absence of a contract or under a void agreement will be
b) Powers reasonably incidental or necessary to the company’s main objects liable to make a reasonable payment for the value of such benefit. (Please
(termed as “Implied’ powers). refer to Quasi Contracts and Void Agreements)
2) The objects clause enables the shareholders, creditors or others to know what
its powers are and what the range of its activities is. The objects clause PM: Explain the steps to be taken by a company for starting a business for
therefore is of fundamental importance to the shareholders, creditors and which there is no provision in the objects clause of the Memorandum of
every other person who deals with the company in any manner what so ever. Association.
A company being an artificial legal person can act only within the ambit of the Provision: [Section 4 (1) (c) of the Companies Act, 2013]
powers conferred upon it by the Memorandum through the “Objects Clause”.

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 Chapter 2 Formation & Incorporation of the Companies 2.7

1) The memorandum of a company shall state the objects for which the company State with reasons whether its object clause can be amended. State briefly the
is proposed to be incorporated and any matter considered necessary in procedure to be adopted for change in the object clause. [LDR IMP]
furtherance thereof. Provision: [Section 4 & 13 of the Companies Act, 2013]
2) The company can run with only one object. But what if the company can run a 1) The memorandum of a company shall state the objects for which the company
new business at very low cost and make more profit. Thus the objects of the is proposed to be incorporated and any matter considered necessary in
company can be divided in to two parts: furtherance thereof.
a) Main Object 2) The company can run with only one object. But what if the company can run a
b) Ancillary objects / supplementary objects. new business at very low cost and make more profit. Thus the objects of the
3) The Company must pass GM-SR for alteration of object clause. company can be divided in to two parts:
2) In case of a company which has raised funds from public through prospectus a) Main Object;
has some of such funds unutilized then it can alter its object clause by passing b) Ancillary objects / supplementary objects.
special resolution and: 3) The alteration of object clause of MOA will require the GM-SR.
a) Details as decided while passing special resolution are published in one 4) In case of a company which has raised funds from public through prospectus
English newspaper and one vernacular (i.e. regional) newspaper of place of has some of such funds unutilized then it can alter its object clause by passing
registered office. Also, same is published on website of the company special resolution and:
indicating such proposed change. And a) Details as decided while passing special resolution are published in one
b) The shareholders who did not agree for change are given chance by the English newspaper and one vernacular (i.e. regional) newspaper of place of
promoters or major shareholders to voluntarily quit their shares according registered office. Also, same is published on website of the company
to the guidelines given by the SEBI. indicating such proposed change. And
3) The registrar has to register the proposed change in object clause within 30 b) The shareholders who did not agree for change are given chance by the
days of receipt of special resolution by company being published contents as promoters or major shareholders to voluntarily quit their shares according
mentioned in subsection 4(a) above. to the guidelines given by the SEBI.
Explanation & Answer: 5) The registrar has to register the proposed change in object clause within 30
Hence, if a company wishes to start a business which is not provided for in its days of receipt of special resolution by company being published contents as
Memorandum, it must first alter its Memorandum to include that business in its mentioned in subsection 4(a) above.
objects clause by following procedure mentioned above. Explanation & Answer:
As per the provision given above management of Ambitious Properties Ltd need
M04, M05 & M07: The management of Ambitious Properties Ltd. has decided to to alter its memorandum to carry out such business & by following above
take up the business of food processing activity because of the downward trend procedure given object clause can be amended.
in real estate business. There is no provision in the object clauses of the
Memorandum of Association to enable the company to carry on such business.

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N19 RTP: Vintage security equipments limited is a manufacturer of CCTV 5) The registrar has to register the proposed change in object clause within 30
cameras. It has raised ` 100 crores through public issue of its equity shares for days of receipt of special resolution by company being published contents as
starting one more unit of CCTV camera manufacturing. It has utilized 10 crores mentioned in subsection 4(a) above.
rupees and then it realized that its existing business has no potential for
Explanation & Answer:
expansion because government has reduced customs duty on import of CCTV Looking at the above provision we can say that company can add the object of
camera hence imported cameras from china are cheaper than its own mobile app development in its memorandum and divert public money into that
manufacturing. Now it wants to utilize remaining amount in mobile app business. But for that it will have to comply with above requirements.
development business by adding a new object in its memorandum of
association.
Does the Companies Act, 2013 allow such change of object. If not then what N06, MTPN.19 & PM: XY Ltd. has its registered office at Mumbai in the State of
advise will you give to company. If yes, then give steps to be followed. Maharashtra. For better administrative conveniences the company wants to
Provision: [Section 13 of the Companies Act, 2013] shift its registered office from Mumbai to Pune (State of Maharashtra). What
1) The memorandum of a company shall state the objects for which the company formalities the company has to comply with under the provisions of the
is proposed to be incorporated and any matter considered necessary in Companies Act, 2013 for shifting its registered office as stated above? Explain.
furtherance thereof. [LDR IMP]
2) The company can run with only one object. But what if the company can run a Provisions: [Section 12 & 13 of the Companies Act, 2013]
new business at very low cost and make more profit. Thus the objects of the 1) Change of registered office from one City to another City and from one ROC to
company can be divided in to two parts: another but in same state will require the BOD-OR + GM-SR (for change in city
a) Main Object; of GM) + Both ROC approval. The ROC approval means the approval of the
b) Ancillary objects / supplementary objects. regional director for the same.
3) The alteration of object clause of MOA will require the GM-SR. 2) Such application to regional Director is to be given in Form INC 23 along with
4) In case of a company which has raised funds from public through prospectus fee.
has some of such funds unutilized then it can alter its object clause by passing 3) Confirmation of change: is to be given to the company by the regional director
special resolution and: within 30 days of application made.
a) Details as decided while passing special resolution are published in one 4) Then such confirmation is to be filed with registrar in 60 days of receipt.
English newspaper and one vernacular (i.e. regional) newspaper of place of 5) And finally, the registrar has to certify such change within 30 days of receipt of
registered office. Also, same is published on website of the company confirmation of regional director from the company.
indicating such proposed change. And 6) Once the certificate of such change is issued it will be the proof that change in
b) The shareholders who did not agree for change are given chance by the location of registered office has taken place as per the provisions of the act
promoters or major shareholders to voluntarily quit their shares according and such change in location will actually start from the date of issue of such
to the guidelines given by the SEBI. certificate.

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7) Further, if the Registrar remains the same for the whole state, there will be no Regarding the validity of Proposals w.r.t change of registered office by A Ltd. in
need for the company to seek the confirmation to such change from the the light of the section 12 of the Companies Act, 2013:
Regional Director. 1) In the first case, where the Registered office is shifted from Thane to Dadar
Explanation: (one District to another District) falling under jurisdiction of same ROC i.e.
Even though the location or Registered Office clause in Memorandum only names Registrar of Mumbai.
the state in which its registered office is situated, a change in address from As per Section 12 (5) of the Act which deals with the change in registered
Mumbai to Pune (i.e. Change in same state) result in alteration of Memorandum office outside the local limit from one town or city to another in the same
as Maharashtra & Tamilnadu are the only 2 states who have 2 ROC in one state state, may take place by virtue of a special resolution passed by the company.
therefore XY Ltd need to comply with above provision to change its registered No approval of regional director is required. Accordingly, said proposal is
office from Mumbai to Pune. valid.
Answer: 2) Section 12 talks about shifting of Registered office only, In the second case the
Hence XY Ltd to comply above formalities for shifting of registered office as corporate office is being shifted from Pune to Mumbai under the authority of
stated above. Board resolution. Shifting of corporate office under the board resolution is
valid.
July21: Examine the validity of the following different decisions/proposals [Note: It may be assumed that corporate office and registered office are same.
regarding change of office by A Ltd. under the provisions of the Companies Act, Then in this case, registered office situated in Mumbai is changed from
2013: Mumbai to Pune falling the jurisdiction of different of ROC’s in the same State.
(i) The Registered office is shifted from Thane (Local Limit of Thane District) to In line section 12 (5) of the Act, where a company changes the place of its
Dadar (Local limit of Mumbai District), both places falling within the registered office from the jurisdiction of one Registrar to the jurisdiction of
jurisdiction of the Registrar of Mumbai, by passing a special resolution but another Registrar within the same State, there such change is to be confirmed
without obtaining the approval of the Regional Director. by the Regional Director on an application made by the company. Accordingly,
the said proposal may be treated as invalid, due to lack of confirmation by
(ii) The Registered office is situated in Mumbai, Maharashtra (within the
Regional director of such change.]
jurisdiction of the Registrar, Mumbai, Maharashtra State) whereas the
3) In the third case, change of registered office within the local limits of the same
Corporate Office is situated in Pune, Maharashtra State (within the
city. Said proposal is valid in terms it has been passed under the authority of
jurisdiction of the Registrar, Pune). A Ltd. proposes to shift its corporate
Board resolution.
office from· Pune to Mumbai under the authority of a Board· resolution.
(iii) The registered office situated in certain place of a city is proposed to be
shifted to another place within the local limits of the same city under the MTPM23: Examine the validity of the following different decisions/proposals
authority of Board Resolution. regarding change of office by A Limited under the provisions of the Companies
Act, 2013:
Provision: [Section 12 & 13 of the Companies Act, 2013 is as follows]
(i) The Registered office is shifted from Thane (Local Limit of Thane District) to
Dadar (Local limit of Mumbai District), both places falling within the

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jurisdiction of the Registrar of Mumbai, by passing a special resolution but d) sub-divide the whole or any part of its shares into shares of smaller amount
without obtaining the approval of the Regional Director. than is fixed by the Memorandum
(ii) The registered office situated in certain place of a city is proposed to be e) cancel those shares which, at the time of passing of the resolution in that
behalf have not been taken or agreed to be taken by any person, and
shifted to another place within the local limits of the same city under the
diminish the amount of its share capital by the amount of the shares so
authority of Board Resolution. cancelled.
Provision: [Section 12 of the Companies Act, 2013] 2) Further, under section 64 where a company alters its share capital in any of
Regarding the validity of Proposals w.r.t change of registered office by A Limited the above mentioned ways, the company shall file a notice in the prescribed
in the light of section 12 of the Companies Act, 2013: form with the Registrar within a period of 30 days of such alteration or
(i) In the first case, the Registered office is shifted from Thane to Dadar (one increase or redemption, as the case may be, along with an altered
District to another District) falling under jurisdiction of same ROC i.e. memorandum
Registrar of Mumbai. As per Section 12 (5) of the Act which deals with the 3) Section 13 provides for the procedure to be followed for alteration of the
change in registered office outside the local limit from one town or city to Memorandum, as under:
another in the same state, may take place by virtue of a special resolution a) A special resolution must be passed to effect the alteration. For this
passed by the company. No approval of regional director is required. purpose, a Board Meeting must be held to convene a general meeting of
Accordingly, said proposal is valid. the members and all legal provisions in this behalf followed including the
(ii) In the second case, change of registered office within the local limits of the circulation of a detailed explanatory note on the proposed change along
same city. Said proposal is valid in terms it has been passed under the with the notice for the general meeting;
authority of Board resolution. b) The company must file with the Registrar the special resolution passed by
the company to effect an alteration in the capital clause of the
M08,PM: The Directors of Mars India Ltd. desire to alter capital clause of Memorandum;
Memorandum of Association of their company. Advise them, under the c) No alteration to the Memorandum will have effect unless it has been
provisions of the Companies Act, 2013 about the ways in which the said clause
registered with the Registrar as above.
may be altered and procedure to be followed for the said alteration. [V. IMP]
Explanation & Answer:
Provision: [Section 61(1), 13 of the Companies Act, 2013]
The Directors of Mars India Ltd can alter the capital clause of Memorandum of
1) A limited company having a share capital may, if authorized by its Articles,
Association of their company by following the ways given in above provisions of
alter its Memorandum in its general meeting as under:
companies Act,2013 & shall comply with procedure to alter the same.
a) it may increase its authorized share capital by such amount as it thinks
expedient;
b) it may consolidate and divide all or any of its share capital of a larger N10,PM: RSP Limited, with a limited liability of its members by guarantee of Rs.
amount than its existing shares 10 lacs to each member. The company increases the liability of the members
c) convert all or any of its paid up shares into stock and reconvert that stock from Rs.10 to15 lacs by an alteration made in the liability clause of the
into fully paid shares of any denomination Memorandum of Association. Referring to the provisions of the Companies Act,

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 Chapter 2 Formation & Incorporation of the Companies 2.11

2013 decide, whether the members of the company are liable for the increased Companies Act, 2013, whether the company is liable? If so, what is the extent of
liability. [V.IMP] liability of the company in this case?
Provision: [Section 13 of the Companies Act, 2013] Provision: [Section 5 of the Company Act, 2013]
1) As said in section 61 of the Act, a company can alter the provisions of its The articles of association are in fact the bye-laws of the company according to
memorandum if such change is supported by Ordinary resolution and all other which directors and other officers are required to perform their functions as
provisions required for alteration are fulfilled. regards the management of the company, its accounts and audit. It is important
2) Any change done by the company in its memorandum will have its legal effect therefore that the auditor should study them and, while doing so he should note
only when all the provisions related to the change under this section are the provisions therein in respect of relevant matters.
fulfilled. Doctrine of Ultra-vires:
Explanation: The company shall not work beyond the powers of its MOA and AOA. The MOA
1) The limitation of liability is an essential clause in the Memorandum and on and AOA are the limitations of the company which are stated and approved by
registration of the company becomes binding on all present and future the members i.e. owners of the company. The company shall not work beyond
members. the same. Any act done beyond the MOA and AOA will be considered as void-ab-
2) The present question states that the liability of the members has been initio.
increased by the company without clarifying the mode. The company can act Answer:
only through its Board of Directors or through its members. In the given case, the company is not liable to the directors.
3) The Board of Directors do not have the authority to alter the clause; hence it
means that the alteration was approved by the members at a general PM: The Articles of Association of a Limited Company provided that ‘X’ shall be
meeting. the Law Officer of the company and he shall not be removed except on the
4) However, section 13 of the Act which deals with the alteration of the ground of proved misconduct. The company removed him even though he was
Memorandum does not provide for the alteration of its liability clause. Hence, not guilty of misconduct. Decide, whether company’s action is valid? [V.IMP]
the liability of members cannot be altered once the company is formed. Provision: [Section 5 of the Companies Act, 2013]
Answer: 1) The Articles of a company contain the regulations for the management of a
The alteration in the given question is therefore invalid. company. The Articles of a company shall contain all matters that are
prescribed under the Act and also such additional matters as may be
considered necessary for the management of the company.
Section 5: Article of Association And
2) The Memorandum and Articles of Association of a company are binding upon
Section 14: Alteration Of Article Of Association company and its members and they are bound to observe all the provisions of
memorandum and articles as if they have signed the same.
M08: Under the Articles of Association of Sunshine Ltd. Company directors had
3) However, the company and members are not bound to outsiders in respect of
power to borrow up to Rs.10,000 without the consent of the general meeting.
anything contained in memorandum/articles by which such outsiders have
The Directors themselves lent Rs.35,000 to the company without such consent
and took debentures of the Company. Decide under the provisions of the

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 Chapter 2 Formation & Incorporation of the Companies 2.12

been given any rights. This is based on the general rule of law that a stranger Explanation& Answer:
to a contract cannot acquire any right under the contract. In the present case, Yadav Dairy Products Private Limited is a private company
Explanation: and wants to protect provisions of articles regarding forfeiture of shares. It means
2) In this case, Articles conferred a right on ‘X’, the law officer that he shall not be it wants to make entrenchment of articles, which is allowed. But the company will
removed except on the ground of proved misconduct. have to pass a resolution taking permission of all the members and it should also
3) In view of the legal position explained above, ‘X’ cannot enforce the right give notice to Register of Companies regarding entrenchment of articles.
conferred on him by the articles against the company.
Answer: N08,PM: The Articles of a Public Company clearly stated that Mr. A will be the
Hence, the action taken by the company (i.e. removal of ‘X’ even though he was solicitor of the company. The Company in its general meeting of the
not guilty of misconduct) is valid. (Eley V Positive Govt. Security Life Assurance shareholders resolved unanimously to appoint B in place of A as the solicitor of
Co., Major General Shanta Shamsher jung V Kamani Bros. P. Ltd.) However, by the company by altering the articles of association. Examine, whether the
altering the Articles by a special resolution under section 14 of the Act and Mr. X company can do so? State the reasons clearly.
can be removed. Provision: [Sections 10 & 14 of the Companies Act, 2013 are as follows]
1) The Memorandum and Articles, when registered, would be binding on the
M.20 RTP: Yadav Dairy Products Private limited has registered its articles along company and its members to the same extent as if each one of them had
with memorandum at the time of registration of company in December, 2014. individually signed the documents, so far as the covenants therein are
Now directors of the company are of the view that provisions of articles
concerned.
regarding forfeiture of shares should not be changed except by a resolution of
90% majority. While as per section 14 of the Companies Act, 2013 articles may 2) Articles can be altered as per the provisions of the act and any conditions
be changed by passing a special resolution only. Hence, one of the directors is of mentioned in the memorandum by passing special resolution in general
the view that they cannot make a provision against the Companies Act, 2013. meeting.
You are required to advise the company on this matter. 3) Whenever the article is altered with special resolution then such change
Provision: [Section 5 of the Companies Act, 2013] should be intimated to registrar within 15 days of change along with copy of
1) As per section 5 of the Companies Act, 2013 the article may contain provisions altered articles.
for entrenchment to the effect that specified provisions of the articles may be 4) Once the change is made in articles then it will be treated as if it is the original
altered only if more restrictive conditions than a special resolution, are met. fact mentioned in the articles.
2) The provisions for entrenchment shall only be made either on formation of a Explanation & Answer:
company, or by an amendment in the articles agreed to by all the members of In the given case, the company has altered the Articles by a unanimous resolution
the company in the case of a private company and by a special resolution in of the members passed at a general meeting. Hence, the alteration is valid and
the case of a public company. after registration of the altered Articles, the appointment of B will stand and A
3) Where the articles contain provisions for entrenchment, whether made on will be terminated.
formation or by amendment, the company shall give notice to the Registrar of
such provisions in prescribed manner.

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 Chapter 2 Formation & Incorporation of the Companies 2.13

M11: Describe the procedure for converting a private company into a public 1) The company should convene a General Meeting to pass a GM-SR to amend
company under the provisions of the Companies Act, 2013. the Name Clause in the memorandum by removing the word ‘Private’.
Provision: [Section 14 of the Companies Act, 2013 & Rule 33 of The Companies 2) Further, the GM-SR must also be passed a for deleting from its articles the
(Incorporation) Rules, 2014] restricting clauses of a private company under Section 2(68). Similarly all other
1) Articles can be altered as per the provisions of the act and any conditions clause in the articles which do not apply to a public company should be
mentioned in the memorandum by passing special resolution in general deleted and those which apply to private companies should be inserted such
meeting. as increasing the number of shareholders to at least 7 and number of directors
2) Articles can also be altered to give effect to the conversion of – to at least 3. These resolutions will be passed clause by clause
a) Public company to private company, or 3) An application should be made to the Tribunal for approval to the various
b) Private company to Public company. resolutions passed.
3) But, if a private company alters its articles in such a way that it stops following 4) The documents along with the order of Tribunal will be filed with the Registrar
the restrictions related to private company then such company will no longer along with a copy of the revised Articles and fees in form no. INC 27 for
have its status as private company from the date of effect of such alterations. registration within 15 days of change.
4) For conversion of Private to public company or vice versa it should be filed in 5) On registration by the Registrar the process will be complete.
Form INC27 with fees and Approval from Central government is also to be Explanation & Answer:
filed. The Board of Directors of the private company should convene a Board Meeting
to take necessary decision to fix the time, place and agenda for convening a
5) Whenever the article is altered with special resolution and order of the
General Meeting of members & follow the above mentioned procedure.
tribunal if any as the case may be, then such change should be intimated to
registrar within 15 days of change along with copy of altered articles and order N.18 RTP: The Board of Directors of Sindhu Limited wants to make some
of tribunal if any. changes and to alter some Clauses of the Articles of Association which are to be
6) Once the change is made in articles then it will be treated as if it is the original urgently carried out, which include the increase in Authorized Capital of the
fact mentioned in the articles. company, issue of shares, increase in borrowing limits and increase in the
number of directors.
Answer:
Discuss about the provisions of the Companies Act, 2013 to be followed for
Above procedure need to be complied for converting a private company into a
alteration of Articles of Association.[V.IMP]
public company under the provision of the Companies Act, 2013. Provision: [Section 5 & 14 of the Companies Act, 2013].
1) The articles of association are in fact the bye-laws of the company according to
N03: Board of Directors of a private company decided to convert it into a public which directors and other officers are required to perform their functions as
company. State the steps to be taken for such conversion in order to comply regards the management of the company, its accounts and audit.
with the requirements under the Companies Act, 2013.
2) Section 14 of the Companies Act, 2013, vests companies with power to alter or
Provision: [Section 14 of the Companies Act, 2013 & Rule 33 of The Companies
add to its articles. The law with respect to alteration of articles is as follows:
(Incorporation) Rules, 2014].

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 Chapter 2 Formation & Incorporation of the Companies 2.14

a) Alteration by special resolution: Subject to the provisions of this Act and the 2) Section 14 of the Companies Act, 2013, vests companies with power to alter or
conditions contained in its memorandum, if any, a company may, by a add to its articles. The law with respect to alteration of articles is as follows:
special resolution alter its articles. a) Alteration by special resolution: Subject to the provisions of this Act and
b) Filing of alteration with the registrar: Every alteration of the articles and a the conditions contained in its memorandum, if any, a company may, by a
copy of the order of the Tribunal approving the alteration, shall be filed with special resolution alter its articles.
the Registrar, together with a printed copy of the altered articles, within a b) Filing of alteration with the registrar: Every alteration of the articles and a
period of 15 days in such manner as may be prescribed, who shall register copy of the order of the Tribunal approving the alteration, shall be filed
the same. with the Registrar, together with a printed copy of the altered articles,
c) Any alteration made shall be valid: Any alteration of the articles registered within a period of 15 days in such manner as may be prescribed, who shall
as above shall, subject to the provisions of this Act, be valid as if it were register the same.
originally contained in the articles. c) Any alteration made shall be valid: Any alteration of the articles registered
d) Alteration noted in every copy: Every alteration made in articles of a as above shall, subject to the provisions of this Act, be valid as if it were
company shall be noted in every copy of the articles, as the case may be. If a originally contained in the articles.
company makes any default in complying with stated provisions, the d) Alteration noted in every copy: Every alteration made in articles of a
company and every officer who is in default shall be liable to a penalty of company shall be noted in every copy of the articles, as the case may be. If
one thousand rupees for every copy of the articles issued without such a company makes any default in complying with stated provisions, the
alteration. [Section 15] company and every officer who is in default shall be liable to a penalty of
Explanation & Answer: one thousand rupees for every copy of the articles issued without such
Board of Directors of Sindhu Limited need to follow the above provisions for alteration. [Section 15]
alteration of Articles of Association for purpose of carrying out proposed changes Explanation & Answer:
in their clauses of Articles of Association. Board of Directors of PV Limited need to follow above provisions for alteration of
Articles of Association for purpose of carrying out proposed changes in their
M.18 OLD: The Board of Directors of PV Limited wants to make some changes clauses of Articles of Association.
and to alter some Clauses of the Articles of Association which are to be
urgently carried out, which include the increase in Authorized Capital of the
company, issue of shares, increase in borrowing limits and increase in the
Section 7: Incorporation of Company
number of directors. Please advise the company about the procedure to be
followed for alteration of Articles of Association. [V.IMP] M07: Mr. Ram Lal and his friend desire to incorporate a Public Company and
Provision: [Section 5 & 14 of the Companies Act, 2013]. approach you for help. Advise.
1) The articles of association are in fact the bye-laws of the company according Provision [Section 2(71) & 7 of the Company Act, 2013]
to which directors and other officers are required to perform their functions as 1) A Public company can be formed for any lawful purpose with a minimum of 7
regards the management of the company, its accounts and audit. persons acting as subscribers to the memorandum.

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 Chapter 2 Formation & Incorporation of the Companies 2.15

2) For registration of the company, following documents and information are with their consent to act as directors of the company in such form and
required to be filed with registrar within whose jurisdiction the registered manner as may be prescribed.
office of the company is proposed to be situated- Explanation:
a) The Memorandum of Association (MOA) and Articles of Association (AOA) 1) In the given case, Ram, Lal & his friend should file the above mentioned
of company duly signed by all subscribers to the memorandum. documents & information along with the prescribed fees to the jurisdictional
b) A declaration by a person who is engaged in the formation of the company ROC.
(an Adv., CA, CMA or CS in practice), and by a person named in the articles 2) The ROC shall register all the documents and information in the register and
(director, manager/secretary of company), that all requirements of this Act issue a certificate of incorporation in the prescribed form to the effect that the
and rules made there under in respect of registration and matters proposed company is incorporated under this Act.
precedent or incidental thereto have been complied with. 3) On and from the date mentioned in the certificate of incorporation, the
c) An affidavit from each of the subscribers to memorandum and from Registrar shall allot to the company a corporate identity number, which shall
persons named as first directors, if any, in the articles stating that – be a distinct identity for the company and which shall also be included in the
i) he is not convicted of any offence in connection with the promotion, certificate.
formation or management of any company, or Answer:
ii) he has not been found guilty of any fraud or misfeasance or of any Ram Lal & his friend should follow the above mentioned approach & on
breach of duty to any company under this Act or any previous company incorporation, the company shall maintain and preserve at its registered office
law during the last five years, copies of all documents and information as originally filed, till its dissolution
iii) and that all the documents filed with the Registrar for registration of the under this Act.
company contain information that is correct and complete and true to
the best of his knowledge and belief; M11, PM: Which documents are required to be filed with the Registrar of
d) The address for correspondence till its registered office is established. Companies at the time of registration of a company under the provisions of the
e) The particulars (names, including surnames or family names, residential Companies Act, 2013[LDR IMP]
address, nationality) of every subscriber to the memorandum along with Provision: [Section 7 of the Companies Act 2013 & Rule 12 of Companies
proof of identity, and in case of a subscriber being a body corporate, such (Incorporation) rules 2014]
particulars as may be prescribed. 1) A company shall file an application in form INC2: for OPC & INC7: for other
f) the particulars (names, including surnames or family names, the Director company with fees as per the Companies (Registration Offices and Fees) Rules,
Identification Number, residential address, nationality) of the persons 2014 for registration of a company with the registrar along with the following
mentioned in the articles as the first directors of the company and such documents mentioned below.
other particulars including proof of identity as may be prescribed; and 2) Following documents are to be submitted with the registrar of companies
g) The particulars of the interests of the persons mentioned in the articles as under whose jurisdiction the proposed company is going to be established:
the first directors of the company in other firms or bodies corporate along

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 Chapter 2 Formation & Incorporation of the Companies 2.16

a) Memorandum & Articles of the company which is signed by the Above documents are required to be filed with the Registrar of Companies at the
subscribers. time of registration of a company under the provisions of the Companies Act,
b) Declaration of: 2013
i) Advocate, CA, CS, Cost accountant who is engaged in formation of the
MTP-Apr23: Mr. Ram along with his brothers got registered a company in the
company and
state of Telangana by furnishing false information knowingly. What action may
ii) The person whose name is mentioned in the memorandum as be taken against the company and its promoters under the provisions of the
director/manager/Secretary of the company in the memorandum companies act, 2013?
c) Also, a declaration from all the subscribers and the First directors that: Provision: [Section 7 of the Companies Act, 2013]
i) He is not punishable under any of the offences related to promotion As per section 7 of the Companies Act, 2013 where a company has been got
formation or managing of any other company, incorporated by furnishing any incorrect information, the Tribunal may on an
ii) He has not committed any fraud or misstatements or any breach of duty application made to it, on being satisfied that the situation so warrants:
a) pass orders for regulation of the management of the company including
towards any other company. Also,
changes, if any, in its memorandum and articles; or
iii) The information mentioned in the documents submitted at the time of
b) direct that liability of the members shall be unlimited; or
formation of the company is true and correct to the best of his
c) direct removal of the name of the company from the register of companies; or
knowledge and belief.
d) pass an order for the winding up of the company; or
d) An additional address to communicate till registered office of proposed
company is established. e) pass such other orders as it may deem fit: Provided that before making any
order under this sub-section,—
e) Following information about every subscriber of the company:
(i) the company shall be given a reasonable opportunity of being heard in the
i) Full Name,
matter; and
ii) Residential Address,
(ii) the Tribunal shall take into consideration the transactions entered into by
iii) Nationality,
the company.
iv) Etc., Along with Proof of Identity
Also the promoters, the persons named as the first directors of the company
v) In case where subscriber is a body corporate then other proofs and
and the persons making declaration at the time of registration of company
details as are required to prove its identity are to be furnished.
shall each be liable for action under section 447.
f) Above mentioned details are also required to be taken of the first directors
of the company along with their Directors Identification Number.
g) Following details of the directors along with their consent to act as a Certificate of Incorporation as Conclusive Evidence
director of the proposed company: N08: The Memorandum of Association of a company was presented to the
i) Similar holdings of the directors in any other company. Registrar of Companies for registration and the Registrar issued the certificate
ii) There any kind of interest in any other company, etc.
of incorporation. After complying with all the legal formalities a company
Answer:
started a business according to the object clause, which was clearly an illegal
business. The company contends that the nature of the business cannot be gone

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 Chapter 2 Formation & Incorporation of the Companies 2.17

into as the certificate of incorporation is conclusive. Answer the question Section 8: Non-Profit-making organization / Charitable
whether company ‘s contention is correct or not. Organization
Provision: [Section 3 & 9 of the Companies Act, 2013]
1) A company may be formed for any lawful purpose by 7 or more persons in N07, PM: Mr. V, along with six other persons desires to float a company for
case of public company, 2 or more persons in case of private company and 1
charitable purposes, as permissible under Section 8 of the Companies Act, 2013.
person in case of a one person company.
2) From the date of incorporation mentioned in the certificate of incorporation, He seeks your advice about the procedure to be followed to give effect to the
such subscribers to the memorandum and all other persons, as may from time above proposal. Advise him.
to time, become members of the company, shall be a body corporate capable Provision: [Section 8 of the Companies Act, 2013 & Rule 19 of Companies
of exercising all the functions of an incorporated company under this Act. (Incorporation) Rules, 2014]
Case Law: 1) If company is to be proposed for :
In Bowman v. Secular Society Ltd., the court held that the statute does not
a) Nonprofit earning objects.
provide that all or any of the objects specified in the memorandum, if otherwise
illegal, would be rendered legal by the certificate. b) Also it will apply its profit to full fill its object.
Explanation: c) It will not give dividends to its members
1) In the present case the Registrar was at fault in issuing the certificate of If all above conditions are fulfilled, CG grants license to company to get
incorporation but the issue of the certificate of incorporation does not give the itself register under section 8.
company the right to do illegal business. On applying the above provisions in 2) In order to get it registered as above, a company has to give application in
the present problem, the company’s contention is wrong. Form No. INC.12 along with the fee as provided in the Companies (Registration
2) Though a certificate of incorporation is conclusive evidence of its formation Offices and Fees) Rules, 2014 to the Registrar for a license under subsection
and existence, it does not render its illegal objectives as legal. (1) of section 8.
3) Therefore, the contention of the company that the nature of business cannot 3) Memorandum and articles of association of such proposed company are to be
be gone into after the certificate of incorporation has been obtained is not filed in form INC 13.
tenable. Moreover, the illegality of its objects is adequate grounds for the 4) And the declarations required to be filled by related persons are to be filled in
Registrar to rectify his gross mistake and suo motto take necessary steps to form INC 15.
cancel the certificate of incorporation. 5) A power of attorney in favour of Practicing CA/CS/CMA or an advocate for
Answer: presentation before ROC to make corrections and collect incorporation
Under this Act a company can be formed for a lawful purpose. Hence, a company certificate must also be filed on non-judicial stamp paper.
cannot be formed for an unlawful purpose or for carrying on illegal business. 6) Company registered under this section will have status of a limited company
as registered u/s 7.
7) The company becomes operative on receipt of the certificate of incorporation.
Explanation & Answer:

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 Chapter 2 Formation & Incorporation of the Companies 2.18

Mr.V and the six other persons with him should prepare and sign the MOA and over the liabilities, if any, amongst the members will not hold good, since
AOA and follow the above mentioned procedure to give effect to the above there is a restriction as pointed out in point (b) above regarding application of
proposal. its profits or other income only in promoting its objects.
2) Further, there is restriction in the application of the surplus assets of such a
company in the event of winding up or dissolution of the company as provided
M.19: A group of individuals intend to form a club namely 'Budding Pilots
in sub-section (9) of Section 8 of the Companies Act, 2013.
Flying Club' as limited liability company to impart class room teaching and
Answer:
aircraft flight training to trainee pilots. It was decided to form a limited liability
Therefore, the proposal is not feasible.
company for charitable purpose under Section 8 of the Companies Act, 2013
for a period of ten years and thereafter the club will be dissolved and the
MTP(N.18): Mr. X, in association with his relative formed a company to promote
surplus of assets over the liabilities, if any, will be distributed amongst the
education for the children of poor section. A licence was issued by the Central
members as a usual procedure allowed under the Companies Act.
Government allowing the said company to be registered under section 8 of the
Examine the feasibility of the proposal and advise the promoters considering
Company. Government aids and lot of funds were contributed by public for the
the provisions of the Companies Act, 2013.
fulfilment of the benevolent object. However, on the compliant against the
Provision: [Section 8 of the Companies Act, 2013]
company, CG came to know about the manipulation of the funds in the
1) According to section 8(1) of the Companies Act, 2013, where it is proved to the
company and so order to revoke the licence of the company. Further, directed
satisfaction of the Central Government that a person or an association of
for the amalgamation with another company registered under this section with
persons proposed to be registered under this Act as a limited company—
an object to save girl child.
a) has in its objects the promotion of commerce, art, science, sports,
Examine the legal position as to the order passed by the Central government in
education, research, social welfare, religion, charity, protection of
the given situation in the light of the Companies Act, 2013.
environment or any such other object;
Provision: [Section 8 of the Companies Act, 2013]
b) intends to apply its profits, if any, or other income in promoting its objects;
1) As per the Section 8 of the Companies Act, 2013, the Central Government may
and
by order revoke the licence of the company where the company contravenes
c) intends to prohibit the payment of any dividend to its members;
2) The Central Government may, by issue of licence, allow that person or any of the requirements or the conditions of this sections subject to which a
association of persons to be registered as a limited liability company. licence is issued or where the affairs of the company are conducted
3) Company registered under this section will have status of a limited company fraudulently, or violative of the objects of the company or prejudicial to public
as registered u/s 7. interest.
4) The company becomes operative on receipt of the certificate of incorporation. 2) Where a licence is revoked, the Central Government may, by order, if it is
Explanation: satisfied that it is essential in the public interest, direct that the company be
1) In the instant case, the decision of the group of individuals to form a limited wound up under this Act or amalgamated with another company registered
liability company for charitable purpose under section 8 for a period of ten under this section.
years and thereafter to dissolve the club and to distribute the surplus of assets

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 Chapter 2 Formation & Incorporation of the Companies 2.19

3) Where a licence is revoked and where the Central Government is satisfied that any of the requirements or the conditions of section 8 subject to which a
it is essential in the public interest that the company registered under this licence is issued or where the affairs of the company are conducted
section should be amalgamated with another company registered under this fraudulently, or in violation of the objects of the company or prejudicial to
section and having similar objects, then, the Central Government may, by public interest, and on revocation, the Registrar shall put ‘Limited’ or ‘Private
order, provide for such amalgamation to form a single company with such Limited’ against the company’s name in the register. But before such
constitution, properties, powers, rights, interest, authorities and privileges and revocation, the Central Government must give it a written notice of its
with such liabilities, duties and obligations as may be specified in the order. intention to revoke the licence and opportunity to be heard in the matter.
Explanation: 2) Where a licence is revoked, the Central Government may, by order, if it is
1) According to the given situation, on revocation of licence, the Central satisfied that it is essential in the public interest, direct that the company be
Government ordered for the amalgamation of the company with the wound up under this Act or amalgamated with another company registered
separate entity registered under the section 8 of the Companies Act, 2013. under this section.
2) However, an object for which both the Companies formed were promoting However, no such order shall be made unless the company is given a
different objects. reasonable opportunity of being heard. [Section 8(7)]
Answer: 3) A company registered under this section shall amalgamate only with another
Accordingly, the order passed by the Central Government after the revocation of company registered under this section and having similar objects. [Section
license, is not in compliance of the Section 8 of the Companies Act, 2013. 8(10)]
Answer:
July21 & MTPOct22: State Cricket Club was formed as a Limited Liability (i) Hence, in the instant case, Central Government can revoke the license given
Company under Section 8 of the Companies Act, 2013 with the object of to State Cricket Club/ P State Cricket Club as section 8 company, as the affairs
promoting cricket by arranging introductory cricket courses at district level and of the company are conducted fraudulently and dividend was paid to its
friendly matches. The club has been earning surplus. Of late, the affairs of the members which is in contravention to the conditions given under section 8.
(ii) Hence, the stated company may be wound up.
company are conducted fraudulently and dividend was paid to its members.
(iii) In the instant case, State Cricket Club/P State Cricket Club cannot be merged
Mr. Cool, a member decided make a complaint with Regulatory Authority to
with Cool Net Private Limited as the objects of both the companies are
curb the fraudulent activities by cancelling the licence given to the company.
different and not similar.
(i) Is there any provision under the Companies Act, 2013 to revoke the licence?
If so, state the provisions.
RTPM22: One of the matters contained in the articles of Dhimaan Foundation,
(ii) Whether the Company may be wound up?
incorporated as a limited company under section 8 of the Companies Act,
(iii) Whether the State Cricket Club can be merged with M/s. Cool Net Private
2013, was altered by passing a special resolution in its general meeting and
Limited, a company engaged in the business of networking?
thereafter, intimation for the same was given to Registrar of Companies.
Provision: [Section 8 of the Companies Act, 2013]
However, such alteration in the articles was opposed by Dhwaj & Co., a
1) According to Section 8(6) of the Companies Act, 2013, the Central Government
partnership firm which is its member that there such alteration was not valid.
may by order revoke the licence of company where the company contravenes

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 Chapter 2 Formation & Incorporation of the Companies 2.20

Advise, as per the provisions of the Companies Act, 2013, whether the
contention of Dhwaj & Co. was valid and whether it can be a member in such MTP-II M24 & MTP-I JAN25: Trinity school started imparting education on 1st
company? April, 2010, with the sole objective of providing education to children of
Provision: [Section 8 of the Companies Act, 2013] weaker society either free of cost or at a very nominal fee depending upon the
According to section 8 of the Companies Act, 2013, a company registered under financial condition of their parents. However, on 30th March 2024, it came to
this section shall not alter the provisions of its memorandum or articles except the knowledge of the Central Government that the said school was operating
with the previous approval of the Central Government (the power has been by violating the objects of its objective clause due to which it was granted the
delegated to Registrar of Companies). Also, a firm may be a member of the status of a section 8 company under the Companies Act, 2013. Describe what
company registered under section.
powers can be exercised by the Central Government against the Trinity school,
Explanation & Answer:
in such a case?
a) Here, one of the matters of articles of Dhimaan Foundation was altered by
Provision: [Section 8 of the Companies Act, 2013]
passing a special resolution in its general meeting and thereafter, intimation for
Section 8 of the Companies Act, 2013 deals with the formation of companies
the same was given to Registrar of Companies.
which are formed to promote the charitable objects of commerce, art, science,
b) As per the provisions of the Act, it is necessary to take previous approval of the
education, sports etc. Such company intends to apply its profit in promoting its
Registrar of Companies for the same which was not done in the present case objects. Section 8 companies are registered by the Registrar only when a license
and thus the contention of Dhwaj & Co. was valid. is issued by the Central Government to them. Since, Trinity school was a Section 8
c) Also, section 8 allows a firm to be a member of such company and hence, company and it had started violating the objects of its objective clause, hence in
Dhwaj & Co. can be its member. such a situation the following powers can be exercised by the Central
Government:
MTP-II M24 & MTP-I JAN25: Explain the provisions of the Companies Act, (i) The Central Government may by order revoke the licence of the company
2013- who can get a licence to operate as a section 8 company (non-profit where the company contravenes any of the requirements or the conditions of
organization)? this sections subject to which a licence is issued or where the affairs of the
Provision: [Section 8 of the Companies Act, 2013] company are conducted fraudulently, or violative of the objects of the
As per section 8 of the Companies Act, 2013, the Central Government (ROC in its company or prejudicial to public interest, and on revocation the Registrar
behalf) may grant a licence (to operate as a non profit organisation) if it is proved shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the
to the satisfaction that a person or an association of persons proposed to be register. But before such revocation, the Central Government must give it a
registered under the Companies Act, 2013, as a limited company: written notice of its intention to revoke the licence and opportunity to be
a) has in its objects the promotion of commerce, art, science, sports, education, heard in the matter.
research, social welfare, religion, charity, protection of environment or any (ii) Where a licence is revoked, the Central Government may, by order, if it is
such other object; satisfied that it is essential in the public interest, direct that the company be
b) intends to apply its profits (if any) or other income in promoting its objects; wound up under this Act or amalgamated with another company registered
and
c) intends to prohibit payment of any dividend to its members.

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 Chapter 2 Formation & Incorporation of the Companies 2.21

under this section. However, no such order shall be made unless the company 3) Under this Act a company can be formed for a lawful purpose. Hence, a
is given a reasonable opportunity of being heard. company cannot be formed in the first place for an illegal business activity.
(iii) Where a licence is revoked and where the Central Government is satisfied Explanation:
that it is essential in the public interest that the company registered under 1) In the present case the Registrar was at fault in issuing the certificate of
this section should be amalgamated with another company registered under incorporation but the issue of the certificate of incorporation does not give the
this section and having similar objects, then, notwithstanding anything to the company the right to do illegal business.
contrary contained in this Act, the Central Government may, by order, 2) On applying the above provisions in the present problem, the company’s
provide for such amalgamation to form a single company with such contention is wrong.
constitution, properties, powers, rights, interest, authorities and privileges 3) Though a certificate of incorporation is a conclusive evidence of its formation
and with such liabilities, duties and obligations as may be specified in the and existence, it does not render its illegal objectives as legal.
order. Case Law:
In Bowman v. Secular Society Ltd., the court held that the statute does not
provide that all or any of the objects specified in the memorandum, if otherwise
Section 9: Effect of Registration illegal, would be rendered legal by the certificate.
PM& N08: The Memorandum of Association of a company was presented to the Answer:
Registrar of Companies for registration and the Registrar issued the certificate Therefore, the contention of the company that the nature of business cannot be
of incorporation. After complying with all the legal formalities a company gone into after the certificate of incorporation has been obtained is not tenable.
started a business according to the object clause, which was clearly an illegal Moreover, the illegality of its objects is adequate grounds for the Registrar to
business. The company contends that the nature of the business cannot be gone rectify his gross mistake and suo motto take necessary steps to cancel the
certificate of incorporation.
into as the certificate of incorporation is conclusive. Answer the question
whether company’s contention is correct or not.
N03, N07:A company was incorporated on 6th October, 2019. The certificate of
Provision: [Section 3 & 9 of the Companies Act, 2013] incorporation of the company was issued by the Registrar on 15th October,
1) A company may be formed for any lawful purpose by 7 or more persons in 2019. The company on 10th October, 2019 entered into a contract which
case of public company, 2 or more persons in case of private company and 1 created its contractual liability. The company denies from the said liability on
person in case of a one person company. Hence, a company cannot be formed the ground that company is not bound by the contract entered into prior to
for an unlawful purpose or for carrying on illegal business. issuing of certificate of incorporation. Decide, under the provisions of the
2) Section 9 of the Act further provides that from the date of incorporation Companies Act, 2013, whether the company can be exempted from the said
mentioned in the certificate of incorporation, such subscribers to the contractual liability.[LDR IMP]
memorandum and all other persons, as may from time to time, become
Provision: [Section 9 of the Companies Act, 2013 & section 70 of the Indian
members of the company, shall be a body corporate capable of exercising all
Contract Act, 1872]
the functions of an incorporated company under this Act.
1) Right from the date of Incorporation as mentioned in the certificate of
incorporation the company will have the status of body corporate and that:

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 Chapter 2 Formation & Incorporation of the Companies 2.22

a) All the subscribers and other persons whose names are mentioned in Provision: [Section 9 of the Companies Act, 2013]
memorandum will become members and directors as the case may be, 1) As per Section 9 of the Companies Act, 2013, from the date of the
b) Also, company will have following: incorporation, the subscribers to the memorandum and all other persons
i) Common Seal, who may from time to time become members of the company shall be a body
ii) Perpetual Succession, corporate by the name contained in the memorandum.
iii) Sale or purchase of movable or immovable property or Tangible and 2) Such a registered company shall be capable of exercising all the functions of
intangible Assets in the name of the company, an incorporated company under this Act and having perpetual succession
iv) Also will have right to sue and be sued as company. with power to acquire, hold or dispose of property, both movable and
Case Law: immovable, tangible and intangible, to contract and to sue and be sued, by
No contracts can bind a company before it becomes capable of contracting after the said name.
incorporation. Two consenting parties are necessary to a contract, whereas 3) As per Section 10 of the Companies Act, 2013, subject to the provisions of this
the company before incorporation is a non-entity [Kelner v. Baxter 1866]. Act, the memorandum and articles shall, when registered, bind the company
Explanation & Answer: and the members thereof to the same extent as if they respectively had been
1) A company even after incorporation cannot ratify a contract entered into signed by the company and by each member.
before its incorporation as a void contract cannot be ratified. 4) It means that on the basis of MOA and AOA:
2) Normally, the correct procedure will be for the promoters to enter into any a) The company is liable to members.
pre incorporation contract in their personal names and after the company is b) Members are liable to the company.
formed, to enter into a fresh contract in the name of the company on the c) But, members are not liable to each other.
same terms and conditions. However, this will depend on the other Answer:
Sapphire Private Limited has registered its articles along with the memorandum
contracting parties if they wish to enter into such contracts.
as of 1st July 2021.
3) However, in evaluating the liability of companies in pre incorporated contracts In the present case, after the registration of articles and memorandum, the
the provisions of the Indian Contract Act, 1872 must be considered, wherein a effects as mentioned in Sections 9 & 10 of the Companies Act, 2013 shall take
person lawfully does anything for another person, or delivers anything to him, place.
without intending to do so gratuitously, and such other person enjoys the
benefit thereof, the latter is bound to make compensation to the former in Section 10: Effect of MOA & AOA
respect of, or to restore, the thing so done or delivered.
M04,PM: The Articles of Association of a Limited Company provided that `X'
M22: Sapphire Private Limited has registered its articles along with shall be the Law Officer of the company and he shall be removed except on the
memorandum as on 15th July 2021, The directors of the company seeks your ground of proved misconduct. Decide, whether company's action is valid?
advice regarding effect of registration of the company on the company itself [V.IMP]
and on its members. Provision: [Section 5 & 10 of the Companies Act, 2013]

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 Chapter 2 Formation & Incorporation of the Companies 2.23

1) The Articles of a company contain the regulations for the management of a Provisions: [Section 19 of the Companies Act, 2013]
company. 1) A subsidiary company cannot either by itself or through its nominees hold any
2) The Articles of a company shall contain all matters that are prescribed under shares in its holding company and no holding company shall allot or transfer
its shares to any subsidiary companies. Any such allotment or transfer of
the Act and also such additional matters as may be considered necessary for
shares in a company to its subsidiary is void.
the management of the company. The section however does not apply where:
3) The Memorandum and Articles of Association of a company are binding upon a) the subsidiary company holds shares in its holding company as the legal
company and its members and they are bound to observe all the provisions of representative of a deceased member of the holding company, or
memorandum and articles as if they have signed the same. b) the subsidiary company holds such shares as a trustee, or
4) However, company and members are not bound to outsiders in respect c) the subsidiary company was a shareholder in the holding company even
of anything contained in memorandum/articles by which such outsiders have before it became its subsidiary.
2) Position of the following with regard to membership in a company:
been given any rights. This is based on general rule of law that a stranger to a
i. Partnership Firm:
contract cannot acquire any right under contract. Section 2 (55) of the Companies Act 2013 defines a member as a subscriber
Explanation: to the memorandum of association whose name is entered in the Register
In the given case, Articles conferred a right on ‘X’, the law officer that he shall not of Members following the incorporation of the company, every other
be removed except on the ground of proved misconduct. In view of the legal person who agrees in writing to become a member of the company and
position explained above, ‘X’ cannot enforce the right conferred on him by the whose name is entered in the register of members of the company and any
articles against the company. person holding shares in a company and whosename is entered as the
Answer: beneficial owner in the records of the depository.A partnership firm may
Hence action taken by company (i.e. removal of ‘X’ even though he was not guilty therefore hold shares in a company provided its name appears in the
of misconduct) is valid. register of members of the company. However, as a firm is not a legal
Suggestion: entity it will be able to hold shares in the individual names of partners as
However, by altering Articles by a special resolution under section 14 of Act & Mr joint shareholders. However, this will not apply to a “Limited Liability
X can be removed. Partnership”. (Ganesh Das Ram Gopal v. R.G.Cotton Mills Ltd.)Under
section 8 (3) of the Companies Act 2013, a firm may be a member of a
Section 19: Subsidiary Company shall not hold shares in company incorporated under section 8 i.e. a company formed as a
charitable or social venture.
its Holding Company
ii. An Insolvent:
An insolvent may be a member of a company. So long as his name appears
PM: With reference to the provisions of the Companies Act, 2013 explain the in the register of members, he is a member and is entitled to vote even
circumstances under which a subsidiary company can become a member of its though his shares vest in the Official Assignee or Receiver. (Morgan v.
holding company. Examine the position of the following with regard to Gray) allotment or transfer of shares is by way of security for the purpose
membership in a company: of a transaction.
i. An Insolvent
ii. Partnership Firm.

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 Chapter 2 Formation & Incorporation of the Companies 2.24

RTP N19: S Ltd. is a company in which H Ltd. is holding 60% of its paid up share (ii) Can S Ltd. exercise voting rights at Annual general meeting of H Ltd.?
capital. One of the shareholder of H Ltd. made a charitable trust and donated (iii) Can H Ltd. allot or transfer some of its shares to S Ltd.?[LDR IMP]
his 10% shares in H Ltd. and `50 crores to the trust. He appoints S Ltd. as the Provisions: [Section 19 of the Companies Act, 2013]
trustee. All the assets of the trust are held in the name of S Ltd. Can a 1) According to section 19 of the Companies Act, 2013 a company shall not hold
subsidiary hold shares in its holding company in this way?
any shares in its holding company either by itself or through its nominees.
Provisions: [Section 19 of the Companies Act, 2013]
Also, holding company shall not allot or transfer its shares to any of its
1) According to section 19 of the Companies Act, 2013 a company shall not hold
any shares in its holding company either by itself or through its nominees. subsidiary companies and any such allotment or transfer of shares of a
Also, holding company shall not allot or transfer its shares to any of its company to its subsidiary company shall be void.
subsidiary companies and any such allotment or transfer of shares of a 2) Following are the exceptions to the above rule:
company to its subsidiary company shall be void. a) where the subsidiary company holds such shares as the legal
2) Following are the exceptions to the above rule: representative of a deceased member of the holding company; or
a) where the subsidiary company holds such shares as the legal b) where the subsidiary company holds such shares as a trustee; or
representative of a deceased member of the holding company; or c) where the subsidiary company is a shareholder even before it became a
b) where the subsidiary company holds such shares as a trustee; or subsidiary company of holding company but in this case it will not have a
c) where the subsidiary company is a shareholder even before it became a right to vote in meeting of holding company.
subsidiary company of the holding company but in this case it will not have Explanation & Answer:
a right to vote in the meeting of holding company. 1) The paid-up share capital of S Ltd. is ` 1,00,00,000 divided into 10,00,000
Explanation: equity shares of ` 10 each. Of this, H Ltd. is holding 6,00,000 equity shares.
In the given case one of the shareholders of holding company has transferred his 2) Hence, H Ltd. is the holding company of S Ltd. and S Ltd. is the subsidiary
shares in the holding company to a trust where the shares will be held by company of H Ltd. by virtue of section 2(87) of the Companies Act, 2013.
subsidiary company. It means now subsidiary will hold shares in the holding 3) In the instant case,
company. But it will hold shares in the capacity of a trustee. a) As per the provisions of sub-section (1) of Section 19 of the Companies Act,
Answer: 2013, no company shall, either by itself or through its nominees, hold any
Therefore, we can conclude that in the given situation S Ltd. can hold shares in H shares in its holding company. Therefore, S Ltd. cannot make further
Ltd. investment in equity shares of H Ltd. during 2018-19.
b) As per second proviso to Section 19, a subsidiary company shall have a
M.19 & Sept25: As at 31st March, 2018, the paid up share capital of S Ltd. is ` right to vote at a meeting of the holding company only in respect of the
1,00,00,000 divided into 10,00,000 equity shares of ` 10 each. Of this, H Ltd. is shares held by it as a legal representative or as a trustee. Therefore, S Ltd.
holding 6,00,000 equity shares and 4,00,000 equity shares are held by others. can exercise voting rights at the Annual General Meeting of H Ltd. only in
Simultaneously, S Ltd. is holding 5% equity shares of H Ltd. out of which 1% respect of 1% shares held as a legal representative of a deceased member
shares are held as a legal representative of a deceased member of H Ltd. On of H Ltd.
the basis of the given information, examine and answer the following queries c) Section 19 also provides that no holding company shall allot or transfer its
with reference to the provisions of the Companies Act, 2013 : shares to any of its subsidiary companies & any such allotment or transfer
(i) Can S Ltd. make further investment in equity shares of H Ltd. during 2018 of shares of a company to its subsidiary company shall be void. Therefore,
19? H Ltd. cannot allot or transfer some of its shares to S Ltd.

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 Chapter 2 Formation & Incorporation of the Companies 2.25

MTP(N.18):Give answer in the following cases as per the Companies Act, 2013 MTP(M23) & MTP-II Sept24: Octagon Limited is holding 58% of the paid up
(i) X Ltd., holds 20 lacs shares in ABZ Ltd. In 2017, ABZ Ltd. controls the share capital of Pentagon Limited. Vijay, one of the shareholders of Octagon
composition of the Board of directors of X Ltd. and transfers certain shares to Limited, holding 10% shares of the company, has made a charitable trust. He
it. State whether such transfer of shares by ABZ Ltd. to X Ltd. is valid. donated his 10% shareholding in Octagon Limited and Rs. 20 crore to the trust.
(ii) In continuation of above facts, Mr.R, is a member of the ABZ Ltd. He met an
He appointed Pentagon Limited as the trustee. All the assets of the trust are
accident. Mr. N (son of Mr. R), is one of the director of the X Ltd. He was also
held in the name of Pentagon Limited. As per the provisions of the Companies
a nominee of shares held by Mr. R. Being a legal representative and
nominee, Mr. N gets transferred the shares of Mr. R. State on the validity of Act, 2013, decide whether Pentagon Limited can hold shares of Octagon
the transfer of such shares to Mr. N of X Ltd. Limited.
Provisions: [Section2(87) & 19 of the Companies Act, 2013] Provisions: [Section 19 of the Companies Act, 2013]
1) A subsidiary company cannot either by itself or through its nominees hold any 1) According to section 19 of the Companies Act, 2013 a company shall not hold
shares in its holding company and no holding company shall allot or transfer any shares in its holding company either by itself or through its nominees.
its shares to any subsidiary companies. Any such allotment or transfer of
2) Also, holding company shall not allot or transfer its shares to any of its
shares in a company to its subsidiary is void.
subsidiary companies and any such allotment or transfer of shares of a
2) The section however does not apply where:
company to its subsidiary company shall be void.
a) the subsidiary company holds shares in its holding company as the legal
3) Following are the exceptions to the above rule;
representative of a deceased member of the holding company, or
a) Where the subsidiary company holds such shares as the legal
b) the subsidiary company holds such shares as a trustee, or
representative of a deceased member of the holding company; or
c) the subsidiary company was a shareholder in the holding company even
b) Where the subsidiary company holds such shares as a trustee; or
before it became its subsidiary.
c) Where the subsidiary company is a shareholder even before it became a
3) As per section 2(87) of the Companies Act, 2013, X Ltd. is a subsidiary
subsidiary company of the holding company, but in this case, it will not
company of ABZ Ltd. as ABZ Ltd. controls the composition of the Board of
have a right to vote in the meeting of holding company
Directors of X Ltd.
Explanation & Answer:
Explanation & Answer:
a) In the given case, one of the shareholders of holding company (Octagon
On the basis of the above provisions, following are the answers:
Limited) has transferred his shares in the holding company to a trust where
(i) In the given case, X ltd. already holds shares in ABZ Ltd. before becoming its
the shares will be held by subsidiary company (Pentagon Limited).
subsidiary. The given situation falls within the purview of the exceptions
b) It means now subsidiary will hold shares in the holding company. But it will
when such transfer of shares by holding company to its subsidiary is
hold shares in the capacity of a trustee. Therefore, we can conclude that in the
permissible. So this transfer of shares by ABZ Ltd. to X Ltd. is valid.
given situation Pentagon Limited can hold shares in Octagon Limited .
(ii) This situation falls within the purview of exemption stating that such
subsidiary company who holds such shares as legal representative of a
deceased member of holding company, are entitled to hold the shares of the
holding company. So Mr. N being the legal representative of deceased
member of Holding company was entitled for holding of shares of ABZ Ltd.

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 Chapter 2 Formation & Incorporation of the Companies 2.26

Section 20: Service of Document improper.

Decide:
N22: The Article of Association (AOA) of AB Ltd. provides that documents may (i) Whether the contention of Ashok is valid.
be served upon the company only through Speed Post. Suresh dispatches some (ii) Will your answer be the same if Ashok remains in U.S.A. for one month
documents to the company by courier, under certificate of posting. The during the notice of the meeting and the meeting held?
company did not accept it on the ground that it is in violation of the AOA. As a Provision: [Section 20 of the Companies Act, 2013]
result, Suresh suffered from loss. Explain with reference to the provisions of the 1) Any document can be officially handed over to the company or an officer of
Companies Act, 2013: the company by sending them to the registered office of the company
(i) Whether refusal of document by the company is valid? through:
(ii) Whether Suresh can claim damages for it? a) registered/speed post, or
Provision: [Section 20 of the Companies Act, 2013] b) Courier, or
Any document can be officially handed over to the company or an officer of the
c) Leaving such document at registered office, or
company by sending them to the registered office of the company through:
a) registered/speed post, or d) Electronic, or
b) Courier, or e) Other mode as prescribed.
c) Leaving such document at registered office, or 2) However, a member may request for delivery of any document through a
d) Electronic, or particular mode, for which he shall pay such fees as may be determined by the
e) Other mode as prescribed. company in its annual general meeting.
Explanation & Answer: 3) The Companies Act, 2013 does not lay down provisions relating to the service
In the instant case, Suresh dispatches some document to AB Ltd. by courier
of documents either on the company or on members by the company.
whereas the AOA of said company provides that documents may be served upon
the company only through Speed Post. AB Ltd. did not accept the documents on 4) However, in case where securities are held with a depository, the records of
the ground that it is in violation of the AOA. the beneficial ownership may be served by such depository on the company
Taking into account the above provision, by means of electronic or other mode.
(i) Refusal of documents by AB Ltd. is not valid as sending of documents by Explanation:
courier to AB Ltd. is complying with the provisions given under section 20(1) Thus, if a member wants the notice to be served on him only by registered post at
of the Act. his residential address at Kanpur for which he has deposited sufficient money, the
(ii) Since, the AB Ltd. is at fault by not accepting the documents sent by Suresh, notice must be served accordingly, otherwise service will not be deemed to have
YES, he can claim the damages for any loss occurred to him been effected.
Answer:
M.19 OLD: Ashok, a director of Gama Electricals Ltd. gave in writing to the
Accordingly, the questions asked may be answered as under:
company that the notice for any general meeting and of the Board of Directors'
meeting be sent to him only by registered post at his residential address at (i) The contention of Ashok shall be tenable, for the reason that the notice was
Kanpur for which he deposited sufficient money. The company sent notice to not properly served.
him by ordinary mail under certificate of posting. Ashok did not receive this
notice and could not attend the meeting and contended that the notice was

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 Chapter 2 Formation & Incorporation of the Companies 2.27

(ii)In the given circumstances the company is bound to serve a valid notice to however, entered into an agreement with Q to supply 100 laptops worth Rs. 5
Ashok by registered post at his residential address at Kanpur and not outside lacs for resale purposes. Subsequently, the company refused to make payment
India. on the ground that the transaction was ultra-vires the company.
Examine the validity of the company's refusal of payment to Q under the
MTPN22 & MTP-1M24: Explain the provisions of the Companies Act, 2013
provisions of the Companies Act, 2013. [LDR IMP]
relating to the ‘Service of Documents’ on a company and the members of the
company? Provisions: [Custom Usage]
Provision: [Section 20 of the Companies Act, 2013] 1) Doctrine of Ultra-vires:
1) Under section 20 of the Companies Act, 2013 Any document can be officially a) The company shall not work beyond the powers of its MOA and AOA. The
handed over to the company or an officer of the company by sending them to MOA and AOA are the limitations of the company which are stated and
the registered office of the company through: approved by the members i.e. owners of the company.
a) registered/speed post, or b) The company shall not work beyond the same.
b) Courier, or c) Any act done beyond the MOA and AOA will be considered as void-ab-
c) Leaving such document at registered office, or initio.
d) Electronic, or 2) Doctrine of Constructive Notice:
e) Other mode as prescribed. a) The MOA and AOA are public documents. The outsider or the 3rd party
2) However, in case where securities are held with a depository, the records of dealing with the company shall have the knowledge of the MOA and AOA of
the beneficial ownership may be served by such depository on the company by the company.
means of electronic or other mode. b) Anything which is not approved as per MOA and AOA or beyond its powers
3) Under section 20 (2), save as provided in the Act or the rule thereunder for will be considered as invalid in law.
filing of documents with the registrar in electronic mode, a document may be c) All the requirements of MOA and AOA shall be complied by the company
served on Registrar or any member by sending it to him by post or by before entering into contract with the 3rd party or outsider.
registered post or by speed post or by courier or by delivering at his office or d) If the contract is beyond the limits of MOA or AOA it will be void and 3rd
address, or by such electronic or other mode as may be prescribed. party or outsider cannot claim any compensation for the same as it is
4) However, a member may request for delivery of any document through a assumed that he had knowledge of contravention through MOA or AOA.
particular mode, for which he shall pay such fees as may be determined by the Case Law:
company in its annual general meeting The powers of the company are limited to the powers expressly given by the
memorandum or conferred by the Companies Act or other statute and powers
Doctrine of Ultra Virus & Doctrine of Constructive Notice reasonably incidental or necessary to the company’s main purpose. The acts
beyond the powers of the company are ultra-vires and void and cannot be ratified
M10: The object clause of the Memorandum of Association of RST Limited even though every member of the company may give his consent [Ashbury
authorizes it to publish and sell text-books for students. The company, Railway Carriage Company Vs. Riche].

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 Chapter 2 Formation & Incorporation of the Companies 2.28

Explanation: M03: Briefly explain the doctrine of "Constructive Notice" under the Companies
1) In the given case, RST Limited is authorised to publish and sell text-books for Act, 2013. Are there any exceptions to the said doctrine?
students. It has no power to enter into agreement with Q to sell 100 laptops. Provisions: [Custom Usage]
2) Such an act can never be treated as express or implied power of the company. 1) The MOA and AOA are public documents. The outsider or the 3rd party
Q is deemed to be aware of the lack of powers of RST Ltd. dealing with the company shall have the knowledge of the MOA and AOA of
3) In the light of above, Q cannot enforce the agreement or liability against RST the company.
Ltd. 2) Anything which is not approved as per MOA and AOA or beyond its powers
Answer: will be considered as invalid in law.
Hence the refusal of the company for the payment to Q is valid. It is also 3) All the requirements of MOA and AOA shall be complied by the company
supported by the Ganga Metal Refining Company (Private) Limited CIT case before entering into contract with the 3rd party or outsider.
(1963)38 CC. 4) If the contract is beyond the limits of MOA or AOA it will be void and 3rd party
or outsider cannot claim any compensation for the same as it is assumed that
N07, PM: X, a chemical manufacturing company distributed Rs. Twenty Lacs to he had knowledge of contravention through MOA or AOA.
scientific institutions for furtherance of scientific education and research.
5) There is exception to doctrine of "Constructive Notice:
Referring to the provisions of the Companies Act, 2013 decide whether the said
a) There is one limitation to the doctrine of constructive notice of the
distribution of money was "Ultra vires" the company?
Memorandum and the Articles of a company. The outsiders dealing with
Provisions:[Custom Usage]
1) The company shall not work beyond the powers of its MOA and AOA. the company are on their part entitled to assume that as far as the internal
2) The MOA and AOA are the limitations of the company which are stated and proceedings of the company are concerned, everything has been done
approved by the members i.e. owners of the company. properly in accordance with the Memorandum and Articles and the Act.
3) The company shall not work beyond the same. Any act done beyond the MOA b) They are only bound to read the registered documents and satisfy
and AOA will be considered as void-ab-initio. themselves that the proposed dealing is not inconsistent therewith, but
Case Law: are not bound to do more; they need not inquire into the regularity of the
Distribution of Rupees Twenty Lacs by a company engaged in Chemical internal proceedings as required by the Memorandum and the Articles.
manufacturing is not 'Ultravires' since it was conducive to the continued growth c) This limitation of the doctrine of constructive notice is known as the
of the company as chemical manufacturers (Evans vs Brunner, Mood & Co. ‘doctrine of indoor management ’or the rule laid down in the celebrated
Ltd.1921). case of Royal British Bank v. Turquand.
Explanation:
Answer:
In order for a contract to be ultra vires, it would be essential to refer to its objects
clause. Restrictions of the type mentioned in the question are not an item of the Thus, whereas the doctrine of constructive notice protects the company against
Objectives Clause. outsiders, the doctrine of indoor management seeks to protect outsiders against
Answer: the company.
Hence, the issue of ultra vires does not arise to such a donation.

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 Chapter 2 Formation & Incorporation of the Companies 2.29

Doctrine of Indoor Management Provisions: [Custom Usage]

1) According to this doctrine, persons dealing with the company need not inquire
M.19 OLD: The directors of Smart Computers limited borrowed a sum of whether internal proceedings relating to the contract are followed correctly,
money from Mr.Tridev. The company's articles provided that the directors may once they are satisfied that the transaction is in accordance with the
borrow on bonds such sums as may, from time to time, be authorized by memorandum and articles of association.
resolution passed at a general meeting of the company. The shareholders 2) Stakeholders need not enquire whether the necessary meeting was convened
claimed that there had been no such resolution authorizing the loan, and
and held properly or whether necessary resolution was passed properly. They
therefore, it was taken without their authority. Hence, the company is not
are entitled to take it for granted that the company had gone through all these
bound to repay the loan to Mr.Tridev, In the light of the contention of
shareholders, decide whether the company is bound to pay the loan proceedings in a regular manner.
Provisions: [Custom Usage] 3) The doctrine helps to protect external members from the company and states
1) According to this doctrine, persons dealing with the company need not that the people are entitled to presume that internal proceedings are as per
enquire whether internal proceedings relating to the contract are followed documents submitted with the Registrar of Companies.
correctly, once they are satisfied that the transaction is in accordance with the 4) The doctrine of indoor management is opposite to the doctrine of constructive
memorandum and articles of association.
notice. Whereas the doctrine of constructive notice protects a company
2) Stakeholders need not enquire whether the necessary meeting was convened
against outsiders, the doctrine of indoor management protects outsiders
and held properly or whether necessary resolution was passed properly. They
are entitled to take it for granted that the company had gone through all these against the actions of a company. This doctrine also is a safeguard against the
proceedings in a regular manner. possibility of abusing the doctrine of constructive notice.
3) The doctrine helps to protect external members from the company and states
that the people are entitled to presume that internal proceedings are as per MTP-I Sept24: Explain the exceptions to the Doctrine of Indoor Management.
documents submitted with the Registrar of Companies. Provisions: [Custom Usage]
4) What happens internal to a company is not a matter of public knowledge. An Exceptions to Doctrine of Indoor Management Relief on the ground of ‘indoor
outsider can only presume the intentions of a company, but not know the management’ cannot be claimed by an outsider dealing with the company in the
information he/she is not privy to. If not for the doctrine, the company could
following circumstances:
escape creditors by denying the authority of officials to act on its behalf.
Explanation& Answer: 1) Knowledge of irregularity - In case this ‘outsider’ has actual knowledge of
In the given question, Mr.Tridev being a person external to the company, need irregularity within the company, the benefit under the rule of indoor
not enquire whether the necessary meeting was convened and held properly or management would no longer be available. In fact, he/she may well be
whether necessary resolution was passed properly. considered part of the irregularity.
Even if the shareholders claim that no resolution authorizing the loan was passed, 2) Negligence: If with a minimum of effort, the irregularities within a company
the company is bound to pay the loan to Mr.Tridev. could be discovered, the benefit of the rule of indoor management would not
apply. The protection of the rule is also not available where the
MTPN22: The persons (not being members) dealing with the company are circumstances surrounding the contract are so suspicious as to invite inquiry,
always protected by the doctrine of indoor management. Explain. and the outsider dealing with the company does not make proper inquiry.

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 Chapter 2 Formation & Incorporation of the Companies 2.30

3) Forgery: The rule does not apply where a person relies upon a document that after incorporation as
turns out to be forged since nothing can validate forgery. A company can being non-existent it cannot
never be held bound for forgeries committed by its officers. appoint agents on its behalf.
4) Where the question is in regard to the very existence of an agency.
5) Where a pre-condition is required to be fulfilled before company itself can
exercise a particular power. In other words, the act done is not merely ultra
vires the directors/officers but ultra vires the company itself

Pre – Incorporation& Provisional Contracts

M04,N11: Distinguish between "pre–incorporation contracts" and "provisional Execution As the company is not in Contracts entered into by a
contracts" under the Companies Act, 2013.[IMP] existence , so company is company after its
Pre-incorporation vs. Provisional Contracts: Following are the points of neither bound by nor can it incorporation and before it is
distinction between Pre-incorporation contracts and Provisional-contracts enforce a pre-incorporation entitled to commence
Basis of Pre-incorporation Contracts Provisional Contacts contracts nor can it ratify the business are provisional only
differences same after incorporation and are not binding on the
Meaning Contracts which are entered Contracts which are entered company until the trading
into, by the persons into by a company after company completes the
proposing to float a company obtaining the Certificate of added formalities under
in the name of the Incorporation but before it section 11 (1) (a) and (b)
prospective company before become eligible to
it have come into existence. commence business
under section 11 of the
Companies Act.
Nature & Contracts are void ab initio as Contract shall be binding
Consequences the company is not in upon the company from the
existence and hence cannot date on which the company
enter into a contract either in is entitled to commence
its own name or through business
agents. A company is neither
bound by nor can it enforce
a pre-incorporation contracts
nor can it ratify the same

© CA CS Darshan D. Khare’s