Chapter 1: Introduction - Corporate Form of Business,

Artificial Corporate Personality and Corporate Veil

 A company is a body corporate - the persons composing it form one body by

incorporating it according to the law and clothing it with legal personality.

 It is an association of like-minded persons, formed for the purpose of carrying out some

business or undertaking. In law, it is an association of both natural and artificial

persons

 Defined under §2(20): "company incorporated under the 2013 Act or under any previous

company law."

 An association formed not for profit also acquires a corporate character and falls within

the meaning of a company by reason of a licence issued under §8(1).

 In common law, a company is a “legal person” or “legal entity” separate from, and

capable of surviving beyond, the lives of its members.

 Definition of a company by Lord Justice Lindley: “an association of many persons who

contribute money or money’s worth to a common stock and employ it in some trade or

business and who share the profit and loss arising therefrom. The common stock so

contributed is denoted in money and is the capital of the company. The persons who

contributed in it or form it, or to whom it belongs, are members. The proportion of

capital to which each member is entitled is his ‘share’. The shares are always

transferable although the right to transfer them may be restricted.”

 A company has its own distinct corporate and legal personality, which is separate from its

members. Being a creation of law, it possesses only the powers conferred upon it by its

Memorandum of Association, which is the charter of the company. Within the limits of

powers conferred by the charter, it can do all acts as a natural person may do.
CHARACTERISTICS OF A COMPANY

1. Corporate Personality:

A company is vested with a corporate personality and has a separate legal existence upon

incorporation, i.e., it has an identity separate from its members. It bears a distinct name, and

is capable of owning property, incurring debts, having a bank account, employing people, etc.

A shareholder is not liable for company's actions, even if he holds large share capital.

Further, the shareholders’ are not agents and cannot bind the company.

'Incorporation': the act of forming a legal corporation as a juristic person - entity acts like a

natural person through a designated person - conferred with rights and obligations. [See

Shiromani Gurdwara case].

 Salomon v. Salomon**:** established the principle that once a company has been validly

constituted under the Companies Act, it becomes a legal person distinct from its

members, and for this purpose it is immaterial whether any member holds a large or small

proportion of the shares, and whether he holds those shares as beneficially or as a mere

trustee (company distinct from members)

 More on Salomon

The authorised or nominal capital is the maximum amount of shares that a company can

issue at a particular time. To issue further shares, the company will have to amend the MoA

and increase the authorised capital.

Issued capital is the amount of capital that the company has issued at a given time.

Authorised capital is an amount that a company can issue.

Subscribed capital is the amount of issued capital that has been subscribed by the public.

Issued capital can be less than or equal to authorised capital, similarly, the subscribed capital

can be less than or equal to the issued capital.

Called-up capital is the amount that the company asks the subscribed shareholder to be paid.

It can be paid at once or in portions as per the company’s business strategy. Called-up capital

can be less than or equal to subscribed capital. It can be equal when the capital has to be paid

at one go in advance.

Paid-up capital is the actual amount that the shareholders have paid. It can be less than or

equal to called-up capital. Those shareholders who do not pay are the debtors to the company.

The paid-up capital is the amount that the company actually has for conducting its business.

In Salomon, the paid-up capital was 7 pounds. Salomon sold his sole-proprietorship to his

own company comprising his family members. Salomon had overcharged the company for

this resulting in loss to the creditors. Creditors asked the court to lift the corporate veil since

Salomon is part of the company also. The court rejected this argument since the company is a

separate entity (artificial, legal entity), and creditors should have been more careful. The

economic aspect of promoting business and adhering to this form of company, was also a

consideration for the court. There was one dissenting opinion (not important). Though this

case is considered the earliest case of company as a separate legal entity, a case in front of

Calcutta HC was actually delivered much earlier dealing with this matter.
 Lee v. Lee: Salomon Principle applied. It was held that Lee and the Company were

separate entities who had entered into an employment relationship where he served the

company as a chief pilot. Therefore, his widow was held entitled to get the compensation.

In effect the magic of corporate personality enabled him (Lee) to be the master and

servant at the same time and enjoy the advantages of both.

 Kondoli Tea Co. Ltd**.:** recognised the principle of separate legal entity much before

Salomon. "The company was a separate person, a separate body altogether from the

shareholders and the transfer was as much a conveyance, a transfer of the property, as if

the shareholders had been totally different persons."

 More on Kondoli

Certain persons transferred a Tea Estate to a company and claimed exemptions from ad

valorem duty on the ground that since they themselves were also the shareholders in the

company, it was nothing but a transfer from them in one name to themselves under another

name. While rejecting this, Calcutta High Court observed: “The company was a separate

person, a separate body altogether from the shareholders and the transfer was as much a

conveyance, a transfer of the property, as if the shareholders had been totally different person

 New Horizons Ltd. v. Union of India: The experience of a shareholder of a company can

be regarded as experience of a company.

 More on NH

NH was a joint venture (‘JV’) company which is formed through an agreement for a single

purpose – to respond to a project – and after the project is completed, the company is

dissolved (see more background in module). UOI rejected the tender since the company did

not have the necessary years of experience. New Horizon argued that though the JV is new,
the companies and the workmen are experienced. Thus, the argument was to use the

experience of the shareholder and members as the experience of the company. Court allowed

this and disregarded the personality. This was done to allow such JV types of company and

further competition and business activities. Thus, unlike Lee and Solomon, this approach was

taken for the ‘competition’ rather than the ‘competitor’.

A company is an aritificial person created by law: it is invisible, intangible, and only exists in

the legal context (legal personhood: can enter into contracts, possess properties in its own

name, sue and be sued by others etc.). It is capable of enjoying rights and being subject to

duties.

 Union Bank v. Khader International: It was held that a company can file a suit as an

indigent (poor) "person" under Order 33 Rule 1 of the CPC. Any company, as an

association or body of individuals (incorporated or unincorporated) was held to be a

'person' within the purview of this provision since it includes natural and juristic persons.

2. Limited Liability:

Liability of a member as a shareholder extends to the contribution to the capital of the

company up to the nominal value of the shares held and not paid by him, i.e., a shareholder is
liable to pay the balance (if any) due on the shares held by him, when called upon to pay
and nothing more, even if the liabilities of the company far exceed its assets (if the company
requires more money).

Exceptions to the principle of limited liability:-

1. when number of members reduces below 7 (for a public company) or 2 (for a private
company), and the company continues to carry on business for >6 months in such a
 situation —> then every remaining member cognizant of the situation will be severally
liable for the whole debts contracted at that time [§3A].
2. when a company has been incorporated by furnishing false or incorrect information or
representation OR by suppressing material facts in documents or declaration OR by any
fraudulent action,
3. where in the course of winding up under §339(1) some intent to defraud creditors or
persons for any purposes is revealed
4. when a company is incorporated as an unlimited company under §3(2)(c)
5. when a prospectus has been issued with the intent to defraud the applicants for securities
of a company under §35(3),
6. under §75(1) when a company fails to repay, wholly or partly, the deposit or any interest
thereon as per §74, within a stipulated time, and it is proved that the deposits were
accepted with intent to defraud the depositors or for nay fraudulent purpose,
7. under §224(5) where the report made by an inspector states that fraud has taken place in a
company and due to such fraud any director, key managerial personnel, other officer of
the company or any other person or entity, has taken undue advantage or benefit.

3. Perpetual Succession:

An incorporated company never dies unless wound up by law. The comoany is not affected
by the death or departure of any or all of its members. Membership of the company may keep
changing but that shall not affect the continuity of the company. Membership may change
due to selling or transfer of shares or if the member dies or ceases to be a member. Perpetual
succession denotes the ability of a company to maintain its existence by the succession of
new individuals who step into the shoes of those who cease to be members of the company
(can be legal heirs).

The life of a company is determined by terms in its Memorandum of Association. states the
life of the company.

4. Separate Property:

As a separate legal person, a company can own, enjoy and dispose of property in its own
name.
R.F. Perumal v. H. John Deavin: no member can claim to be the owner of a company's
property
Mrs Baha F. Guzdar v. The Commisioner of Income Tax, Bombay: held that though the
income of a tea company is entitled to be exempted from Income-tax up to 60% being partly
agricultural, the same income when received by a shareholder in the form of dividend, cannot
be regarded as agricultural income for the assessment of income-tax. The court refused to
identify the shareholders with the company and reiterated the distinct personality of the
company.

5. Transferability of Shares:
A company's capital is divided into parts called shares, which are regarded as moveable
property. Under certain conditions, shares are freely transferable so that no shareholder is
permanently tied to a company. This is provided under §44 of the 2013 Act. Shares may be
transferred in the manner specified in the Articles or (in the absence of the former) by the
regulations under Table F of Schedule 1. If that is also included, the transfer is governed by
general law on transfer of moveable property. A member may sell his shares in the open
market and realise the money invested by him. This ensures liquidity for the member and
stability for the company. Would not affect the structure of a company, unlike in a
partnership.

6. Common Seal:

Since the company has no physical existence, it must act through its agents and all contracts
entered into by its agents must be under the seal of the company, which is instrument it uses
to officiate its documents. It is the official signature of a company, containing its engraved
name. The 2013 Act provides for the nature in which the common seal has to be used. It is
only used by authorised persons.

The 2015 Amendment did away with the mandatory requirement of a common seal. Still, if a
company chooses to one, then it is governed by the appropriate provisions in the 2013 Act.

7. Capacity to Sue and Be Sued:

A company being a body corporate, can sue and be sued in its own name. A company’s right
to sue arises when some loss is caused to the company, i.e. to the property or the personality
of the company.
Example: a company can sue for damages in libel and slander [Floating Services Ltd. v. MV
San Fransceco Dipaloa];
As a separate entity, a company can even sue one of its members + a company is not liable
for contempt by one of its officers

8. Contractual Rights:

A company can enter into contracts for the conduct of the business in its own name. A
shareholder cannot enforce a contract made by his company; he is neither a party to the
contract, nor entitled to the benefit derived from of it, as a company is not a trustee for its
shareholders. Likewise, a shareholder cannot be sued on contracts made by his company. The
distinction between a company and its members is not confined to the rules of privity, but
permeates the whole law of contract.

The company as a legal person can take action to enforce its legal rights or be sued for breach
of its legal duties. Its rights and duties are distinct from those of its constituent members.

9. Limitation of Action:

Company cannot operate beyond the powers under the Memorandum of Association (MoA).
In order to enable it to carry out its actions without such restrictions and limitations in most
cases, sufficient powers are granted in the Memorandum of Association. Once such powers
have been laid down, it cannot go beyond such powers unless the Memorandum of
Association itself is altered prior to doing so..

10. Separate Management:

The companies’ day-to-day actions cannot be managed by its owners. They do not have
effective and intimate control over its working, and they elect their representatives as
Directors on the Board of Directors of the company to conduct corporate functions through
managerial personnel employed by them (though they may also appoint themselves as
Directors in which case their roles will be dual)

11. Voluntary Association for Profit:

A company is formed to meet some stated goals, and the profits are divided amongst its
shareholders or saved for expansion. Only a §8 company can be formed with no profit motive

12. Termination of Existence:

A company cannot just cease to exist. It does not die a natural death. The existence of a
company has to be terminated by law. This is generally done via the process of winding up.
The company will exist till the process is not completed. To avoid winding up, sometimes
companies adopt strategies like reorganisation, reconstruction and amalgamation.

“a company is a voluntary association for profit with capital divisible into transferable
shares with limited liability, having a distinct corporate entity and a common seal with
perpetual succession”.

Evolution of Company Law: not v imp, read from page 12-13 of module.

DIFFERENCE BETWEEN A COMPANY AND A PARTNERSHIP

The differences can be summed up in 12 points (read module page 13-14).

1. A partnership does not have distinct legal personality
2. Property belongs to individuals forming partnership
3. Creditors of a partnership firm are creditors of individual partners. Thus, they can
proceed against individuals partners (jointly and severally liable) without going after
the entire partnership
4. Partners are agents of the firm. They can dispose of the property and incur liabilities
as long as they act in the course of the firm’s business
5. A partner cannot contract with their own firm
6. A partner cannot transfer shares to another without the consent of the other partners
 7. Restrictions on a partner’s authority contained in the partnership contract do not bind
outsiders
8. A partner has unlimited liability
9. Death or insolvency of partner dissolves the firm, i.e., there is no perpetual succession
10. A company can have have any number of members except in the case of a private
company which cannot have more than 200 members
11. Discretionary auditing for partnership firms, mandatory for companies
12. A firm can be dissolved by way of agreement at any time

DIFFERENCE BETWEEN A COMPANY AND HUF BUSINESS

1. A company comprises diverse heterogenous members, while a HUFB consists of

unvarying homogenous members, of the joint family itself
2. In a HUFB, the only karta can secure debts (not other coparceners). There is no such
system in a company.
3. Membership in a HUFB is secured by virtue of birth
4. No registration is compulsory for carrying on business for gain by a HUF, even if it
has >20 members

DIFFERENCE BETWEEN A COMPANY AND AN LLP

What is an LLP? an alternative corporate business form that gives the benefits of limited
liability of a company and the flexibility of a partnership. Since LLP contains elements of
both ‘a corporate structure’ as well as ‘a partnership firm structure’, LLP is called a hybrid
between a company and a partnership.

LLP is a separate legal entity, liable to the full extent of its assets, but liability of the partners
is limited to their agreed contribution in the LLP. Further, no partner is liable on account of
the independent or un-authorized actions of other partners, thus individual partners are
shielded from joint liability created by another partner’s wrongful business decisions or
misconduct. Mutual rights and duties of the partners within a LLP are governed by an
agreement between the partners or between the partners and the LLP as the case may be. The
LLP, however, is not relieved of the liability for its other obligations as a separate entity.
Difference: (i) The internal governance structure of a company is statutorily regulated by the
Companies Act. For an LLP it would be by a contractual agreement between the partners. (ii)
The management-ownership divide inherent in a company is not there in an LLP. LLPs have
more flexibility and lesser compliance requirements as compared to a company.

CORPORATE VEIL

The separate personality of a company is a statutory privilege and it must be used for
legitimate business purposes only. Where a fraudulent and dishonest use is made of the legal
entity, the individuals concerned will not be allowed to take shelter behind the corporate
personality —> “lifting of or piercing the corporate veil.” The Court will look behind a
corporate entity to ascertain and will treat it as not separate from members.

The Companies Act, 2013 itself contains some provisions [§§ 7(7), 251(1) and 339], which
lift the corporate veil to reach the real forces of action. §7(7) deals with punishment for
incorporation of company by furnishing false information; §251(1) deals with liability for
making fraudulent application for removal of name of company from the register of
companies; and §339 deals with liability for fraudulent conduct of business during the course
of winding up.

 shareholders cannot ask to lift the veil for their purposes [Premlata Bhatia v. Union of
India]
 corporate veil can be lifted when it has been used to commit fraud or improper conduct
[Jones v. Lipman: to escape a decree of specific performance]
 the veil can be lifted when the corporate façade is really only an agency instrumentality -
one company acted as nominee of another [Re. R.G. Films Ltd]
 when the conduct conflicts with public policy [Connor Bros v. Connors & Daimler Co.
Ltd. v. Continental Tyre & Rubber Co: "enemy” company]
 when the company was made for purpose of tax evasion [Re. Sir Dinshaw Manakjee Peti]
 when the company has avoided of welfare legislations [The Workmen Employed in
Associated Rubber Industries Limited, Bhavnagar v. The Associated Rubber Industries
Ltd., Bhavnagar : only for the purpose of splitting the profits into two hands and thereby
reducing the obligation to pay bonus and Kapila Hingorani v. State of Bihar]
 if there is abuse of corporate personality for unjust or inequitable purposes
 in case of small scale industries which are given some exemptions and the company
owning an industry was controlled by some group of persons or companies —> to check
if the company is actually subsidiary [Inalsa Ltd. v. Union of India]
 when the corporate veil is used to hide criminal activity, like evasion of customs and
excise duties payable by the company —> the court could lift the corporate veil and treat
the assets of the company as the realisable property of the shareholder [Re H. and Others
(Restraint Order: Realisable Property)]

CORPORATE CITIZENSHIP

 There are three views of corporate citizenship

1. Limited view - corporate philanthropy in the local community;
2. Equivalent view - corporate social responsibility - as economic, legal, ethical, and
philanthropic responsibilitie
3. Extended view - in terms of its distinctly political connotations, such as corporate claims
to citizenship entitlements, firms' participation in global governance, or corporate
involvement in the administration of individuals' social, civil and political rights (referred
to as "political CSR")
 Although it is generally accepted that corporations are not citizens in the same way that
"real" citizens are, it has been recognized that they do share in some of the same or
similar practices, such as paying taxes, engaging in free speech, and expecting certain
protections from the state
 A company is not a citizen under the Citizenship Act or the Constitution. However, it
enjoys certain FRs, like the right to equality. A person can plead on behalf of the
company if their rights have also been violated as part of the process. [R.C. Cooper v.
Union of India & Bennet Coleman v. Union of India]
 A company, however, has domicile, nationality, and residence [Gasque v. Inland Revenue
Commissioners: held that a limited company is capable of having a domicile and its
domicile is the place of its registration and that domicile clings to it throughout its
existence]
 §464 and Rule 10 (2014): law has put a ceiling on the number of persons constituting an
association or partnership - unincorporated company, association or partnership
consisting of large number of persons has been declared illegal (50 ppl)
 Since, the law does not recognize it, an illegal association: (i) cannot enter into any
contract; (ii) cannot sue any member, or outsider, not even if the company is subsequently
registered; (iii) cannot be sued by a member, or an outsider for recovery of any debts; (iv)
cannot be wound up by an order of the court. However, an illegal association is liable to
be taxed. The members of an illegal association are individually liable in respect of all
acts or contracts made on behalf of the association; they cannot either individually or
collectively, bring an action to enforce any contract so made, or to recover any debt due
to the association. Can be fined up to 1 lakh.
Chapter 2: Types of Companies

 Three basic types of companies can be registered under the Companies Act. §3(1)
provides that a company can be formed for any lawful purpose. The following are the
types of companies:
1. Public Company: 7 or more persons can form a public company; any subsidiary
company of a public company shall be treated as a public company even if the
subsidiary has obtained the status of a private company in its AoA (5L)
2. Private Company: 2 or more persons can form a private company subject to a
maximum limit of 200 members other than an OPC; right to transfer its shares is
restricted. (1L)
3. One person Company (OPC): Only one person as member; to be formed as a
private limited company

There is no minimum paid up share capital post the 2015 amendment.

 According to §3(2) any of the aforementioned companies may be:-

1. limited by shares
2. limited by guarantee, or
3. unlimited

Classification based on Incorporation

1. Statutory Companies: Constituted by legislation (Centre or State). Provisions of the

Act do not apply to them. Ex: RBI, LIC etc. (pg 38-40)
2. Registered Companies: Incorporated under the Companies Act, or any other
previous company law

Classification based on Liability

 1. Unlimited Liability: members are liable for the company's debts in proportion to
their respective interests and their liability is unlimited - may or may not have share
capital and can be public or private.

Among limited companies:-

1. Companies limited by Guarantee: liability of members limited to the amount they

respectively undertake by the MoA, to contribute in the event of winding up -
members are effectively in the position of guarantors of the company's debts.
2. Companies limited by Shares: liability of members limited by the MoA to the
amount (if any) unpaid on the shares respectively held by them

Classification based on Purpose

1. Association not for profit [§8]

2. Government
3. Foreign
4. Holding and Subsidiary Companies
5. Associate/JV Companies
6. Investment
7. Producer
8. Dormant

PRIVATE COMPANY
 §2(68): Private company is one which, by its Articles:
1. restricts the right to transfer its shares
2. minimum 2, maximum 200 members (except in case of OPC)
 Not included in number of members

(A) persons who are in the employment of the company; and

 (B) persons who, having been formerly in the employment of the
company, were members of the company while in that employment
and have continued to be members after the employment ceased

3. prohibits any invitation to the public to subscribe for any securities of the
company
 Minimum number of 2 directors (the two only members may be the 2 directors) [§149(1)]
 definition of private limited company specifies the restrictions, limitations and
prohibitions, which must be expressly provided in the Articles of Association of a private
limited company
 §14(1) proviso —> where a company being a private company alters its Articles in such
a manner that they no longer include the restrictions and limitations which are required to
be included in the Articles of a private company under Section 2(68), the company shall,
as from the date of such alteration, cease to be a private company. In such a case, it shall
be treated as a public company from the date of alteration of its Articles
 can only accept deposit from its members in accordance with §73 r/w §76 (punishable -->
§76A and 447 for an officer) . A private company can only accept deposit from its
members in accordance with Section 73 of the Companies Act, 2013. If it accepts or
invites or allows or causes any other person to accept or invite on its behalf any deposit in
contravention with sections 73 or 76 (or the rules made thereunder, or if it fails to repay
the deposit or interest, it shall be punishable, along with its officers, in the manner
described in section 76A. Further, if an officer of a defaulting company has contravened
such provisions → shall be liable under section 447.
 name must have Private Limited at the end

Privileges and Exemptions:

Enjoy certain privileges and exemptions, because private limited companies are restrained
from inviting capital and deposits from the public, not much public interest is involved in
their affairs as compared to public limited companies. Can be modified, extended/restricted
under §462(1)

1. Financial assistance to its employees for purchase/subscription of its own/holding co.

shares [§67(2)]
2. Need not prepare a report on the Annual General Meeting. [§121(1)]
 3. no need to prepare a statement indicating the manner in which board has performed
formal annual evaluation of its own & its committees and individual director's
performances. [§134(3)(p)]
4. need not have more than two directors. [§149(1)]
5. need not appoint independent directors [§149(4)]
6. proportion of directors need not retire every year. [§152(6)]
7. can include additional grounds for disqualification for appointment as a director in
AoA. [§164(3)]
8. restrictive provisions regarding total number of directorships which a person may
hold in a public company do not include directorships held in a private company
which is neither a holding or subsidiary company of a public company. total number
of directorships a person may hold is limited to twenty [§165(1)]
9. AoA can include dditional grounds for vacation of office of a director. [§167(4)]
10. required to hold at least one meeting of the Board in each half of a calendar year. the
two meetings should not be less than 90 days apart.[§173(5)]
11. Board need not constitute an audit committe [§177(1)] or a nomination and
remuneration committee [§178(1)]
12. provisions relating to contract of employment with managing or whole-time directors
does not apply to a private company. [§190(4)]
13. total managerial remuneration payable by a private company, to its directors,
including managing director and whole-time director, and its manager in respect of
any financial year may exceed 11% of the net profits. [§197(1)]

Special Obligations

While filing annual returns [§92], the company must also provide a certificate stating:

1. it has not issued any invitation to the public to subscribe for any securities of the
company
2. if the members exceed 200, that the surplus members fall unfer the exempted category
under §2(68(ii)
3. it continued to be a Private Company during the financial year.

One Person Company (OPC)

 to encourage corporatisation of micro businesses and entrepreneurship
 An OPC and a sole proprietorship are distinct concepts due to difference in
liability: An OPC is a separate legal entity that distinguishes between the promoter
and the company. The promoter’s liability is limited in an OPC in the event of a
default or legal issues. In sole proprietorships, the liability is not restricted and
extends to the individual and his or her entire assets.
 An OPC is a type of Private Company → registered as a private company with one
member and one director → an individual being its member shall be deemed to be its
first director until a director or directors are duly appointed by the member in
accordance with the provisions of that Section [§152(1)]
 An OPC may be formed either as a company limited by shares or a company limited
by guarantee; or an unlimited liability company
 Some Rules pertaining to OPCs:
1. Only an Indian citizen & resident can incorporate or be a nominee for the sole
member of an OPC
2. No person can incorporate more than 1 OPC or become nominee in more than
one such company
3. If a person, who is a member of an OPC becomes a member of another OPC
by virtue of being a nominee, they must meet the eligibility criteria in (2), i.e.,
dispose of /choose any one such membership, within a period of one hundred
and eighty days
4. no minor can become member or nominee of OPC or hold share with
beneficial interest
5. OPC cannot be made into a non-profit under S.8
6. OPC cannot carry out NBFC activities or invest in securities of other
corporates, etc.
7. An OPC cannot convert into any other kind of company voluntarily within 2
years of its incorporation (except when paid up share capital is increased
beyond fifty lakh rupees or its average annual turnover during the relevant
period exceeds two crore rupeesa)
 When an OPC limited by shares or guarantee enters into a contract with the sole
member of the OPC, the company shall, unless the contract is in writing, ensure that
the terms of the contract or offer are recorded in a Memorandum or are recorded in
the minutes of the next meeting of the board after conclusion of the contract;
 [§193(1)] not applicable to OPC contracts in ordinary course of business | the registrar
shall be made aware of such contracts [§193(2)]

Privileges of an OPC

Has all the privileges of a private company. Some additional ones :- [Can be modified,
extended/restricted under §462(1)]

1. Financial statement need not include cash flow statement [§2(40)]

2. member can take financial assistance from the OPC for purchasing or subscribing to its
own shares [§67(2)]
3. need not hold an AGM [§96(1)], or prepare a report on the AGM [§121(1)]
4. annual return need not only be signed by a company secretary in practice → can also be
signed by the director [§92(1)]
5. financial statement and the board's report can be signed only by one director [§134(1)];
there is no need for a statement indicating the manner in which the formal annual
evaluation was made by the Board [§134(3)(p)]
6. need not have more than one director on the board [§149(1]
7. may provide additional grounds for vacation of office of a director in the articles
[§167(4)]
8. retirement by rotation is not applicable. [§152(6)]
9. can include additional grounds for disqualification for appointment as a director in AoA.
[§164(3)]

Benefits

 Individual entrepreneurs have all the benefits of a private company → will get credit,
bank loans, access to market, limited liability, and legal protection;
 with less complexities and compliances, in terms of filing returns, audit, balance
sheets etc. + cuts out any middlemen who migh usurp profits and provides OPC direct
access to the market and wholesale retailers.
 perfect for small businessmen, boosts confidence

Small Company
Introduced the Companies Act, 2013 after the recommendations of the Irani Committee

“The Committee sees no reason why small companies should suffer the consequences of
regulation that may be designed to ensure balancing of interests of stakeholders of large,
widely held corporates. Company law should enable simplified decision making procedures
by relieving such companies from select statutory internal administrative procedures. Such
companies should also be subjected to reduced financial reporting and audit requirements
and simplified capital maintenance regimes. Essentially the regime for small companies
should enable them to achieve transparency at a low cost through simplified requirements.
Such a framework may be applied to small companies through exemptions, consolidated in
the form of a Schedule to the Act.”

 It is a small-sized private company, on the basis of paid up capital and turnover

 §2(85) "small company" is one for which
o paid up capital does not exceed 50lakh or such higher amount as may be
prescribed which shall not exceed 10cr
o turnover cannot exceed does not exceed 2cr or such higher amount as may be
prescribed which shall not exceed 100cr.
 Non-profits, holding and subsidiary companies, and body corporates under a Special Act
cannot be small companies.

Privileges

1. Financial statement need not include cash flow statement [§2(40)]

2. can give financial assistance for purchasing or subscribing to its own/holding company's
shares [§67(2)]
3. need not have more than 2 directors on the board [§149(1]
4. need not prepare a report on the AGM [§121(1)]
5. annual return need not only be signed by a company secretary in practice → can also be
signed by the director [§92(1)]
6. restrictive provisions regarding total number of directorships which a person may hold in
a public company do not include directorships held in small companies which are neither
a holding or subsidiary company of a public company. [§165(1)]
7. AoA can include additional grounds for vacation of office of a director. [§167(4)]
8. required to hold at least one meeting of the Board in each half of a calendar year. the two
meetings should not be less than 90 days apart.[§173(5)]
9. no need for a statement indicating the manner in which the formal annual evaluation was
made by the Board [§134(3)(p)]

PUBLIC COMPANY
 Under §2(71) a public company is a company which is not a private company and has
some prescribed minimum paid-up shared capital (2015 Amendment?)
 Under §3(1)(a), a public company must have 7 or more members and registered under the
Act (there is no limitation on the max number of members)
 In principle, any member of the public, willing to pay the price, can acquire shares in or
debentures of it. The securities of a public company may be quoted on a Stock Exchange.
 the securities and other interests of a public company are freely transferable [§58(2)]. free
transferability of shares in a public company is founded on the principle that members of
the public must have the freedom to purchase and, every shareholder the freedom to
transfer
 public companies are subjected to laws and obligations and the law recognizes the
inherent rights (corresponding to the obligations) of the members of these companies

LIMITED COMPANY
§3(2) → limited by shares, guarantee or unlimited

The liability of the members, in the case of a limited company, may be limited with reference
to the nominal value of the shares, respectively held by them or to the amount which they
have respectively guaranteed to contribute in the event of winding up of the company

By Shares
§2(22): means a company having liability of members limited by the MoA to the amount (if
any) unpaid on the shares respectively held by them (to the extent of the paid up share capital,
if unpaid) → the unpaid portion is payable at any time during the existence of the company
on a call being made, whether the company is a going concern or is being wound up.

By Guarantee

§2(21): liability of members limited to the amount they respectively undertake by the MoA,
to contribute in the event of winding up - members are effectively in the position of
guarantors of the company's debts. ("ltd or pvt ltd")

liability of members to pay their guaranteed amounts arises only when the company has gone
into liquidation and not when it is a going concern. A guarantee company may or may not
have a share capital. As regards the funds, a guarantee company without share capital obtains
working capital from other sources, e.g. fees or grants

In case of a guarantee company having share capital the shareholders have two-fold liability:
to pay the amount which remains unpaid on their shares, whenever called upon to pay, and
secondly, to pay the amount payable under the guarantee when the company goes into
liquidation

UNLIMITED COMPANY
§2(92): unlimited company does not have any limitation on the liability of its members.

the maximum liability of the member of such a company, in the event of its being wound up,
might stretch up to the full extent of their assets to meet the obligations of the company by
contributing to its assets. However, the members of an unlimited company are not liable
directly to the creditors of the company, as in the case of partners of a firm. The liability of
the members is only towards the company and in the event of its being wound up, only the
Liquidator can ask the members to contribute to the assets of the company which will be used
in the discharge of the debts of the company. An unlimited company may or may not have
share capital.
Under §18, May become a limited company by altering MoA and registering again but such
conversion should not affect pending debts and obligations.

ASSOCIATIONS NOT FOR PROFIT (§8

Company)
§8(1) permits the registration (u/ CG's license) of a "associations not for profit" with limited
liability → without being required to use "ltd or pvt ltd" after their names

 Central government may grant such a license if:

1. company is intended for the promotion of commerce, arts, science, education,
social welfare, charity purposes, environment etc.
2. the company prohibits payment of any dividends to its members → appkies its
profits/income to promote its objectives.
 The company is registered without paying any stamp duty on its Memorandum and
Articles
 upon registration, enjoys all privileges of a limited company. a limited company may
become a not for profit one when license is provided by Central Government.
 A licence may be granted by the Central Government under §8 of the Act on such
conditions and subject to such regulations as it thinks fit and those conditions and
regulations shall be binding on the body to which the licence is granted, incorporated into
the MoA.
 Central Government may by order at any time revoke the licence whereupon the word
“Limited’ or “Private Limited’, shall have to be used and the company will lose the
exemptions; can do so only after providing such association an opportunity to be heard →
aggrieved association can challenge the order of the Central Government under Article
226. Further a copy of every such order has to be filed with the Registrar

GOVERNMENT COMPANY
 §2(45): "government company" → any company where 51% or more of the paid-up share
capital is held by the government ( Centre of State, in whole or parts bw themselves).
 this includes subsidiaries of such government companies
 employees are not government servants, and thus have no legal right to claim salary or
any revisional additional expenditure from the govt → payable by the company and not
government. [A.K. Bindal v. Union of India]
 Government company is not a department or wing of government.

Andhra Pradesh Road Transport Corporation v. ITO: claimed exemption from taxation ->
held that though it was wholly controlled by the State Government, it had a separate entity
and its income was not the income of the State Government. The Court observed that the
companies which are incorporated under the Companies Act, have a corporate personality of
their own, distinct from that of the Government of India

Hindustan Steel Works Construction Ltd. v. State of Kerala : held that in spite of all the
control of the Government, the company is neither a Government department nor a
Government establishment, it is just an agency of the Government,

 Can be wound up like any other registered company + may become insolvent or be
unable to pay its debts. That does not mean that the Government holding the shares, viz.
Central or State, as the case may be, has become bankrupt

HOLDING AND SUBSIDIARY

COMPANIES
 Holding Company: [§2(45)] in relation to one or more other companies, means a
company of which such companies are subsidiary companies.
 Subsidiary Company: [§2(87)] any company in which the holding company (i) controls
the composition of the Board of Directors, or (ii) exercises or controls more than 1/2 of
the total voting power by itself or through other subsidiaries.
(such class or classes of holding companies, shall not have layers of subsidiaries beyond the
prescribed limit.)

Meaning of Control

"Control" includes the right to appoint majority of the directors or to control the management
or policy decisions exercisable by a person or persons acting individually or in concert,
directly or indirectly, including by virtue of their shareholding or management rights or
shareholders agreements or voting agreements or in any other manner.[§2(27)]

Explanation a company will be deemed a subsidiary, even if "control" is exercised by

another subsidiary of the holding company.

Explanation b composition of a company's Board will be controlled by another, if that

company has the power to appoint or remove all or a majority of the directors at its discretion

Subsidiary company not to hold shares in its holding company

Subsidiary companies cannot, by itself or through nominees, hold shares in their holding
companies and no holding company can allot or transfer shares to its subsidiaries → any
transfer like this would be void (any interest, if holding company is unlimited or limited by
guarantee without share capital) [§19(1)]

Exceptions:

 holding shares as the legal representative of a deceased member

 holding shares as trustee
 was a shareholder before it became a subsidiary.

However, subsidiary shall have a right to vote at a meeting of the holding company only in
respect of the shares held by it as a legal representative or as a trustee.
Chapter 3: Promoters

DEFINITION

 §2(69): "promoter" defined as a person meeting any of the following conditions:

1. named as such in the prospectus or identified by the company in annual return
[§92], or
2. control over the affairs of the company , directly or indirectly, be it as a
shareholder, director, or in some other capacity
3. with whose advice, instructions or directions the Board of Directors act.
 does not include people who are acting in a purely professional capacity, i.e., giving only
professional advice to the Board such a solicitor who draws up an agreement or Articles,
an accountant or valuer who prepares figures or valuation on behalf of a promoter, and
who is paid for the same.
 A director/officer/employee of the issuer having control over the affairs of the
company, directly or indirectly, in any capacity (shareholder, director or otherwise) will
be considered a promoter.
 "Control", here, would refer to the power to appoint majority of directors or control
management/policy decisions of the company - by person(s) acting individually or in
concert, directly or indirectly, including by virtue of their shareholding or management
rights or shareholders agreements or voting agreements or in any other manner.[§2(27)]
→ not when acting this way merely in professional capacity
 Twycross v. Grant: "one who undertakes to form a company with reference to a given
project and to set it going, and who takes the necessary steps to accomplish that purpose"
- who looks after a bunch of business operations in the setting up and working of the
company.
 There may be several promoters and it depends on a case to case basis. Promoter can be
natural person or company.
 "promoter" is used in common parlance to denote any individual, corporate, syndicate,
association or partnership who/which has taken all the necessary steps to create and
mould a company and get it going. → the promoter originates the scheme for the
 formation of a company; gets together the subscribers to the Memorandum, gets the
Memorandum and Articles prepared, executed and registered, finds the bankers, brokers
and legal advisers, finds the first directors, settles the terms of preliminary contracts with
vendors and agreement with underwriters, and makes arrangement for preparation,
advertisement and circulation of the prospectus and placement of the capital
 a person may be a promoter even if he has undertaken a lesser active role in the formation
of a company. Any person who becomes a director, places shares or negotiates
preliminary agreements, may be covered by this term
 a promoter is personally liable to third parties upon all contracts made on behalf of the
intended company, until with their consent, the company takes over this liability. If the
promoter commits a breach of duties, the company can either rescind the contract or can
compel him to account for any secret profits

LEGAL POSITION

 A promoter is neither an agent of nor a trustee for the company → not in existence, but
similar principles apply
 However, he occupes a fiduciary position w.r.t the company and thus must fully disclose
relevant facts, including profits made etc.
o It is well settled that a promoter of a company is accountable to it for all money
secretly obtained by him from it, just as the relationship of the principal and agent
or the trustee and cestui que trust had really existed between him and the company
when the money was obtained
 Cases

Erlanger v. New Sombrero Phosphate

Lydney and Wigpool Iron Ore Co. v. Bird

Lagunas Nitrate Co. v. Lagunas Syndicate

 FIDUCIARY POSITION: they have the creation and moulding of the company in their
hands → power to define how and when and in what shape and under whose supervision
it shall come into existence and begin to act
 the promoters, being in a fiduciary position, may not make, either directly or indirectly,
any profit at the expense of the company → the company can compel him to account for
any such profits and even to surrender them

DUTIES

 A promoters fiduciary duties under the Companies Act include:

1. Secret Profits:
o if a promoter (or other KMP) has earned any benefits at the expense of the
company, through non-disclosure or insufficient disclosure in any explanatory
statement annexed to the notice of a GM, directly or indirectly, they shall hold
such benefit in trust for the company and shall be liable to compensate the
company to the extent of such benefit (without prejudice to other actions against
them) [§102(4)]
o in the event of the abovementioned default, promoter shall be punishable with fine
of Rs. 50K or 5 times the benefit accruing, whichever is more [§102(5)] partial
disclosure will also attract similar consequences.

based on the principle that a promoter cannot make either directly or indirectly, any
profit at the expense of the company he promotes, without the knowledge and consent
of the company and that if he does so, he can be liable to account for it - promoter is
not forbidden to make profit but he is barred from making any secret profit; may
make a profit out of promotion with the consent of the company

o a promoter also has the duty to disclose to the company any interest he has in a
transaction entered into by them
2. Sale of Property:
o A promoter is not allowed to derive a profit from the sale of his own property to
the company, unless all material facts are disclosed.
o If this happens, the company may either repudiate the sale or affirm the contract
and recover the profit made out of it by the promoter → depriving the dishonest
promoter of such advantage
o Disclosure to be made: Erlanger v. New Sombrero Phosphate Co
3. Object for Prospectus: a company, raising money from the public through prospectus,
having some unutilised amount of money so raised, cannot change the objects for which
promoter raised money unless a special resolution is passed by the company and the
dissenting shareholders are given option to leave by the promoters [§13(8)]
4. Exit Offer: dissenting shareholders being those shareholders who have not agreed to the
proposal to vary the terms of contracts or objects referred to in the prospectus, shall be
given an exit offer by promoters or the controlling shareholders, at an exit
price/manner/conditions specified by the SEBI. [§27(2)]
5. Appointment of Directors: the promoter (or Central Government in his absence) can
appoint the required number of new directors when directors resign or vacate their office
under any disqualifications, who shall hold office till the directors are appointed by the
company in a GM [§167(3) / 168(3): resigning**]**
6. Winding up: promoters shall extend full cooperation to the Company Liquidator in
discharge of his functions and duties during winding up [§284(1)]

Duties under the Contract Act: Promoters’ duties cannot depend on a contract because at
the time the promotion begins, the company is not incorporated, and so cannot contract with
its promoters. Duties are same as that if a person acting on behalf of another individual
without a contract of employment. If he makes any misrepresentation in a prospectus → may
be held guilty of fraud under §17 and held liable for damages

BEGINNING AND END OF PROMOTION

Beginning: the promoter originates the scheme for the formation of a company; gets together
the subscribers to the Memorandum, gets the Memorandum and Articles prepared, executed
and registered, finds the bankers, brokers and legal advisers, finds the first directors, settles
the terms of preliminary contracts with vendors and agreement with underwriters, and makes
arrangement for preparation, advertisement and circulation of the prospectus and placement
of the capital

Termination: Promoter's duties are completed only when the company has acquired the
property for which it was formed to manage and has raised initial share capital, and the Board
takes over the management of its affairs [Lagunas Nitrate v. Lagunas Syndicate] → do not
cease at the time of incorporation alone
 Remedies available to the company as against the promoter

If a promoter makes a secret profit or does not disclose it, the company has got a
remedy against him. This varies according to the circumstances, which can be divided
into two possible situations.

1. Where the promoter was not in a fiduciary position when he acquired the property which
he is selling to the company, but only when he sold it to the company. If a person acquires
property or has had it before he takes any active steps in the promotion of a company and
sells it to the company at a profit, he is entitled to retain that profit. He can hardly be said
to be in a fiduciary relation to the company. As long as he makes a full disclosure of the
fact that the property is his and he is the real vendor, he may sell it to the company at a
profit. If, however, he fails to disclose this fact the company is entitled either to rescind
the contract or claim damages for breach of duty of disclosure.
2. Where the promoter was in fiduciary position when he acquired the property and when he
sold it to the company. This may happen in any of the following circumstances:
1. Where the promoter bought property with a view to sell it to the company which
he intends to promote, he occupies fiduciary position vis-a-vis the company. He
must disclose all the facts to the company (ref point 3)
2. Where the promoter resells property to the company at an increased price, the
property which he purchased after he has commenced to act in the capacity of a
promoter, he cannot retain undisclosed profits.
3. Where a person is a promoter for acquiring the property for the company, the
rules of agency will apply → any profit will belong to the company.
3. Where, the promoter bought the property with a view to sell it to the company he
promotes (2a above), the company may either—
1. rescind the contract and if he has made a profit on some ancillary transaction that
may also be recovered; or
2. retain the property, paying no more for it than what the promoter has paid,
depriving him of his profit; or
3. where the above remedies would be inappropriate, the company may sue him for
misfeasance (breach of duty to disclose) → damages will be the difference
between the market value of the property and the contract price. (cases where the
 property has been altered so as to render recession impossible and the promoter
has already received his inflated price)

LIABILITIES

1. Incorporation of a company by furnishing false information: [§27(2)] if a company is

proved to have been incorporated by furnishing false or incorrect information or
representation, or by suppressing any material facts in the filed documents/declarations,
etc. the promoter, along with the first directors and the persons making such declarations
will be liable for fraud u/ §447
2. Absence of relevant information in the prospectus: promoters may be held liable for
non-compliance of provisions of §26 which provides the matters to be stated and reports
to be set out in the prospectus (SEBI role)
3. Civil liability for misstatement in prospectus: promoter is liable for any misleading
statement in the prospectus, to someone who has subscribed for any securities relying on
the prospectus. Can be liable to pay compensation [§35(1)] along with other punishments
under §36.

No liability if he proves that (a) he withdrew his consent to becoming a director before the
issue of the prospectus and (b) that it was issued without his authority or consent; OR that
(a) the prospectus was issued without his knowledge or consent, and (b) that on becoming
aware of its issue, he forthwith gave a reasonable public notice that it was issued without his
knowledge or consent; or that for every misleading statement purported to be made by an
expert; and that he had reasonable grounds to believe (and did believe up to the time of issue
of the prospectus) that the expert was competent to make the statement

1. Criminal liability for misstatement in prospectus: is imposed under §34 for issuing
prospectus containing untrue or misleading information, or where ommission is likely
to mislead → strict punishment u/ §447: imprisonment of minimum 6 months,
maximum 10 years and also a fine not less than the amount involved in the fraud, and
may extend to 3 times the amount. If the fraud involved public interest, minimum
imprisonment is 3 years
No liability if statement or omission was immaterial; he had reasonable grounds to believe,
and did, up to the time of the issue of prospectus, believe that statement was true or the
inclusion or omission

1. Fraudulently inducing persons to invest: any person who knowingly or recklessly

makes a false, deceptive or misleading statement, promise or forecast, or deliberately
conceals material facts to induce investments, will be liable for fraud u/ §447 [§36]
2. Contravention of provisions related to private placement: If a company makes an
offer or accepts monies in contravention of the provisions of private placement, the
company, its promoters and directors shall be liable for a penalty which may extend to
the amount raised through the private placement or two crore rupees, whichever is lower
+ the company shall also refund all monies with interest as specified + promoters and
directors of the company shall be liable to a monetary penalty for default in filing returns
of allotment + other provisions in other statutes relating to public offer can apply [§42]
3. Liability during Revival/Rehabilitation of Sick Companies: any person who was an
officer (including promoter) of the sick company, who is proven to have diverted the
funds or other property of such company for any purpose other than the purposes of the
company or have managed the affairs of the company in a manner highly detrimental to
the interests of the company → Tribunal shall direct the any and all public financial
institutions, not to provide for upto 10 years, any financial assistance to such person or
any firm of which such person is a partner or any company or other body corporate of
which s uch person is a director, or to disqualify the said promoter, from being appointed
as a director in any company registered under the Act for upto 6 years**.**
4. Failure to cooperate with Company Liquidator during winding up: any promoter,
without reasonable cause, fails to cooperate with the Company Liquidator during winding
up, shall be punishable with imprisonment upto 6 months or with fine of upto 50k, or both
[§284(2)]
5. Misrepresenting facts: A promoter will be responsible for any misstatement as to an
existing fact. A calculation of future profits is not a statement of fact. But a misstatement
as to purposes for which the money to be raised and is to be applied is a misrepresentation
of a present fact.
6. Misstating name of director(s): If a director's name is misstated in the prospectus, it is
an important misrepresentation and the promoter can be held to be liable.
7. Representation true only at time of issue: Sometimes representations which were true
when the prospectus was issued, become false before the allotment is made. A
promoter/director who knows that a statement has become false is under a duty to
disclose the truth and if he abstains, he may be guilty of fraud

RIGHTS/REMUNERATION

 A promoter has no right against the company for his remuneration unless there is a
contract to that effect. In some cases, articles of the company provide for the directors
paying a specified amount to promoters for their services but this does not give the
promoters any contractual right to sue the company. This is simply an authority vested in
the directors of the company.
 Right to receive preliminary expenses : promoter cannot claim promotional expenses or
even preliminary expenses without a valid contract.
o they are entitled to receive all the expenses incurred for in setting up and
registering the company, from Board of Directors
o provisions for this payment will be made in the AoA
o company may pay the expenses to the promoters even after its formation, but such
payments should not be ultra vires the AoA
 Right to recover proportionate amount from co-promoters: promoters are jointly and
severally liable for any secret profits made by them in the formation of a company
o if the entire amount of secret profits/compensation is paid to the company by a
single promoter, he is entitled to recover the proportionate amount from co-
promoters.
o similarly, if the entire liability arising out of misstatement in the prospectus is
borne by one of the promoters; he is entitled to recover proportionately from the
co-promoters.
PROCESS OF INCORPORATION

1) Application for availability of name

 The name stated in the MoA cannot be [§4(2)]

o identical or very close to an pre-existing registered companys name, or
o be such that its use
 would constitute an offence under any law in force or
 is undesirable acc to Central Government.
 The name should not be such that it connotes any connection to the government (in
any way), or use any words which have not been approved by government. [§4(3)]
 The application is made to the Registrar in prescribed form with name of proposed
company or proposed change in name. A fee has to be paid, determined by the rules.
[§4(4)]
 After receipt of said application, the name is reserved for 60 days [§4(5)(i)]

2) Preparation of MoA & AoA

 The MoA (company's charter) defines the area within which the company can operate.
 An MoA should include — [§4(1)]
o the name of the company suffixed with "limited" (public ltd) or "private limited"
o the state where its registered office would be situated;
o the objects for which the company is proposed to be incorporated, and any matters
considered necessary to achieve them;
o the liability of members - whether limited or inlimited, and state the specifications
revolving around limitation by shares/guarantee (amount)
 for company limited by guarantee, it must mention the amount up to which
each member will contribute to (a) the assets in the event of winding up
and (b) the costs, charges and expenses involved in winding up
o in case of a company having share capital —
  the amount of share capital with which the company is to be registered and
its division into a fixed amount along with names of subscribers.
 number of shares each subscriber to the MoA intends to take
o In case of OPC, the name of the person who will become the member in case of
death of subscriber.
 The Articles of a company shall contain the regulations for management of the company
[§5(1)]

3) Filing of documents with the RoC

§7(1) provides a list of 7 documents that need to be filed with the appropriate Registrar. The
Application for Incorporation of Companies needs to filed with the ROC, in form INC-2 (for
an OPC) or INC-7 (for others) [(a)]

4) MoA and AoA of the company duly signed -

 Under §7(1)(a) an MoA "duly signed by all the subscribers [...] in such a manner as may
be prescribed" must be filed
 this manner is provided under Rule 13 of the Incorporation Rules (2014):
o MoA and AoA shall be signed by each subscriber to the Memorandum, with all valid
details like name, address, description, and occupation, in the presence of at least one
witness who shall attest the sign and add their own details (as a witness)
o If the subscriber is illiterate, they will affix their thumb impression (or any other
mark), and have someone writing for them place their name against or below the
mark + must authenticate it w/ their own signature + mention number of shares taken
by the subscriber
o this person will also explain the contents of the MoA to the illiterate subscriber.
o when the subscriber is a body corporate, then a director or officer or employee can
sign the MoA or AoA, if they have been authorised to do so by a resolution
undertaken by board of directors; where the subscriber is an LLP, shall be signed by
a partner, duly authorised by all partners (person authorised must not be a subscriber
independently)
o If the subscriber is a foreign national, their signature has to be notarized by notary in
their country and a certificate to that effect will be given such that it can be
 authenticated by Consular Office OR must have business visa (does not apply to OCI
card holders or Indian origin persons).

5) Declaration from certain professionals -

§7(1)(b) requires filing of a declaration by an advocate, chartered accountant, cost accountant

or CS engaged in the formation of the company, and by a person named in the AoA as a
director/manager/secretary → Declaration stating that all the requirements of the Act and its
rules w.r.t registration and matters precedent or incidental to it have been complied with

6) Affidavit from subscribers and first directors to the memorandum

§7(1)(c) requires the filing of a declaration from each subscriber to the MoA and from
persons named as the first directors (if any) in the AoA stating that

 they are not convicted of any offence in connection with the promotion, formation or
management of any company,
 they have not been found guilty of any fraud or misfeasance or of any breach of duty
to any company under the Act or any previous company law during in the last 5 yrs,
and
 all the documents filed for registration contain correct and complete information, true
to the best of their knowledge and belief;

7) Furnishing verification of registered office -

A company must have registered office within 30 days of its incorporation and at all times
thereafter, capable of receiving and acknowledging all communications and notices addressed
to it. [§12(1)]

If the Registrar has reasonable cause to believe that the company is not carrying on any
business or operations, physical verification may be carried out and if true, the company may
be removed from the RoC.

The company can furnish to the registrar verification of registered office within 30 days of
incorporation → verification can also be sought pre-incorporation by the promoters, filed
along with MoA and AoA (INC 22)
8) Particulars of subscribers -

§7(1)(e) requires filing of the particulars of name, address, nationality etc. of every subscriber
to the MoA along with identity proof.

Rule 16 of the Incorporation Rules provides a comprehensive list of particulars of every

subscriber to be filed at the time of incorporation . (read full here)

Indian and foreign nationalss - BUNCH OF DOCS like income statements, nationality proof,
pan id, etc.

Also provides particulars needed when the subscriber is a body corporate and other rules (pg
55-56)

9) Particulars of first directors along with their consent -

§7(1)(f) requires filing of particulars of persons mentioned as first directors in the AoA, like
their names, address, nationality, Direct Identification Number, etc. + §7(1)(f) their consent
to act as directors in any prescribed manner/form

Under §152(3) DIN (allotted under S.154) is mandatory in order for a person to be appointed
as director → for which an application has to be made u/ §153

DIN has to be obtained pre-incorporation

10) Power of Attorney -

Promoters may appoint an attorney to fulfil formalities required for incorporation →

empower them to carry out any instructions stipulated by the Registrar. PoA executed on
non-judicial stamp paper.

ISSUE OF CERTIFICATE OF
INCORPORATION BY REGISTRAR
 §7(2) provides that the Registrar, on the basis of the documents filed, shall register them
and issue a certificate of incorporation in prescribed form to the effect that it is
incorporated.
 from the date of incorporation, the subscribers (who would become members) and all
other persons who may become members of the company from time to time, will have all
the powers and functions of an incorporated company, with perpetual succession,
common seal, holdable property, capacity to sue, etc.
 This certificate is conclusive evidence that everything is in order as regards registration,
all requirements have been complied with, and that the company has come into existence
from the earliest moment of the day of incorporation stated therein with rights and
liabilities of a natural person, competent to enter into contracts. The validity of the
registration cannot be questioned after the issue of the certificate.
 This certificate, however, cannot legalize any illegal/unlawful objects or procedural
missteps in incorporation process → only conclusive for the purpose of incorporation.

ALLOTMENT OF CIN
The Registrar shall allot Corporate Identity Number to the company, from date of
incorporation in the certificate, which will serve as distinct identity for the company and also
be included in the certificate. [§7(3)]

DOCUMENTS OF INCORPORATION TO
BE PRESERVED
The company shall maintain and preserve at its registered office, copies of all documents and
information originally filed till its dissolution. [§7(4)]

FURNISHING FALSE OR INCORRECT

INFORMATION AT THE TIME OF
INCORPORATION
 If someone furnishes false or incorrect particulars or suppresses any material information
of which they are aware, in any documents filed in relation to registration, they would
punishable by fraud u/ §447. [§7(5)]
 without prejudice to the above, if it is proved that the company was incorporated in such a
manner, then the promoters, first directors, and those making declarations under §7(1)(b)
will be punishable by fraud u/ §447. [§7(6)]

Powers of the Tribunal in Such a Case

 Under §7(7), if a company has been incorporated by furnishing any false [...], the
Tribunal may
o pass orders it deems fit for regulation and management of the company including
changes to its MoA or AoA;
o direct that liability of members will be unlimited;
o direct removal of name from RoC;
o pass an order for winding up of company.
o pass any other order as it deems fit

Before this is done, the company should be given reasonable opportunity to be heard
and tribunal should take into consideration transactions and other obligations of the
company.

INCORPORATION OF SPECIFIC TYPES

OF COMPANIES :-
Incorporation of an OPC

Nomination by the subscriber or member of OPC - MoA of an OPC shall indicate the
name of the nominee (with their consent), who, in the event of the subscriber's death or
incapacity, will become the member of the OPC

 written consent must be filed with the Registrar at the time of incorporation;
 they may withdraw consent, at which point the sole member shall nominate another
person as nominee within 15 days of the receipt of the notice of withdrawal and intimate
such nomination in writing to the Company, along with the written consent of such other
person so nominated + file within 30 days of such withdrawal, a notice of the same and
intomation of the replacement with their consent with the Registrar
 the member may at any time for any reason change the nominee, by giving them notice
 OPC member has a duty to intimate the company about such changes
 when the sole member ceases to be the member, such that the nominee takes over, such a
nominee must in-turn nominate someone else to become the member in the event of their
death or incapacity

Incorporation of a NfP (Sec. 8)

Rule 19-20 of Companies (Incorporation) Rules, 2014

Rule 19: license for new companies under Sec. 8

 license must be obtained, by making an application along with the stipulated fee to the
Registrar
 Application must be accompanied by draft MoA and AOA + declaration by professionals
that the MoA and AoA have been drawn up in conformity with the provisions of Sec. 8
and the rules made thereunder
 an estimate of future annual income and expenses for next three years, specifying sources

Rule 19: license for pre-existing companies to convert into NfPs

 An already existing limited company can also become a not for profit association in a
similar manner.
 Additional compliances for them include publishing a notice in vernacular newspapers
and they may also have to fetch approval from the MCA or the Central Government.
Objections can be given to notice and after due consideration by the RoC, license may or
may not be granted.
Chapter 5: MoA and AoA
MOA & ITS CONTENTS

MOA & ITS CONTENTS

MEMORANDUM OF ASSOCIATION
 Constitution of the company - foundation of which the structure of the company is built -
defines the scope and limits of a company's activities and its relations with the outside
world
 It is is the first step iin the formation of a company → may be formed by members
subscribing their names to the MoA and registering accoirding to the Act [§3].
 §4 spells out the contents of the MoA. The format of the MoA depends on the type of the
company - formats are given in schedules part of the Companies Act.

"The Memorandum of Association of a company is its charter and defines the limitations of
the powers of the company.......... it contains in it both that which is affirmative and that
which is negative. It states affirmatively the ambit and extent of vitality and powers which by
law are given to the corporation, and it states negatively, if it is necessary to state, that
nothing shall be done beyond that ambit........." [Ashbury Railway Carriage & Iron Co. Ltd. v.
Riche]

 Different types of MoA are submitted according to the different types of companies. MoA
→ forms specified in Tables of Schedule I [§4(6)]
o A: limited by shares
o B: limited by guarantee w/o share capital
o C: limited by guarantee w/ share capital
o D: unlimited companies w/o share capital
o E: unlimited companies w/ share capital

Contents in Brief [§4(1)]

MoA must state the following [§4(1)] :-

 Name clause - name of the company with valid suffix - "limited" or "private limited"
 Situation Clause - the state where registered office is to be situated;
 Objects Clause - object for which the company is incorporated [Section 8 companies
only subject to name, situation, and object clause];
 Liability Clause - limited or unlimited liability of the members
o that liability is limited to any unpaid amount on shares (limited by shares)
o that liability is limited to the amount which each member undertakes to contribute
to;
 the assets of a company in the event of winding up, and
 the costs, charges and expenses of winding up and adjustment of the rights
of contributories among themselces
 Capital Clause - for a company having share capital:
o the amount of share capital with which the company is to be registered and its
division into number of shares (a subscriber cannot get less than one share);
o number of shares each subscriber to the MoA intends to take
 OPC: name of nominee in case of OPC.
 If in the MoA, company limited by guarantee and not having a share capital, is purporting
to give any person a right to participate in the divisible profits of the company otherwise
than as a member, such provision shall be void [§4(7)]
 These clauses are designated as compulsory "conditions" on the basis of which a
company is incorporated. The Act overrides any provision in the MoA, in case of
contradiction. [§6]

Name Clause

 name of the company is a symbol of the independent corporate existence of it and is

essential to establish a separate identity for it
 Procedure - Application made to Registrar in prescribed form with name of proposed
company or change in name. Fee has to be given. The name cannot be identical or very
close to an already existing registered company's name and its use should not constitute
an offence under any law in force or be undesirable acc to Central Government. Name
should not be such that it connotes any connection to a government body or use any
 words which have not been approved by government. The Registrar must make
preliminary enquiries to ensure that the name allowed by him is not misleading or
intended to deceive with reference to the Objects Clause of the Memorandum – The rule
will apply also to foreign companies or traders, whose goods are imported into the
country - the registrar is however not responsible for carrying out an elaborate
investigation as long the objective is not prima facie or inherently unlawful. For example,
a company is not allowed to use a name which is prohibited under the Emblems and
Names (Prevention of Improper Use) Act, 1950, or suggestive of any connection with
Government or of State patronage where there is none.
 Name is reserved for 60 days from date of application.
 §16 provides that if by inadvertence or otherwise a name has been registered which is
identical to or too nearly resembles the name of an existing company, the Central
Government may direct the company to change its name. The company will be given 3
months and needs to pass an ordinary resolution to do this + The proprietor of the
registered trade mark may make an application to the Central Government for an order for
rectification of name because it is identical to or too nearly resembles the applicant’s
registered trademarks. - Such application must be made within 3 years from the date of
incorporation or the registration or change of name whether under this Act or previous
company law – in such a case, this company should change its name within 6 months –
after changing the name, company must inform the registrar and the govt within 15 days
from the date of change and the registrar will change the name in the certificate of
incorporation and MoA
 Where a company is directed to change the name, the court cannot directly tell the
Registrar to effect the change in the name of the company. The court can only direct the
company to do so.
 Mere similarity is not the ground for changing the name of the company - the law does
not give a person a right to prevent the use of a name by another person. In the case of
companies, however, registration will be refused only if there is likelihood of deception
or confusion
 A person cannot be permitted to name a company even after his personal name if that
name resembles the name of an existing company.
 Asset Management Companies have to have their MoAs and AoAs vetted by the SEBI
before registration with the RoC.
 Publication of Name: The name of the company and the address of its registered office
must be painted or displayed outside every office or place at which its business is carried
on, in a conspicuous position and in legible letters in English and in the language in
general use in that locality – even if name changes, for two years since then, the company
has to use its old name too along with the new name → + CIN should be on all company
documents [§12]
 In case of a one person company, the words one person company should be printed below
the name of the company

Situation Clause

name of state where the registered office of the company is situated must be in MoA. Exact
address does not need to be given but within 30 days from incorporation, should be finalized
such that correspondences can be sent. Registration verification documents should be
furnished to RoC in 30 days. Publication of name requirements applicable here too [§12].

Objects Clause

§4(1)(c): This includes the purpose for which the company has been formed, the aims it
wishes to achieve, limits to these aims - permitted range of the enterprise. Everything that a
company can undertake must be mentioned. Anything done beyond that will be ultra vires
and void even if it has been approved by shareholders. There is great autonomy in choosing
objects as long as they are not illegal but the objects need to be undertaken within a
reasonable time period. MoA must be read in its natural and ordinary meaning to determine
the objects and limitations.

Ultra vires acts

 beyond the scope of the MoA – may not be illegal – where no nexus exists between
exercise of power and attainment of an object, then the exercise will be ultra vires.
 Propounded in Ashbury Railway Carriage and Iron Co. Ltd. v. Riche: "That is a contract
which we desire to make, which we authorise the directors to make”, still it would be
ultra vires. The shareholders cannot ratify such a contract, as the contract was ultra vires
the objects clause, which by Act of Parliament, they were prohibited from doing.
 However, later on, the House of Lords held in other cases that the doctrine of ultra vires
should be applied reasonably and unless it is expressly prohibited, a company may do an
act which is necessary for or incidental to the attainment of its objects"
 An ultra vires act will not bind the company and a contracting party cannot sue on it.
 if the act is ultra vires the company – can’t be ratified ; if its ultra vires the directors or
AoA – can be ratified (alteration of AoA)
 This rule is meant to protect shareholders and creditors. The doctrine of ultra vires should
be used reasonably and unless expressly prohibited in MoA, reasonable construction
should be given to objects.
 A. Lakshmanaswami Mudaliar v. L.I.C: payment to charity of company money is
considered to be ultra vires unless company is satisfying its objects and reasonable nexus
exists. Charity is allowed only to the extent to which it is necessary in the reasonable
management of the affairs of the company. There must be proximate connection between
the gift and the company’s business interest. Gifts to foster research and payments to
widows is considered valid as they encourage employment.
 If a bank/someone else has lent money for an ultra vires purpose, they cannot recover the
same. [Doctrine first propounded in Ashbury case]
 Corporate bona fide Charitable spending and the ultra vires rule: §181 authorises the
Board of Directors to contribute to bona fide charitable and other funds. However, prior
consent of the company in general meeting, has to be obtained in order to contribute for
any bona fide charitable or other purpose any amount exceeding five per cent of the
average net profits for the 3 immediately preceding FYs
 Loans, borrowings and guarantees: Ultra vires borrowing does not create debtor creditor
relationship and no right to recovery is present unless money was lent for lawful purpose.
 Whether a transaction is ultra vires the company can be decided on the basis of the
following: (1) if a transaction entered into by a company falls within the objects, it is not
ultra vires and hence not void; (2) if a transaction is outside the capacity (objects) of the
company, it is ultra vires; (3) if a transaction is in excess or abuse of the company’s
powers, such transaction will be set aside by the shareholders;
 Implied powers: Some powers are implied – This is important because while pursuing
business, a company should be allowed to engage in consequential businesses as well →
ex: power to appoint and act through agents, borrow and give security (in a tradong
company)
 Not implied: however some have to express like-
 o acquiring a business similar to company’s own business;
o entering into a partnership, profit-sharing or JV or other arrangements with other
persons or companies;
o taking shares in other companies with similar objectives;
o taking shares of other companies where such investment authorises the doing
indirectly that which will not be intra vires if done directly
o promoting other companies or helping them financially;
o using funds for political purposes;
o acting as surety or guarantor;
o power to make gifts and contributions for unstated purposes.
 Shareholders' rights w.r.t ultra vires acts: A shareholder can get back the money paid by
him to the company under an ultra vires allotment of shares. A transferee of shares from
him would not have been so allowed.
 Effects of ultra vires transaction :

1. void ab initio: company cannot sue or be sued upon - estoppel and ratification
do not apply
2. injunction: members can obtain this to restrain the company wherein ultra
vires act has been or is about to be undertaken
3. personal liability of directors: if capital is diverted to purposes alien to the
company’s Memorandum, the directors will be personally liable to replace it.
This applies to acts which are ultra vires the directors and not the company.
Suits maintainable against directors only. In case of deliberate misapplication,
criminal action can also be taken for fraud.
4. Property acquisition: Where a company’s money has been used ultra vires to
acquire some property, the company’s right over such property is held secure
and the company will be the right party to protect the property. This is
because, though the property has been acquired for some ultra vires object, it
represents the money of the company.
5. Ultra vires borrowing does not create the relationship of creditor and debtor

Liability Clause

§4(1)(d):
 Company limited by shares - liability limited to amount unpaid on shares.
 Company limited by guarantee - liability limited to amount which each member
undertakes to contribute to the assets of the company in the event of being wound up and
to the costs of winding up and other adjustments.

Capital Clause

§4(1)(d):

 This clause states the amount of capital with which the company is registered and must
show how this capital will be divided into shares of fixed values (nominal value of
shares).
 A company is not authorised to issue capital beyond its authorised/nominal/registered
capital. If it receives applications for shares beyond the shares covered by the authorised
capital, the amount received on excess number of shares should be returned
 This capital amount cannot be changed without altering the MoA [S61]. If both equity
and preference shares are being distributed, there should be two heads in the MoA which
specify this.
 The subscribed capital may be partly or wholly paid - liable for the rest whenever.
 The statutory requirements regarding subscription are - 1) each subscriber should get at
least one share 2) name of subscriber opp to shares taken should be mentioned.
 A subscriber to the Memorandum cannot, after the issue of the certificate of
incorporation, repudiate his subscription on the ground that he was induced to sign by
misrepresentation.

ALTERATION OF MOA

ALTERATION OF MOA

Alteration
§13(1): provides that except as provided in §61 (power of ltd company to alter share capital),
a company may alter its MoA by special resolution after complying with the procedure
specified

 MoA may be altered in the following respects:

o change of name [§13(2)]
o State of registered office [§13(4) &(7)]
o altering objects [§13(1) and (9)]
o altering share capital [§61]
o reorganising share capital [§230 to §237]
o reducing share capital [§66]
 Alteration has to be done in the exact procedure specified. If not, the alteration wil be
deemed a nullity.
 Moreover, special resolution of company to alter, passed under §13(1) should be
registered with the RoC or alteration will not go into effect [§13(6)].
 Any alteration of the MoA, in the case of a company limited by guarantee and not having
a share capital, purporting to give any person a right to participate in the divisible profits
of the company otherwise than as a member, shall be void. [§13(11)]

Alteration of Name

 §13(2): the name of the company can be altered by a special resolution and with the
approval of the Central Government in writing. Approval of the Central Government is
not necessary if the change relates to the addition/deletion of the word ‘Private’ to the
name of the company consequent to the conversion of a private company into a public
company and vice versa
 if there is change in name, Registrar shall enter new name and issue fresh certificate of
incorporation after which the change will be effective. Issues related to similarity of name
with pre-existing etc. apply the same way. If company does not comply with Central
Government directives, they will be liable for punishment by way of fine.
 The change of name shall not be allowed to a company which has defaulted in filing its
annual returns or financial statements or any document due for filing with the Registrar or
which has defaulted in repayment of matured deposits or debentures or interest on
deposits or debentures [Rule 29, Inc. Rules]
 Listed Companies: If a listed company is entering a new line of business and wishes to
change name, financial disclosures will have to be made first for last 3 years.
Additionally, at least 1 year should have elapsed from last name change, at least 50% of
the company’s revenue/investment from preceding year should have been for new
business calling for name chance. New name will be reflected along with old name for a
period of 1 year on websites of stock exchange. [Clause 32, Listing Agreement]
 Effect of change in name: The change of name shall not affect any rights or obligations
of the company, or render defective any legal proceedings by or against it, and any legal
proceedings which might have been continued or commenced by or against the company
in its former name may be continued by or against the company in its new name –
however, after name change, proceedings cant be initiated in the old name – however, if
suit is filed in the old name, it can be corrected by amending the plaint and substituting
the new name (contrary to what happens when a partnership is reconstituted).

Alteration of Place

 Within local limits: According to §12(5) a company can change its registered office from
one place to another within the local limits of the city, town or village, where it is
situated, by merely passing a Board resolution. This does not involve alteration of
Memorandum. Notice of change needs to be given to the Registrar within 15 days.
 Outside local limits: Section 12(5) of the Act provides that except on the authority of a
special resolution passed by a company, the registered office of the company shall not be
changed,-(a) in the case of an existing company, outside the local limits of any city, town
or village where such office is situated at the commencement of this Act or where it may
be situated later by virtue of a special resolution passed by the company; and (b) in the
case of any other company, outside the local limits of any city, town or village where
such office is first situated or where it may be situated later by virtue of a special
resolution passed by the company:
 Change from jurisduction of Registrar: No company shall change the place of its
registered office from the jurisdiction of one Registrar to the jurisdiction of another
Registrar within the same State unless such change is confirmed by the Regional Director
on an application made in this behalf by the company in the prescribed manner →
Regional Direction shall pass orders within 30 days from application. the company
concerned shall file a copy of the said order with the Registrar of Companies (ROC)
 within a period of sixty days from the order. ROC shall record the ordered changes in its
records. The ROC of the state where the registered office of the company was previously
situated, shall transfer all the documents and papers to the new ROC.
 One city to another within the state: allowed by a special resolution by the board in
general meeting → notice of change must be given to thr Registrat within 30 days
 One state to another: ALTERATION OF MEMORANDUM §13(5)
o then MoA will have to altered and there will need to be a special resolution and
approval from the Central Government.
o Government has to confirm in 60 days and must be satisfied that it has been done
with consent of creditors, debenture holders, etc. or that a sufficient provision has
been made by the company either for the due discharge of all its debts and
obligations or that adequate security has been provided for such discharge.
o Relevant documents (copy of MoA, special resolution details, Central government
approval, list of creditors and debtors, objections) must be filed with Registrar
such that new certificate of incorporation can be given.
o No employee should be retrenched in this process and affidavit has to be given in
this regard.
o The application should be advertised in newspaper and to creditors, etc.
o Objections must be given to the Central Government for their final order on this
matter. Central Government, on approval, may serve a notice to the affected states
regarding this change as there may be loss/increase of revenue.
o §13(7) : a certified copy of the order of the Central Government approving the
alteration shall be filed with the Registrar in each of the States within such time
and in such manner as may be prescribed, who shall register the same. New
Registrar shall issue a fresh certificate of incorporation indicating the alteration
 Employees' right to object: No general right to object has been recognized as
employment of these employees continues as it as attached as a condition to change
registered office. However, an employee's right should not be prejudiced → they can
object to shifting from one state to another on the ground that their interests are likely to
be prejudicially affected. However, it was held that the employees’ union cannot oppose
on the ground that there would be loss of revenue or unemployment in the State or that
the meeting at which the special resolution was passed was itself not valid. – Moreover,
since they were any not getting sacked, they had no grounds for objection
Alteration of Objects

 §13(1): Objects clause can be altered by way of a special resolution- alter the
Memorandum
 §13(6)(a): the company in relation to any alteration of its Memorandum, must file with
the Registrar the special resolution passed by the company under §13(1)
 §13(9): Registrar shall register any alteration of MoA w.r.t objects and certify it within 30
days of filing the special resolution.
 For a listed company, the special resolution for alteration in the objects clause of the
Memorandum of Association needs to be passed through Postal Ballot under §110.
 §13(8): lays down that a company which has raised money from the public through
prospectus, and has any unutilized amounts remaining → can change its objects through a
special resolution (containing many particulars like the justification, money left, etc.)
o the details of this resolution will be published in newspaper and the dissenting
shareholders will be given an opportunity to exit.
o Reasons for changing object clause can be many. For example, cutting back.
 Same procedure has to be followed for deleting any portion of the objects clause.

Alteration of Liability Clause

Procedure remains the same → special resolution.

According to §13(1), a company may, by a special resolution and after complying with the
procedure specified in this Section, alter the provisions of its Memorandum. It means that a
company can change the liability clause of its Memorandum of Association by passing a
special resolution. Further §13(6)(a) provides that a company shall, in relation to any
alteration of its Memorandum, file with the Registrar the special resolution passed by the
company under §13(1)

Alteration of Capital Clause

💡 Difference between shares and stocks – shares are specific to a company ( shares of
XYZ ) , stocks are of any company.
 A limited company having share capital may alter its MoA by ordinary resolution if so
authorised by its AoA at a general meeting [§61]
 The following types of alterations can be made:
o increase in authorised share capital: can be done at any time by alteration of MoA.
 Although, §61(1)(a) refers to the issue of new shares, it really deals with a
case of increase in the authorised share capital, and not increase of the
issued share capital. The case of increase of the issued or subscribed
capital is dealt with separately by §62.
o consolidate and divide all or any of its share capital into shares of a larger amount
o convert fully paid-up shares into stock and reconvert that stock into fully paid-up
shares of any denomination,
o sub-divide shares into shares of small amounts (but ensure that the proportion
between the amount paid and unpaid shall remain the same),
o cancel shares which have not been subscribed to. (not a reduction of share capital)
 required to be notified and a copy of the resolution should be filed with the Registrar
within 30 days of the passing of the resolution
 do not require the confirmation by the Tribunal except that alteration relating to
consolidation and division which results in changes in the voting percentage of
shareholders shall not take effect unless it is approved by the Tribunal on an application
made in the prescribed manner.

Registration of Alteration of MoA

 §13(6)(a): a company shall, in relation to any alteration of its MoA, file with the
Registrar:
1. the special resolution passed under §13(1),
2. approval of the CG under §13(2) if alteration involves change in name
 §13(7) : where an alteration of the Memorandum results in the transfer of the registered
office of a company from one State to another, a certified copy of the order of the Central
Government approving the alteration shall be filed by the company with the Registrar of
each of the States within such time and in such manner as may be prescribed, who shall
register the same, and the Registrar of the State where the registered office is being
shifted to, shall issue a fresh certificate of incorporation indicating the alteration
 §13(9): Registrar shall register any alteration of MoA w.r.t objects and certify it within 30
days of filing the special resolution.
 §13(10):No alteration made under Section 13 (i.e., alteration of Memorandum) shall have
any effect until it has been registered in accordance with the provisions of this Section.

AoA Introductory Concepts

AoA Introductory Concepts

Introductory Concepts

Nature of Articles

§2(5): ‘Articles’ means the Articles of Association of a company as originally framed or as

altered from time to time or applied in pursuance of any previous company law or of this Act

govern the management of its internal affairs and the conduct of its business- deals with the
rights of the members of the company inter se- subordinate to and are controlled by the
Memorandum of Association. Memorandum lays down the scope and powers of the
company, and the Articles govern the ways in which the objects of the company are to be
carried out and can be framed and altered by the members.

Articles Subordinate to Memorandum

Articles are only internal regulations- subordinate to and subject to the Memorandum.
Articles that go beyond the MoA’s sphere of action are inoperative, and anything done under
the authority of such article is void and incapable of ratification, i.e., members of the
company can alter the articles provided the altered article doesn’t give the company or its
members any powers exceeding the MoA

Articles in Relation to Memorandum

 Even though the Articles are subordinate to the Memorandum yet if there be any
ambiguity in the Memorandum, the Articles may be used to explain it but not so as to
extend the objects.
 The Memorandum contains the fundamental conditions upon which alone the
company is allowed to be incorporated. They are conditions introduced for the benefit
of the creditors, and the outside public, as well as of the shareholders. The Articles of
Association are the internal regulations of the company – however, if because of
articles there is some ambiguity , then it shouldn’t be referred to when the meaning in
the memorandum is clear.
 The Articles of a private company must contain the three restrictions in §2(68)
 Entrenchment: May contain entrenchment provisions [§5(3)]- allow for certain
clauses in the Articles to be amended upon satisfaction of certain conditions or
restrictions (such as obtaining a 100% consent) greater than those prescribed under
the Act. This provision acts as a protection to the minority shareholders and is of
specific interest to the investment community. This shall empower the enforcement of
any pre-agreed rights and provide greater certainty to investors, especially in joint
ventures
o Provisions for entrenchment either made on formation of a company, or by an
amendment in the Articles agreed to by all the members of the company in the case of
a private company and by a special resolution in the case of a public company [§5(4)]
o Notice of such provisions must be given to the Registrar [§5(5)]
o ENTRENCHMENT PROVISIONS IN THE ARTICLE – they are more difficult
to override
 Protection to minority share holders
 Put articles in a string position – can’t be changed easily
 ONLY A SPECIAL RESOLUTION CAN CHANGE AN ARTICLE
 Effects – any provision in the article can be altered only after it has met
conditions which are more restrictive than special resolution – basically,
because of this provision, any affirmative right given to a company can’t
be removed even by a special resolution

Private equity is an alternative investment class and consists of capital that is not
listed on a public exchange. Private equity is composed of funds and investors that
directly invest in private companies, or that engage in buyouts of public companies,
 resulting in the delisting of public equity - Because they are private , their capital is
not listed on a public exchange. These funds allow high-net-worth individuals and a
variety of institutions to directly invest in and acquire equity ownership in companies

 Registration of Articles:
o Every type of company must register their Articles of Association. If Articles are not
registered, automatically Table F in Schedule I apply, and if registered, Table F in
Schedule I apply except in so far as it is excluded or modified by the Articles. When
Articles are registered, it specifically states that Table F isn’t applicable
o A company limited by guarantee having a share capital or a company limited by
guarantee not having a share capital or an unlimited company having a share capital or
an unlimited company not having a share capital might adopt any of the appropriate
regulations of Table G, H, I and J respectively in Schedule I [§5(6)]. However nothing
in Section 5 shall apply to the Articles of a company registered under any previous
company law unless amended under this Act [§5(9)].
 Section 6:
o §6 provides that the provisions of the Act will have effect notwithstanding anything to
the contrary in the MoA, AoA, or any agreement, resolution, etc. + any provision
contained in the MoA, Articles, agreement or resolution shall, to the extent to which it
is repugnant to the provisions of this Act, become or be void, as the case may be.
o Example*: if there is a provision in the Articles empowering the Directors of the
company to expel any member of the company under any of the given conditions, then
such a provision shall be totally inconsistent with the provisions of Section 6 of the
Act. It is opposed to the fundamental principles of the company’s jurisprudence and is
ultra vires of the company*

Difference between MoA and AoA

3. General:

1. MoA is the charter of the company which defines the objects for which the
company is granted incorporation.
2. AoA are the rules and regulations framed to govern its internal
management.
 4. Ease of Alteration

1. Clauses of the MoA cannot be easily altered – only in accordance with

mode prescribed in the Act. Sometimes requires permission from the
CG or the Court
2. AoA can be amended by members by special resolution. Generally no
need to obtain permission from the CG or the Court

5. Subservience

1. MoA cannot include any clause contrary to the Act

2. AoA is subsidiary to both the Act and the MoA

6. Relation

1. MoA generally defines relation between the company and the outsiders
2. AoA regulates the relationship between company and its members and
between the members inter se.

7. Ultra vires

1. Acts done by a company beyond the scope of the Memorandum are

absolutely void and ultra vires and cannot be ratified even by unanimous
vote of all the shareholders.
2. Acts of the directors beyond the AoA can be ratified by the shareholders.

Alteration of AoA

Alteration of AoA

Alteration of Articles

Section 14
14(1): subject to the provisions of this Act and the conditions contained in its Memorandum,
if any, a company may, by a special resolution, alter its Articles including alterations having
the effect of conversion of a private company into a public company; or a public company
into a private company.

 First proviso to §14(1) lays down that where a company being a private company alters
its Articles in such a manner that they no longer include the restrictions and limitations
which are required to be included in the Articles of a private company under this Act, the
company shall, as from the date of such alteration, cease to be a private company.
 Second proviso to §14(1) stipulates that any alteration having the effect of conversion of
a public company into a private company shall not be valid unless it is approved by an
order of the Central Government.
 Third proviso to §14(1) applications pending before the tribunal on the date of
commencement of the 2019 amendment shall be disposed of in accordance with the
provisions applicable prior to such commencement.

Limitation to alteration of Articles

In spite of the power to alter its Articles, a company can exercise this power subject only to
certain limitations. The alteration:

1. must not exceed the powers given by the MoA (MoA prevails in case of conflict)
2. must be consistent with the Companies Act or any other statute
3. must not include anything which is illegal or opposed to public policy
4. must be bona fide for the benefit of the company as a whole.
5. must not constitute a fraud on the minority by a majority
6. cannot have retrospective effects.
7. cannot defeat escape from its contractual obligation with any person
8. cannot be altered so as to compel an existing member to take or subscribe for more shares
or in any way increase his liability to contribute to the share capital, unless he gives his
consent in writing [§38]
9. must not be inconsistent with any pending order of the Court, or an order of the NCLT
10. relating to Managing, Whole-time director and non-rotational directors requires Central
Government’s approval
Subject to the foregoing conditions, the Articles in a company can be altered and no clause
can be included in the Articles that it is not alterable. -> though the requisite majority of
members could pass a special resolution to alter the Articles and if the alteration has the
effect of making a fraud on the minority, the minority shareholders not being less than the
number specified in §244 could move the Court for redressing their grievances.

Effect of Altered Articles

Alteration binds members in the same way as original Articles.

Section 8 Companies

A Section 8 Company cannot alter Article except with the approval of Central
Government

 [§8(4)(i)] provides that a company registered under this section, i.e., one with charitable
objects, shall not alter its MoA or AoA except with the previous approval of the CG.

Alteration to be noted in every copy

Every such alteration shall be noted in every copy of that MoA or AoA. [§15(1)] ****If a
company fails to comply with this, then it, and every defaulting officer shall be liable to a
penalty of Rs. 1000 per copy of the MoA or AoA issued without alteration

Legal Effect of MoA and AoA

When registered, the MoA and AoA bind the company and its members to the same extent as
if they have been signed by the company and by each member.

All monies payable by any member to the company under the Memorandum or Articles shall
be a debt due from him to the company [§10]

The operation of the MoA and AoA can be studied in 4 respects

 Members to the Company

 Company to the Members
 Member not bound to Member
 Company not bound to Outsiders

Members Bound to the Company

MoA and AoA constitute a contract, binding the members of the company to the company.

Each member must observe the covenants of the MoU as originally made and altered from
time to time [Malleson v. National Insurance Co.].

Shareholders cannot enter into an agreement which is inconsistent with the AoA [V.B.
Rangaraj v. V.B. Gopalkrishnan]

Company Bound to the Members

AoA is a contract binding company to members. Thus, a member can bring an action against
the company for infringement by it of the MoA or AoA

Normally, action for breach of Articles against the company can be brought only by a
majority of the members. Individual or minority members cannot bring such a suit except
when it is intended for enforcement of personal rights of members or to prevent the company
from doing any ultra vires or illegal act, fraud, or oppression and mismanagement

Member not Bound to Member

MoA & AoA do not create an express contract among the members. Members do not become
bound to other members - Thus, a member of a company has no right to bring a suit to
enforce the Articles in his own name against any other member or members. It is the
company alone which can sue the offender so as to protect the aggrieved member. May sue in
his own name to restrain another, or others from doing fraudulent or ultra vires acts.

Company not Bound to Outsiders

 “Outsider” signifies a person who is not a member of the company even if he is a director
of or solicitor to the company.
 As between outsiders and the company, neither the MoA nor the AoA would give any
contractual rights to outsiders against the company or its members even though the names
of outsiders are mentioned in those documents in connection with the arrangements that
the company might have contemplated for carrying on its business.
 Rule has been modified. Now, while the Articles cannot create a contract between the
company and any person other than a member in his capacity as a member, they may
indicate the basis upon which contracts may be made by the company. If such a contract
is entered into whether with a member of the company or any other person, the conditions
stated in the Articles will be tacitly adopted by that contract, unless expressly held to be
in the negative or varied by the contract itself.
 If directors contravene the provisions in the Articles- render themselves liable for an
action by members. Members can also ratify acts of directors. If any loss is incurred by
the company, directors are liable to reimburse to the company any loss so incurred.

Constructive Notice & Indoor Management

Doctrine of Constructive Notice [§399]

 MoA and AoA, when registered, become public documents - can be inspected by anyone
on payment of nominal fee - every person who contemplates entering into a contract with
a company has the means of ascertaining and is consequently presumed to know - the
exact powers of the company, the extent to which these powers have been delegated to
the directors, and any limitations placed.
 Therefore, every person dealing with the company is deemed to have a “constructive
notice” of the contents of its Memorandum and Articles. In fact, he is regarded not only
as having read those documents but also as having understood them according to their
proper meaning [Griffith v. Paget]
 Doctrine in favour of the company. It protects the company against outsiders
 Presumption that one has gone through or is aware of the MoA and AoA given that they
are public docs. In fact, he is regarded not only as having read those documents but also
as having understood them according to their proper meaning
 One can’t allege that they didn’t know the provisions of these two docs
 Contract can be enforced against the company in this case since whatever problem arose
was because of the internal irregularity of the company
Side Note - Where the conduct of the parties reveals that there has been some practice in
vogue for several years which was accepted by everyone concerned without any challenge or
question, then that practice in the course of long years in itself becomes an indication that
the rules or Articles which are framed by way of internal management were understood in
that sense

Indoor Management

This doctrine operates as an exception to the Doctrine of Constructive Notice.

 It protects third parties who are entitled to an assurance that all the procedural aspects of a
transaction are carried out. – creates a presumption in favour of outsider, since it is very
difficult for an outsider to figure out if there are any irregularities in the functioning of the
company.
 They may be aware of the MoA and AoA, but not of what happens in the company’s
meetings, etc. and are not expected to enquire into the internal management of the
company. Thus, they are presumed to believe that the internal management of company is
devoid of irregularities, so long as the act done by the directors is not inconsistent with
the MoA and AoA
 Outsiders dealing with incorporated bodies are entitled to assume that the directors or
other persons exercising authority on behalf of the company are doing so in accordance
with the internal regulations as set out in the MoA & AoA.
 Royal British Bank v. Turquand

In Royal British Bank v. Turquand, the directors of a banking company were

authorised by the AoA to borrow sums of money authorised to be borrowed by
resolution of the company from time to time. The directors gave a bond to Turquand
without the authority of any such resolution. It was held that Turquand could sue the
company on the strength of the bond, as he was entitled to assume that the necessary
resolution had been passed. “Outsiders are bound to know the external position of the
company, but are not bound to know its indoor management”.

Held that according to the doctrine of indoor management, persons dealing with a
company having satisfied themselves that the proposed transaction is not in its nature
inconsistent with the MoA and AoA, are not bound to inquire the regularity of any
 internal proceedings. In other words, while persons contracting with a company are
presumed to know the provisions of the contents of the MoA and AoA, they are
entitled to assume that the provisions of the AoA have been observed by the officers
of the company. It is no part of the duty of an outsider to see that the company carries
out its own internal regulations.

Impact: A company is subject to the rule that, where the conduct of a party charged with a
notice shows that he had suspicions of a state of facts the knowledge of which would affect
his legal rights, but that he deliberately refrained from making inquiries, he will be treated as
having had notice, though he is not entitled to claim for his own advantage,” [Jones v. Smith]

Exceptions to Indoor Management (when company won’t be liable) [pg. 93-95]

1. Where the outsider had knowledge of irregularity: actual or even an implied notice of the
lack of authority of the person acting on behalf of the company
2. No knowledge of Memorandum and Articles: did not consult the Memorandum and
Articles and thus did not rely on them
3. Forgery: does not extend to transactions involving forgery or to transactions which are
otherwise void or illegal ab initio-
4. Negligence: where an officer of a company does something which shall not ordinarily be
within his powers, the person dealing with him must make proper enquiries and satisfy
himself as to the officer’s authority. If he fails to make an enquiry, he is estopped from
relying on the Rule.
5. Question regarding the very existence of an agency: cannot apply where the question is
not one as to scope of the power exercised by an apparent agent of a company but is with
regard to the very existence of the agency
6. Fulfilment of a pre-condition before the company itself can exercise a particular power:
the act done is not merely ultra vires the directors/officers but ultra vires the company
itself

Construction of MoA and AoA

 AoA should be constructed as a business document so as to give business efficacy

preference to a construction which will prove unworkable.
 Where the conduct of the parties reveals that there has been some practice 92 in vogue for
several years which was accepted by everyone concerned without any challenge or
question, then that practice in the course of long years in itself becomes an indication that
the rules or Articles which are framed by way of internal management were understood in
that sense.
 MoA, like any other document must be construed according to accepted principles
applicable to the interpretation of all legal documents. No rigid canon of construction is to
be applied to such a document. Like any other document, it must be read fairly and its
import derived from a reasonable interpretation
 The two documents must be read together at all events so far as may be necessary to
explain any ambiguity appearing in the terms of the Memorandum or to supplement it
upon any matter as to which it is silent

Validity of Acts of Directors [§176]

 No act done by a person as a director shall be deemed to be invalid, despite the fact that it
was subsequently noticed that his appointment was invalid by reason of any defect or
disqualification or had terminated- Act or in the Articles –
 Provided that nothing in this Section shall be deemed to give validity to any act done by
the director after his appointment has been noticed by the company to be invalid or have
been terminated
 The object of the Section is to protect persons dealing with the company - outsiders as
well as members - by providing that the acts of a person acting as director will be treated
as valid although it may afterwards be discovered that his appointment was invalid or that
it had terminated under any provision of this Act or the Articles

Directors not aware of their disqualification

The allotment and forfeiture of shares made by the directors who continued to act even after
they were disqualified but were not aware of it, were saved by the §179 -> Where this
Section does not save the situation, the company may in general meeting ratify allotment of
shares even if made by de facto directors with mala fide intentions

Alter Ego Doctrine

used by courts to ignore the status of shareholders, officers, and directors of a company in
reference to their liability in their respective capacity so that they may be held personally
liable for their actions when they have acted fraudulently or unjustly – piercing of the
corporate veil when fraudulent/unjust activities are undertaken – different from vicarious
liability

“the default of the managing director who is the “directing mind and will” of the company,
would be attributed to him and he be held for the wrong doing of the company.”
Chapter 6: Pre-Incorporation and
Preliminary Contracts
PRELIMINARY CONTRACTS

 As an artificial person, a company can only contract through its agents. A contract will be
binding on a company, only when it is entered into by a person acting under its express or
implied authority.
 Powers of a company are defined by its MoA. Any contract made beyond the limits of the
MoA will be ultra vires even if consented to by all shareholders.
 At the time of formation, the promoters, acting on behalf of the company, enter into
contracts for the purchase of property, or for securing the services of managers or other
experts → made before incorporation
 Three situations of contracts:
o made on behalf of the company before its incorporation - preliminary or
preincorporation contracts.
o made after incorporation but before filing of the prescribed declaration by a
director and verification of its registered office by company with the Registrar
under §11 (mandatory) - provisional contracts
o made after the company is entitled to commence business.
 for a company without share capital, a contract can only be made in 2 situations: before
and after incorporation → because a company without share capital can commence
business immediately after obtaining certificate of incorporation, no scope for provisional
contracts,

PRE-INCORPORATION CONTRACTS

 As an artificial person, a company can only contract through its agents. A contract will be
binding on a company, only when it is entered into by a person acting under its express or
implied authority.
 Contracts purported to be made on behalf of a company before its incorporation
 “Although a contract made before the company’s incorporation cannot bind the
company*, it is not wholly denied of legal effect. It* takes effect as a personal contract
with the persons who purport to contract on the company’s behalf and they are liable to
pay damages for failure to perform the promises made in the company’s name, even
though the contract expressly provides that only the company’s paid-up capital shall be
answerable for performance."
 before incorporation → company is non-existent and has no capacity to contract. as a
result, nobody can contract as an agent on its behalf (agent cannot perform what cannot
be done by the principal).
 contract made by a promoter purporting to act obo the company before incorporation
never binds the company (it has no legal existence)
 even if the parties act on the contract or the company derives some benefit from a contract
made before its formation, it will not bind the company
 the promoters alone, will remain personally liable for such contracts, unless the company
enters into the contract in terms of such agreement after incorporation
 a company cannot ratify a pre-incorporation contract after incorporation, but it can enter
into a new contract after its incorporation to give effect to it
 pre-incorporation contract is a nullity → the company cannot sue the vendor of property
if he fails to carry out such a contract

Changes in Pre-Incorporation Contracts after 1963 (The Specific Relief Act)

 §15 and §19 of the SRA considerably alleviated the difficulty posed by the nullity of pre-
incorporation contracts
o §15(h): where the promoters of a company have entered into a pre-incorporation
contract, for the purposes of the company, and such a contract is warranted by the
terms of incorporation, the company may, if it has accepted the contract, and has
communicated such acceptance to the other party to the contract, obtain specific
performance of the contract
o §19(e): under similar circumstances, specific performance may be enforced
against the company by the other party to the contract
 A company cannot acquire shares before incorporation [Inlec Investment (P) Ltd. v.
Dynamatic Hydraulics] → any pre-incorporation agreement to subscribe to shares of a
 company to be formed, cannot be enforced and is usually revocable unless accepted by
the company after its formation

COMMENCEMENT OF BUSINESS

For companies incorporated after the 2019 amendment, a company having share capital
cannot commence business after incorporation till a declaration is filed by the Director that
every subscriber has paid the value of shares agreed (Verified by CS, CA or cost accountant)
and the company has filed for verification of registered office. Default in complying can lead
to 50000 rupees fine and removal of name from RoC.

Commencement of new business by existing company

 if the company wishes to pursue business not in "objects" clause of MoA, it will require
approval of shareholders in general meeting by way of a special res to alter the MoA
[S13]. This res shall be filed with the Registrar and will be certified or not within 30 days.
New business means any activity which is not germane to the original business.
Chapter 7: Conversion of Companies
 According to §14(1) a company may alter its AoA by "special resolution", subject to the
provisions of the Act and the conditions in the MoA, with the effect of conversion from:
o private to public or
o public to private

PUBLIC COMPANY → PRIVATE COMPANY

 Requires alteration of AoA by special resolution in a general meeting

 Any alteration effecting conversion of a public company into a provate company, cannot
take effect without the approval of the Central Government, in a requisite order [second
proviso to §14(1)] + Get NCLT’s approval
 Name clause of Memorandum needs to be amended to include the word ‘Private’ + The
Articles of the Company shall be suitably amended for the insertion of restrictive
provisions applicable to a Private Company.
 every alteration of the AoA and a copy of the order of the Tribunal/CG must be filed with
the Registrar within 15 dayss → File form INC. 27 with Registrar (Rule 33,
Incorporation Rules)
 SUBSDIDIARY: A subsidiary of a public company will be a public company even if it
continues to be a pricate company in its Articles; subsidiary of public company shall be
deemed to be public company even if it continues to be private company [proviso to
§2(71)]
 COMPANIES ALREADY REGISTERED:
o A company which already exists can convert by alteration of its MoA and AoA
according to the provisions of Chapter II [Incorporation of Company and Matters
Incidental thereto] [§18(1)]
o When conversion is done u/ this provision, the Registrar, after satisfaction that the
provisions required for registration have been complied with, will close the first
registration, and issue a new certificate of incorporation, after registering requisite
documents.
 o This will not affect the company's pre-existing debts, liabilities, rights,
obligations, and contracts.
 certified true copy of the special resolution along with a copy of the Notice convening the
meeting including the explanatory statement shall be filed with the Registrar in Form
No.MGT.14

PRIVATE COMPANY → PUBLIC COMPANY

Private company loses its "private" character upon alteration of Articles, such that the 3
restrictions required under §2(68) are removed, namely (i) restriction on transferability of
shares, (ii) maximum 200 members and (iii) prohibit invitation to public to subscribe for
securities. Thereafter, it will cease to have the privileges and exemptions conferred on such a
company by the Act → becomes a public company [proviso to §14(1)]

 Pass special resolution in general meeting

 File form INC 27 with Registrar
 File MGT 14 for special resolution
Chapter 8: General Meetings
 Meeting: a gathering/assembly/getting together of a number of persons for transacting
any lawful business. Convening of one such meeting every year is compulsory
 There must be at least two persons to constitute a meeting - one shareholder cannot
constitute a company meeting even if he holds proxies for other shareholders (except in
exceptional circumstances)
 a company, being an artificial person, cannot act on its own. It, therefore, expresses its
will or takes its decisions through resolutions passed at validly held meetings. The
primary purpose of a meeting is to ensure that a company gives reasonable and fair
opportunity to those entitled to participate in the Meeting to take decisions as per the
prescribed procedures. decision making powers of a company are vested in the Members
and the Directors and they exercise their respective powers through Resolutions.
 Members' Meetings: Company needs to hold meetings of the members, to take approval
of certain business items → meetings to be held for seeking approval to ordinary business
and special business are called annual general meeting and extraordinary general
meeting. In certain cases, a company may have to hold a meeting of a particular class of
members.
 Types of Meetings: AGM, EGM, Class Meetings. There can also be other meetings, such
as the Board of Director's Meeting (Sec. 173), Creditors Meeting (Sec. 230) / Debenture
Holders Meeting with the Board of Directors Audit Committee Meeting (Sec. 177)
Nomination and Remuneration Committee Meeting (Sec. 178)

Annual General Meeting (AGM)

 §96 provides that every company other than an OPC must hold an AGM every year - it is
an important annual event where members get an opportunity to discuss the activities of
the company
 Holding of AGM:
o An AGM should be held once a year
o The First AGM must be held within 9 months from the closing of the first FY.
Thus, not necessary to hold AGM in the year of its incorporation
o Subsequent AGMs should be held 6 months from the closing of the FY
 o The gap between 2 AGMs should not exceed 15 months
 Extension of validity period: If the company cannot hold an AGM within the prescribed
time, the Registrar may give an extension of a maximum of 3 months, but it cannot be
granted for the first AGM.
 Time and place: AGM can be called during business hours (9am to 6pm) on any day that
is not a national holiday. Must be held in registered office or the company or any other
place in local limits. CG may exempt any company from these provisions, subject to
conditions.
 Default: if there is default in holding meeting, then a fine of upto 1 lakh (may extend to
Rs. 5,000/- for each day in case of a continuing defect) can be imposed on the company
and every officer who is in default [§99] + and any member can approach the Tribunal to
call or direct the calling of an AGM of the company and to issue any relevant directions
→ may include a direction that one member of the company present in person or by
proxy shall be deemed to constitute a meeting
 Business at AGM - §102(2)(a) all business at an AGM except the following would be
special business :-
o consideration of financial statements and the reports of the Board of Directors
and auditors,
o declaration of dividend,
o appointment of directors in place of those retiring,
o appointment and remuneration of auditors.

everything else is special business

Extraordinary General Meeting (EGM)

 All general meetings except AGMs are EGMs

Calling of EGM:

May be called for :-

 By Board [§100(1)]: Board may call an EGM whenever it deems fit

 By Board on Requisition [§100(2)]: Board must call an EGM on receipt of requisition
from:
 o members who hold not less than 1/10th of the paid up share capital on the date of
receipt of requisition, and carry the right to vote (for companies with share
capital), or
o members who hold not less than 1/10th of the voting power on the date of receipt
of requisition (for companies without share capital)

Requisition with particulars of what needs to be discussed will be sent to the

registered office, signed by the requisitionists. This meeting has to be called for
within 45 days of receipt of requisition with 21 days notice.

 By requisitionists [§100(4)]: if the Board does not call for a meeting after receipt of
valid requisition (within the abovestated time limits), the meeting may be called and held
by the requisitionists themselves, within 3 months of the receipt of the requisition.
o Any reasonable expenses for such a meeting would be reimbursed by the
company. The company will in turn recover this from the defaulting directors
o quorum needs to present within 30 mins from the time appointed for holding a
meeting called by requisitionists or the meeting will stand cancelled.
o requisition provided in writing or in electronic mode at least 21 days before
proposed day of the EGM, specifying the date, time, place and the business to be
transacted at the meeting, but does not have to have an explanatory statement →
in case a special resolution is proposed, it should be specified
o notice must be signed by all requisitions and will go to all members on the
Registry
 By Tribunal [§98]: if it is impracticable to call/hold/conduct the meeting of the
company, the Tribunal may suo motu or on application:
o order a meeting to be called, held and conducted in such manner as it thinks fit
o give any ancillary or consequential directions as it thinks expedient, including
directions regarding conduct of meetings.

Class Meeting

Such meeting is convened by a particular class of shareholders only and only if they think
that their rights are being altered or if they want to vary their attached rights, as mentioned u/
§48 , and u/ §232 also, if under Mergers and Amalgamation scheme, meetings of particular
shareholders and creditors can be convened if their rights/privileges are being varied to their
interests in such company.

Statutory Meeting

Every company limited by shares and every company limited by guarantee and having
a share capital shall, within not less than one month and not more than six months from the
date at which the company is entitled to commence a business, hold a general meeting of the
members of the company.

This meeting is called the ‘statutory meeting.’ This is the first meeting of the shareholders of
a public company and is held only once in the lifetime of a company.

Quorum

 Quorum refers to the minimum number of members required to constitute a valid

meeting.
 §103 provides the quorum for various categories of companies.
o Public Company:
 5 if total number of members is not more than 1000
 15 if total number of members is b/w 1000 and 5000
 30 if more than 5000
o Private Company: 2 members
 If the quorum is not present within half-an-hour from the time appointed for holding a
meeting of the company: (a) the meeting shall stand adjourned to the same day in the next
week at the same time and place, or to such other date and such other time and place as
the Board may determine; or (b) the meeting, if called by requisitionists, shall stand
cancelled.

Chairman of Meetings

 Unless provided otherwise in the AoA, members personally present at the meeting shall
elect one of themselves to be a chairman, by a show of hands [§104]
 in case of a poll on the election of a chairman, it shall be taken forthwith in accordance
with the provisions of this Act and the Chairman elected on a show of hands shall
continue to be the Chairman of the meeting until some other person is elected as
Chairman as a result of the poll

Proxies

 §105 Any member entitled to attend and vote at a meeting shall be entitled to appoint
another person as a proxy to attend and vote at the meeting on his behalf.
 Every notice calling a meeting of a company which has a share capital, or the Articles of
which provide for voting by proxy at the meeting, should carry with reasonable
prominence, a statement that a member entitled to attend and vote is entitled to appoint a
proxy, or, where that is allowed, one or more proxies, to attend and vote instead of
himself, and that a proxy need not be a member.
 A proxy shall not have the right to speak at the meeting.
 A proxy shall be entitled to vote only on a poll.
 A member of a company registered under Section 8 shall not be entitled to appoint any
other person as his proxy unless such other person is also a member of such company.
 A person appointed as proxy shall not act as proxy on behalf of more than fifty members
and members holding in the aggregate more than ten percent of the total share capital of
the company carrying voting rights.
 The instrument appointing the proxy must be deposited with the company, 48 hours
before the meeting (Form MGT 11)

Postal Ballot

 §2(65): postal ballot means voting by post or through any electronic mode -
 §110 - If a company is transacting in a business which the Central Government has by
notification declared as one in which postal ballots need to be used, then this cannot be
deviated from.
 Some examples of items which only be transacted by postal ballot voting :-
o alteration of objects clause of AoA
o alteration of AoA, to remove/include pvt company restrictions under S.2(64)
o change in place of registered office outside local limits
o change in objects for whoch a company has raised money via prospectus
o issue of shares with differential rights as to voting or dividend or otherwise
o variation in the rights attached to a class of shares or debentures or other securities
o buy-back of shares
o election of a director under §151
o sale of the whole or substantially the whole of an undertaking of a company as
specified
o giving loans or extending guarantee or providing security in excess of the limit in
§186
Chapter 9: Concept of Capital and
Financing

Meaning and Classification of Capital

Layman’s terms, capital is money raised by the issue of shares. Debentures, borrowed money
by the company (DOES NOT MEAN CAPITAL)

“Capital”: in Company Law, capital refers to the “share capital”, which is the capital in
terms of rupees divided into specified number of shares, each of a fixed amount.

Share capital of a company is classified as :-

1. Nominal, Authorised or Registered Capital: such capital as is authorised by the MoA

to be the maximum share capital of the company [§2(8)]
2. Issued Capital: such capital as the company issues from time to time for subscription –
part of the authorised capital which the company issues for the time being for subscription
and allotment by the public – computed at face/nominal value. [§2(50)]
3. Subscribed Capital: such part of the (issued) capital which is for the time being
subscribed by the members of a company at face value. Entire issued capital may or may
not be subscribed. [§2(86)]
4. Called-up Capital: part of the capital, which has been called for payment - portion of the
subscribed capital which has been called up or demanded on the shares by the company.
[§2(15)]
5. Paid-up Share Capital: amount of money credited to the company as capital which has
been paid-up by the issue of shares. also includes any amount credited as paid-up in
respect of shares of the company, but does not include any other amount received in
respect of such shares, by whatever name called. [§2(64)]
6. Preference & Equity Share Capital: [§43]
o Equity share capital: means all share capital which is not preference share capita
 o Preference share capital: means that part of the issued share capital of the
company which carries or would carry a preferential right with respect to (a)
payment of dividend and (b) repayment, in case of winding up. (amount is fixed or
rate can be fixed)

Meaning and Nature of Shares

 §2(84): “share” → a share in the share capital of a company and includes stock except
where a distinction between stock and shares is expressed or implied.
 A share is a right to a specified amount of share capital of a company, carrying with it
certain rights and liabilities while the company is a going concern, and while winding up.
 Refers to the interest of the shareholder in the company measured by a sum of money, for
the purposes of liability in the first place, and of interest in the second, but also consisting
of a series of mutual covenants entered into by all the shareholders inter se
 A share is a right to participate in the profits made by a company, while it is a going
concern and declares a dividend and in the assets of company when it is wound up
 A share is not a sum of money but a bundle of rights and liabilities; it is an interest
measured by a sum of money. These rights and liabilities are regulated by the Articles of
a company.
 Shares are moveable property, transferable in the manner provided by the AoA → share
is regarded as goods in India (SOGA) [§44]

Kinds of Shares
 §43 permits a company limited by shares to issue 2 types of shares –
1. Equity Share Capital
1. With voting rights
2. With differential rights as to dividend, voting or otherwise according to
prescribed rules
2. Preference Share Capital
 §47(2): every member of a company limited by shares and holding any preference share
capital therein shall, in respect of such capital, have a right to vote only on resolutions
placed before the company which directly affect the rights attached to his preference
 shares and, any resolution for the winding up of the company or for the repayment or
reduction of its equity or preference share capital and his voting right on a poll shall be in
proportion to his share in the paid-up preference share capital of the company.

o Provided that the proportion of the voting rights of equity shareholders to the
voting rights of the preference shareholders shall be in the same proportion as the
paid-up capital in respect of the equity shares bears to the paid-up capital in
respect of the preference shares:
o Provided further that where the dividend in respect of a class of preference shares
has not been paid for a period of two years or more, such class of preference
shareholders shall have a right to vote on all the resolutions placed before the
company

Preference v. Equity Share Capital

 Preference shareholders are entitled to a fixed dividend, while the dividend amount for
equity shareholders depends on the profit available with the company.
 Preference shareholders receive their dividend first.
 In case of winding up, preference shareholders have preferential right to get initial
investment back.
 Dividend for them may be cumulative while this is not the case for equity shareholders.
 Preference shareholders can only vote on matters which affect their special rights -
resolutions on winding up, repayment, dividend considerations, etc. whereas equity
shareholders can vote on all matters affecting the company.
 Voting rights of preference/equity shareholders shall be in proportion to their share in
the paid-up capital.
 No bonus shares/right shares are issued to preference shareholders - equity shareholders
may get.
 Redeemable preference shares may be redeemed by the company. Equity shares cannot
be redeemed except under a scheme involving reduction of capital or buy back of its
own shares.

Issue of Securities at a Premium

A company may issue securities at a premium when it is able to sell them at a price above par
or above nominal value – no restrictions under the Act for this – but regulations are there

When a company issues shares at a premium, the aggregate amount of the premium received
on those shares is transferred to a “securities premium account” → provisions relating to
reduction of share capital will apply to this account, as if it were the paid up share capital of
the company

Utilising Securities Premium

 Securities premium can be used only for for

o issuing fully paid bonus shares to members,
o writing off of preliminary expenses of the company,
o providing premium payable on redemption of any redeemable preference shares or
debentures of a company
o for the purchase of its own shares and securities [§68].
 Firstly, the premium is not profit which is why it cannot be distributed as dividend.
Secondly, the amount of premium (in whatever form of payment) must be kept in a
separate account, known as the “Securities Premium Account”. Thirdly, the amount of
premium is to be maintained with the same sanctity as the share capital.
 Where a company issues shares at a premium, even though the consideration may be
other than cash, a sum equal to the amount or value of the premium must be transferred to
the securities premium account.
 Premium does not give shareholders any preferential rights during winding up

Prohibition on issuing shares at discount

Shares cannot be issued at a discount and if the company does so, then they will be liable to
pay a penalty of the amount intended to be raised by discounted shares or 5 lakh rupees,
whichever is lower and all the money will have to be refunded with interest [§53]

Exceptions to this (2017 Amendment):

 §54 which is the issue of sweat equity shares

 Shared issued to creditors when debt is converted to shares, in pursuance of any statutory
resolution plane etc.

Issue of Sweat Equity Shares

 §2(88) defines “sweat equity shares” as equity shares issued by a company to its directors
or employees at a discount or for consideration, other than cash, for providing know-how
or making available rights in the nature of intellectual property rights or any value
additions [§54]- Their consideration for these value additions is not added to their
remuneration which is why they get discounted shares
 issue of sweat equity shares has to be verified/passed by a special resolution in a
general meeting – explanatory note should have details of the meeting and the reason
behind issuing these shares – specifics like number, price etc. Such a resolution of valid
for 12 months
 Listed companies provide such shares according to SEBI rules
 Unlisted companies must follow CG rules (Share Capital and Debenture Rules, 2014)
 Holders of Sweat Equity Shares to be ranked pari passu with other Equity shareholders
(same rights and obligations)
 Limits:
o company shall not issue sweat equity shares for more than 15% of the existing
paid-up in a year or shares of the issue value of rupees five crores, whichever is
higher.
o In case of start-up, for first 10 years after incorporation, they can give 50% shares.
o The issuance of sweat equity shares in the Company shall not exceed twenty five
percent, of the paid up equity capital of the Company at any time.
o These shares are locked/non-transferable for a period of 3 years from issuance
o valuation is carried out by a registered valuer (Registrar, especially when they are
given for non-cash consideration fully).
 As compensation: They will be considered as part of managerial remuneration if issued
to a director or manager and if they are issued for non-cash consideration such that it can
be translated on the balance sheet. If shares are issued pursuant to acquisition of an asset
by the employee, then the shares excess of asset amount will be treated as compensation
 and if they are issued not in pursuance of asset acquisition, the entire equity share amount
will be treated as compensation.
 Board must disclose the details of sweat equity shares in the Directors' Report with
required details. A Register of sweat equity shares shall be maintained.

Shares with Differential Voting Rights:

 §43 enables companies to issue a variety of equity shares with differential rights.
 Subject to certain conditions:
o AoA should authorise the issue of such shares
o Passed by ordinary resolution passed at a general meeting (explanatory statement
with all details must be enclosed, like total no of shares to be issued, details of
differential rights , % of voting right)
o Voting power for these shares with differential rights cannot exceed 74% of the
total voting power
o company should not have any subsisting defaults in payment of declared dividend
to shareholders etc.
o Company should not have defaulted in payment of dividend to any share holder or
submitting financial statements for 3 preceding years
o Company hasn’t been penalised by any court or tribunal
 Rule 4(3) states that the company shall not convert its existing equity share capital with
voting rights into equity share capital carrying differential voting rights and vice–versa
 Board must disclose the details of differential rights shares in the Directors' Report with
required details. Special record will be maintained by Register of Members.
 Rights of holders of differential shares: holders shall enjoy all other rights such as bonus
shares, rights shares etc., which the holders of equity shares are entitled to, subject to the
differential rights with which such shares have been issued.
 Register of Members to contain the details of equity shareholders having differential
voting rights

Issue & Redemption of Preference Shares

 A company cannot issue irredeemable preference shares or redeemable preference shares
with the redemption period beyond 20 years. [§55(1)-(2)]
 Exception: company engaged in the setting up and dealing with of infrastructural projects
may issue preference shares for which redemption period can go up to 30 years,
 Conditions [proviso to §55(2)]
o Shares can only be redeemed out of the profits of a company, or out of the proceeds of a
fresh issue of shares made for the purposes of such redemption
o No such shares shall be redeemed unless they are fully paid
o A sum should be transferred from the profits of the company to a Capital Redemption
Reserve Account.
 The issue of these shares has to be done by way of a special resolution with particulars
(explanatory statement to be supplied before) in general meeting. The company should
not have any subsisting defaults with respect to redemption of preference shares or in
payment of dividend before/after the commencement of the Act.
 Special record will be maintained by Register of Members.
 Redemption - a company may redeem its preference shares on the terms of issue or
varied terms which have been approved by preference shareholders under §48 of the Act
and the preference shares may be redeemed-
o

1. at any fixed time or on happening of a particular event

o

2. at any time at the company's option and

3. any time at the shareholder's option

When a company isn’t in a position to redeem preference shares, it can issue more
redeemable preference shares equal to the amt unpaid

 Publication of authorised, subscribed and paid-up capital - Any publication of

authorised capital of a company should be accompanied by advertisement of paid up and
subscribed shares. Penalty - 10k for the company, and 5k for each defaulting officer.
Further issue of shares (“Rights Shares”)
 Further issue of shares are called rights shares. §62 provides that a company can increase
its subscribed capital by the issue of further shares which will first be offered to the
existing equity shareholders in proportion to their paid-up share capital amounts by a
letter of offer-
 The company must give notice to each of the equity shareholders, giving him option to
take the shares offered to him by the company - The equity shareholder can decide
between 15 to 30 days if they wish to take more shares. If they do not do so, they will
have deemed to decline the offer unless the AoA allows for renouncing of shares to
another person -
 If a shareholder has neither renounced in favour of another person nor accepted the
shares, the Board of directors may dispose of the shares so declined in such manner which
is not dis-advantageous to the shareholders and the company.
 A company can issue further shares to persons other than existing shareholders either for
cash or for a consideration other than cash, if — (1) the company in General Meeting
passes a special resolution to this effect; and (2) the price of such shares is determined by
the valuation report of a registered valuer, and other conditions are complied with.
 Cases - §62 is intended to cover cases where the director of a company decides to
increase the issued capital of a company within the limit of the total authorised capital as
per the MoA and AoA by issuing further shares. The directors must act responsibly and
for the benefit of the company [Nanalal Zaver]. The power may not be used only when
there is need to raise additional capital, but may also be used to meet statutory
compliances such as having sufficient numbers of shareholders [Needle Industries].
o (c) Balkrishan Gupta Swadeshi Polytex Ltd. (1985) 58 Com Cases 563: AIR 1985 SC
520]. Although the term ‘holders of the equity shares’ is used in Sub-Section (1)(a)
and ‘members’ in SubSection (1A)(b) of Section 81 (Corresponding to Section 62 of
the Companies Act, 2013), the two terms are synonymous and mean persons whose
names are entered in the register of members
o (d) In Worldwide Agencies (P) Ltd. v. Margaret T. Desor, (1990) 67 Com Cases 607:
AIR 1990 SC 737, it was held that persons who have become entitled to the shares of
a deceased member can exercise all the membership rights of the deceased
irrespective of the fact whether their name is in the register of members or not.
 o (e) Mathalone (R) v. Bombay Life Assurance Co. Ltd. AIR 1953 SC 385: (1954) 24
Com Cases 1. The Court held that the transferor could not be compelled by the
transferee to take up on his behalf the rights shares offered to the transferor and all
that he could require the transferor to do was to renounce the rights issue in the
transferee’s favour. [RANDOM CASE LAW]

Bonus Shares
 §63: A company, if provided by its AoA, may capitalize its profits by issuing fully-paid
bonus shares. If a company accumulates a large amount of distributable profits, they may
choose to issue bonus shares by converting profits into capital and dividing it up. These
shares are given free of cost and do not represent taxable income
 Advantages:
1. Fund flow is not adversely impacted
2. Market value of company shares come down to its nominal value
3. Market value of members shareholdings increase
4. Not taxable income
5. Paid up share capital increase with issue of bonus shares
 Sources: According to §63(1), can issue bonus shares out of (i) its free reserves, (ii)
securities premium account, (iii) capital redemption reserve account
 Conditions: §63(2) provides that a company cannot issue bonus shares unless:
1. it has been authorised by the AoA
2. has on the recommendation of the Board been authorised at a general meeting
3. company has not defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it.
4. Company has not defaulted on payment of statutory dues of its employees
5. All partly-paid shares are fully-paid up
 Bonus shares cannot be issued in lieu of dividend
 A company which has once announced the decision of its Board recommending a bonus
issue, shall not subsequently withdraw the same.
ESOP Scheme (Employee Stock Option)
[§2(37)]
Refers to the scheme of giving directors, employees and officers of a company or its
subsidiaries the chance to subscribe to shares of a company at a future date at a pre-
determined price. Also sanctioned by §62(1)(b), company may issue further shares to its
employees under ESOP.

Rules:

 An ESOP scheme can be initiated after approval from the shareholders through special
resolution (an explanatory statement with all particulars needs to be given before)
 An employee is a permanent employee, or a director or even promoter.
 The Company is free to decide the pricing structure as long as it is in conformity with
accounting policies
 A separate resolution is needed to grant option to employees of holding/subsidiary
companies
 There shall be a minimum period of one year between the grant of options and vesting of
option.
 The company is free to specify the lock-in period
 Employees shall not have right to receive any dividend or to vote or in any manner enjoy
the benefits of a shareholder in respect of option granted to them, till shares are issued on
the exercise of option.
 These aren’t free – it may be forfeited if it is not exercised in the stipulated time or
amount may be refunded if option cannot be vested
 Conditions:
o The option granted to employees shall not be transferable to any other person.
o The option granted to the employees shall not be pledged, hypothecated,
mortgaged or otherwise encumbered or alienated in any other manner.
o no person other than the employees to whom the option is granted shall be entitled
to exercise the option.
 In the event of the death of employee while in employment, all the options granted to him
till such date shall vest in the legal heirs or nominees of the deceased employee.
 Board must disclose the details of differential rights shares in the Directors' Report with
required details (options granted, options vested, options exercised, etc)
 Separate register of ESOP will be maintained by Register of Members

Issue of Shares on Preferential Basis

 §62(1)(c) – company can issue shares to further persons other than existing shareholders
– for cash or for consideration if:
 In general meeting, company passes a resolution to this effect
 price of such shares is decided by valuation report of a registered valuer in accordance w/
provisions of Ch III and any other prescribed conditions

Preferential offer

The term preferential offer means an issue of shares/ securities by a company to any select
person/ group on a preferential basis – and does not include shares or securities offered via –
public issue, rights issue, employee stock option scheme, employee stock purchase
scheme, sweat equity share issue, bonus shares depository receipts issued abroad or
foreign securities (any other categories)

Rules

When preferential offer is made by a listed company→ must comply with provisions of the
Act and SEBI rules.

If made by an unlisted company, only in accordance with the Act, and must meet the
following requirements:

 issue is authorized by AoA

 issue is authorized by special resolution of members
 the following disclosures must be made in explanatory statements annexed to general
meeting notice:
 o Object of issue
o Total no of shares issued
o Price/ price band of issue
o Basis for deciding date on which price was arrived at + report of registered valuer
o Date on which price was decided
o Class/ classes to whom allotment will be made
o Intention of promoters/directors, management etc to subscribe to offer
o Time within which allotment will be completed
o Names of proposed allottees + % of post pref offer capital they will hold
o Change in control of company that could occur due to such offer
o of people who have already received pref allotment – no of securities and price to
be mentioned
o Justification for allotting for consideration and not cash
o Pre-issue + post-issue shareholding patter – prescribed format
 The allotment of securities must be done within 12 months from passing of the special
resolution
 If allotment is not completed within 12 months – another special resolution has to be
passed to complete allotment thereafter
 price of shares – either for cash or consideration – has to be decided based on registered
valuer’s report
 when convertible securities offered on preferential basis w/ option to apply and get equity
shares – price of resultant shares has to be determined:
o When offer for convertible shares is being made (according to valuer report)
o Not before 30 days from date when holder of convertible securities shares
becomes entitled to apply for shares (according to valuer report – submitted not
before 60 days of holder becoming eligible to apply for shares)
 When shares being allotted for consideration other than cash– valuation of consideration
to be done by valuer & his report
o If non-cash consideration takes form of depreciable/ amortizable assets – shall be
carried to balance sheet in accordance w accounting standards –
o if not applicable then it shall be expensed as provided in accounting standards

Alteration of share capital

 A limited company having share capital may alter its MoA by ordinary resolution if so
authorised by its AoA at a general meeting [§61]
 The following types of alterations can be made:
1. increase in authorised share capital: can be done at any time by alteration of MoA.
2. consolidate and divide all or any of its share capital into shares of a larger amount
1. proviso to §61(1)(b) states that no consolidation and division can take
place in a manner that affects changes in voting percentage of
shareholders, without approval from the Tribunal, on application
3. convert fully paid-up shares into stock and reconvert that stock into fully paid-up
shares of any denomination,
4. sub-divide shares into shares of small amounts (but ensure that the proportion
between the amount paid and unpaid shall remain the same),
5. cancel shares which have not been subscribed to. (not a reduction of share capital
only the cancellation of unissued share capital)
 Company needs to have authority to alter its share capital, in the AoA. If not, then AoA
has to be amended by special resolution–

o Power to alter clause should be – bona fide, in interest of company & not for
benefit of a group. Capital clause in MoA can be amended by ordinary
resolution (if empowered by the AoA)

 §64 – when (a) a company alters its share capital according to §61(1); (b) government
passes order under §62(4)/(6) increase authorised capital, or (c) a company redeems any
redeemable preference shares – company must file notice w/ Registrar within 30 days
along w altered Memorandum (notice in Form No. SH.7 + fee)

Contravention of this section – company & officers responsible – pay penalty of

Rs.1000 per day of default or 5 lakhs whichever is less [§64(2)]

 Government can also increase capital by an order:

o Government can pass an order under §62(4)/(6)– to convert debentures into

shares on terms and conditions considered reasonable by Government – will
have the effect of increase in authorized capital of company. The company
can appeal before tribunal (within 60 days of receiving order) for not carrying
 out this order. If company is okay w it – then Memorandum will stand altered
and authorized share capital will be increased by amt = value of newly
converted shares (from debentures)

 The consent of meeting of classes and shareholders will not be needed for increasing
share capital – won’t affect or vary class rights .
 This power can be exercised ONLY if AoA allows for it.
 Notice of meeting should specify the amount by which and to which share capital is to be
increased
 Can share be increased beyond accepted amt? YES – can later be ratified
 Points laid down by judgments:

o Increased capital can consist of preference shares as long as it isn’t

inconsistent w rights under MoA
o Resolution for the cancellation of shares has to be passed by company in
general meeting – power to cancel shares cannot be restricted by injunction
passed by court
o Consolidation and sub-division of shares can be done via same resolution
o Notice convening meeting to pass resolution for increasing MUST specify amt
of increase
o If shares issued beyond authorized amt and resolution passed at gen meeting –
original issue not in acc w Articles but such ratification of shares is effective +
allottees are bound now

Nature of stock
 §61 allows conversion of fully paid shares into stocks
 §2(84) defines shares as inclusive of stock – “share means a share in the capital of a
company and includes stock.”
 By converting shares into stock, shareholder → stockholder. Stockholder has same
rights to dividend as a shareholder
 Conditions for conversion:-
o ONLY FULLY PAID SHARES CAN BE CONVERTED TO STOCKS.
o no direct issue of stock by a company is lawful.
  It is only the conversion of fully-paid shares into stock, that is allowed by §61(1)(c) and
not a direct issue of stock.
 Stocks cannot be directly issued – unlawful
 When shares converted to stock – value of investment made by person, in company,
stays same just that it is described differently – After shares are converted into stock, the
stockholder may own Rs. 1,000 worth of stock where formerly he held one hundred
shares of Rs. 10 each.

Difference between shares and stonks:

Reduction of Share Capital

Reduction of Share Capital

Reduction of capital means reduction of issued, subscribed and paid-up capital of the
company. The need for reducing capital may arise in various circumstances for example
trading losses, heavy capital expenses and assets of reduced or doubtful value

 66(1): Subject to confirmation by the Tribunal on an application by the company– a

company limited by shares or limited by guarantee and having a share capital may, by a
special resolution, reduce the share capital in any manner – the order of the tribunal
confirming the reduction shall be sent to the ROC.
 It can reduce by:
o Extinguishing/ reducing liability on shares wrt share capital not paid up
o With or without extinguishing/ reducing liability on share cap
1. Cancel paid up share capital which is which is lost or is unrepresented by
available assets
2. Pay off any paid-up share capital in excess of the wants of the company,
alter its Memorandum by reducing amt of share capital and shares
accordingly
 REDUCTION IS NOT ALLOWED WHEN COMPANY IS IN ARREARS IN
REPAYMENT OF ANY DEPOSITS IT HAS ACCEPTED [proviso to §66(1)]
Steps For Reducing Share Capital:

1. Share capital of a company may be reduced by a special resolution, which is then subject
to confirmation by the NCLT.
2. Application submitted to the Tribunal, along with the following documents:
o List of creditors – certified by Managing Director if not MD then 2 directors – list
to be made not before 15 days from subbing of application
o List has to be class-wise and show names, address amts owed to creditors
o Certificate from auditor that list of creditors is valid document as company records
o Certificate by auditor + directors that company is not in arrears in repayment of
deposits
o Certificate from auditor stating that accounting treatment for the company’s
reduction is acc to accounting standards of §133.
3. Tribunal sends notice seek representations and objections from the Central Govt., ROC,
SEBI (if company is listed) and creditors. If the Tribunal is convinced that debts and
claims of creditors have been discharged/secured/determined + consent obtained – then
notice doesn’t need to be sent to the creditors
4. Subsequently, the Tribunal may pass an order confirming application – then company
passes special resolution again– and reduce its share capital in any manner, in particular:

1. extinguish or reduce the liability on any of its shares in respect of the share capital
not paid-up; or
2. either with or without extinguishing or reducing liability on any of its shares,—
1. cancel any paid-up share capital which is lost or is unrepresented by
available assets; or
2. pay off any paid-up share capital which is in excess of the wants of the
company, alter its memorandum by reducing the amount of its share
capital and of its shares accordingly:

Provided that no such reduction shall be made if the company is in arrears in the repayment
of any deposits accepted by it, either before or after the commencement of this Act, or the
interest payable thereon.

1. The Court also has to sanction the confirmation – §102

Notice by tribunal – §66(2)

Tribunal has to send notice of all applications made for reduction to:

 Central govt
 Registrar
 SEBI (for a listed company)
 Creditors of the company

All parties have 3 months to respond to notice or send in representations – if they quiet then
Tribunal will assume they’re okay with it [proviso to §22(2)]

Confirmation of reduction – [§66(3)]

 If Tribunal satisfied that the debts and claims of creditors have been
discharged/determined/secured + they have consented to reduction – it may pass order
confirming reduction based on terms and conditions it deems fit
 Tribunal cannot sanction an application for reduction of share capital unless the
accounting treatment, proposed by the company for such reduction is in conformity with
the accounting standards specified in §133 or any other provision of this Act and a
certificate to that effect by the company’s auditor has been filed with the Tribunal
 The Company has to publish order of confirmation according to Tribunal’ directions –
§66(4)

Deliver copy of Order to the ROC [§66(5)]

 Within 30 days of receiving the copy of order – company has to send to the ROC,
certified copy of order + minute i.e., document containing details of reduction approved
by Tribunal showing:
 Details that have to be approved in the minute document
o amount of share capital
o of shares it was divided into
o amount of each share
o amount (if any) deemed to be paid up, at the date of registration, on each share
 Thereafter, Registrar will register and issue certificate for the same.

Difference between alteration and reduction

of share capital
Untitled

Diminution of Share Capital Is Not Reduction

 According to §61(1)(e) - Diminution of capital is the cancellation of the unsubscribed

part of the issued capital. This can be effected by an ordinary resolution, as long as it is
authorised in the AoA
 On the other hand, according to §61(2) – cancellation of shares under §61(1) shall not
be deemed to be a reduction of share capital. Thus, diminution also does not need
confirmation by Tribunal
 Cases where diminution cannot be treated as reduction:
o Where the company cancels shares which not have not been or agreed to be
taken up by anyone – [61(1)(e)]
o Where redeemable preference shares are redeemed by company according to 55
o Where any shares are forfeited due to non-payment of calls and such forfeiture
amounts to reduction of capital
o Where the company buys-back its own shares under §68 [§66(6)]
o Where reduction is done due to Tribunals order sanctioning compromise or
arrangement under §230

Reduction of Share Capital without Tribunal Confirmation

This can happen in two situations:

1. Surrender of shares – this is when shareholder surrenders their share to company –

either by settlement of dispute or other reasons – will have same effect as transfer of
shares in company’s favour + amt to reduction of capital
 But if under arrangement shares are transferred to a nominee of company – then wont
amount to reduction of capital

Surrenders are allowed when:

o the same circumstances where forfeiture has been accepted/ is justified

o where AoA allows for it – it has the effect of releasing shareholder from further
liability
o when shares surrendered in exchange for new shares of same nominal value
2. Forfeiture of shares – by way of AoA – company may allow for forfeiture for non-
payment of calls – doesn’t need tribunal confirmation

The regulations regarding notice, procedure and manner stated in AoA have to be
strictly followed – otherwise will be void

Effected by resolution passed by Board of Directors

Creditors right to object:

 After special resolution is passed company has to apply to court by way of petition for
confirmation under §101
 Where reduction involves diminution of liability w.r.t unpaid capital, or payment to
shareholder of paid up share capital, or in any other case if court directs – the following
provisions are to be followed:
o Creditors having debt/ claim admissible in winding up are entitled to object
o Court will settle list of those creditors allowed to object
o If any creditor objects – either his consent should be obtained for reduction or
should be paid off or payment secured
o Court will also consider minority shareholder & creditors while considering
reduction sanction
 When company is returning excess paid up share capital –
o their class rights are considered – court treats reduction = liquidation
o shareholders w priority during returns in liquidation – will get capital first
even if they remain members
Confirmation & Registration Of Reduction by Court

 §102 – if court is satisfied that the debts and claims of creditors

determined/secure/discharged – will confirm reduction
 Can also direct company to add “and reduction” to name of company for some time + will
ask to publish reasons for & causes that led reduction – to give public info they need
 Once again courts order + minute [the doc] must be subbed to Registrar for registering –
ONLY WHEN REGISTERED WILL REDUCTION TAKE EFFECT
 Registrar will issue certificate – conclusive proof that Act has been complied w & share
capital is now of the manner mentioned in the minute – reduction will be conclusive once
certificate has been issued EVEN IF:
o later discovered that company was not authorized by AoA to reduce
o special resolution was invalid

Buy Back of Securities – **§**68

Sources –

 According to §68(1) - Companies can purchase its own shares or other specified
securities (buy-back) out of:
 free reserves
o securities premium account
o proceeds from other type of shares or specified securities
 No buy-back of any kind of shares/ securities can be conducted using proceeds of an
earlier issue of the same kind of shares/securities.
 At time of buy-back – company has to have enough balance in the one or more
reserves/accounts to accommodate full value of buy back.

Authorisation [§68(2)]
  Buy-back has to be authorised by the AoA. If no such provision is available, the AoA
need to be altered in order to authorise buy-back.
 Buy-back can be made with:
o the Board’s approval at a board meeting – they can approve buy back up to
10% of total paid up equity capital and free reserves – resolution has to be
passed at their meeting, and/or
o speciall resolution passed by shareholders in a general meeting – can authorize
buy-back of up to 25% of the total paid up capital and free reserves of
company – in a financial year can approve 25% of total equity capital in that
year by spl resolution
o if listed company – then approval of shareholders can only be obtained by
postal ballot

Explanatory Statement [§68(3)]

Notice of the meeting where the special resolution is proposed to be passed shall be
accompanied by an explanatory statement with:

 full & complete disclosure of all material facts

 necessity of buy back
 class of shares/securities intended to be bought back
 amount to be invested for buy back
 time limit for completion of buy back

Letter of offer for buyback to be filed w ROC before buy

back – Rule 17(2)

Before proceeding with buy backs after the special resolution – letter of offer has to be sent to
the ROC , signed on behalf of the board of directors by 2 directors –

Dispatch of letter of offer to shareholders after filing w ROC

– within 21 days of filing – Rule 17(4)
this letter should also be sent to the shareholders or security holders immediately after filing
it with the ROC, within 21 days.

Offer for buy-back open for – Rule 17(5)

Offer for buy back shall remain open for period of 15 days (minimum)– 30 days (maximum)
from date of dispatch of letter – if audit account over 6 months old then calculation for buy
back will be on basis of unaudited accounts not older than 6 months from date of offer
documents which are sub to limited review by auditor

Page 157 onwards -

§68(2)(d) – Post buy back debt-equity ratio i.e. the secured and unsecured debts should be
2:1 – it should be not more than twice the paid up capital and free reserves – C.Govt can
notify via order a higher ratio for class of companies – ALSO all shares or securities for buy
back have to be FULLY PAID UP §68(2)

§68(2) – No offer for buy-back shall be made within one year of closure of prev buy-back

§68(4) – every buy back to be completed within one year of spl resolution being passed

§68(5) – buy back can be from:

 existing shareholders/security holders on proportionate basis

 open market
 purchasing securities issued to employees pursuant to scheme of stock option of sweat
equity

§68(6) – before actually making the buy back – declaration of solvency has to filed with ROC
and SEBI (if listed company) – declaration signed by at least 2 directors one of whom is MD
- in Form No. SH.9

Also, verification by way of affidavit that Board has made full inquiry into company affairs
& that it can take up the liability w/o becoming insolvent within one year of the declaration

§68(7) – when companies buy back shares/securities – has to extinguish and physically
destroy the shares/securities bought back within 7 days of last date of completion of buy back
§68(8) – when companies buy back shares/securities – cannot issue/allott same type of
shares/security within 6 months of such buy back – EXCEPT by way of bonus issue or
discharge of subsisting obligations like conversion of warrants; stock option schemes; sweat
equity or conversion of pref shares/ debentures into equity shares

§68(9) – company has to maintain register of all buy backs, consideration paid date of
cancellation of securities, date of extinguishing or destruction and other prescribed particulars

§68(10) – company has to file return w the ROC and SEBI (if listed company) – with
particulars relating to buy back – within 30 days of completion.
Chapter 10: Private Placement and
Prospectus
 A prospectus is defined by §2(70) of the Act as "any document described or issued as a
prospectus and includes a red herring prospectus referred to in §32 or shelf prospectus
referred to in §31 or any notice, circular, advertisement or other document inviting offers
from the public for the subscription or purchase of any securities of a body corporate."
 Ingredients to constitute a prospectus:
o Invitation to the public
o Invitation made "by or on behalf of the company" or in relation to an intended
company
o invitation must be to subscribe or purchase
o invitation must relate to any securities of the company

INVITATION TO PUBLIC

 Means that a prospectus is an invitation issued to the public to offer for

purchase/subscribe any securities of the company
 document is deemed to be issued to the public, if the invitation to subscribe for share
capital is open to anyone who brings his money and applies in prescribed form, whether
the prospectus was addressed to him or not.
 The test is not who receives the document, but who can apply for the securities in
response to the invitation contained in it.
 An issue is not "public" if
o it is directed to a specified group of person/person and
o it is not intended that the securities will become available to other people.
 Cases
o advertisement in newspaper to invite applications for purchase of remaining
shares is prospectus [Pramatha Nath Sanyal v. Kali Kumar Dutt]
o a single private communication to a particular person which is incidentally passed
on through a small circle of friends of the directors will not amount to "issue" to
 the public of prospectus → any action for compensation by the allottee for loss
sustained by reason of an omission in the document, failed [Nash v. Lynde]
o offer to buy to one's kith and kin cannot be considered an invitation to public
[Rattan Singh v. Managing Director, Moga Transport Co. Ltd.]
o a circular issues to the shareholders of other companies to acquire their shares
held in those companies and issue its own shares in exchange is not a prospectus
as there was no public issue → only communication of offer to exchange shares in
the new company for shares in others [Govt. Stock and Other Securities
Investment Co. Ltd. v. Christopher];
o "public" is a general world and includes any section of the public. For instance, if
a document inviting persons to buy shares is issued to all doctors, all advocates,
all foreigners in India, all shareholders in a particular company, (in this case it was
members of certain gas companies only) etc., it would be a public issue [In Re.
South of England Natural Gas and Petroleum Co. Ltd]

PUBLIC OFFER AND PRIVATE PLACEMENT

 Chapter III deals with prospectus and allotment of securities. Part I deals with public
offer, and Part II deals with private placement.
 §23(1) a public company may issue securities -
o to public through prospectus ("public offer") by complying with Part I
o through private placement by complying with Part II
o through a rights issue or a bonus issue
 §23(2) a private company may issue securities
o by way of rights issue or bonus issue
o through provate placement under Part II

PRIVATE PLACEMENT

 §42(3) explanation I: "private placement" means any offer or invitation to subscribe to

securities of a company to a select group of persons by a company through private
placement offer-cum-application satisfying the conditions in the section.
 Private placement offer-cum-application: a company may make private placement
through private placement offer-cum-application in Form PAS-4 [§42(1)]. A company
 issuing securities under §42 cannot release any public advertisements or use any media,
marketing or distribution channels/agents to inform the public about sich an issue.
 Maximum number of people the offer can be made to: offer of securities or invitation
to subscribe (private placement) shall be made to a number not exceeding 50 or higher
number as may be prescribed [§42(2)] → if a company makes an offer to allot more it
will be deemed a public offer under Part I. [Rule 14(2)(b-d) of Prospectus and
Allotment of Securities Rules]
o such an offer cannot be made to more than 200 persons in the aggregate FY. offers
made to qualified institutional buyers, or employees under a scheme is not
counted in this.
o this limit is calculated individually for each kind of security, i.e., equity share,
preference share, debenture etc.
o the value of the offer per person should have an investment size of at least 20000
rupees on the basis of the face value of the securities
o payment to be made from bank account of subscriber which will be recorded
 Private placement cannot be made unless the proposed offer of securities or invitation to
subscribe has been previously approved by shareholders via a special resolution for each
of the offers/invitations
o the explanatory statement attached to the notice of the GM should disclose the the
basis or justification of the price at which the offer is made
o for offer or invitation for non-convertible debentures, company can pass a
previous special resolution only once in a year for all such offers or invitations
during the year
 Fresh Offer: Under §42(5) no fresh offer or invitation shall be made unless the
allotments w.r.t any previous offer have been completed, or that offer has been
withdrawn/abandoned. More than one issue can be made at the same time as long as the
maximum number of identified people is maintained as per §42(2).
 Mode of payment: Money towards subscription must be paid through cheque, DD or
other banking channels - no cash [§42(4)]
 Time Limit: A company making an offer/invitation must allot securities within 60 days
from the date of receipt of the application money → if this is not done, then the money
must be repaid within 15 days from expiry, with an additional 12% per annum interest in
case of delay (from the 60th day) [§42(6)]
 Separate Bank Account: Subscription money must be kept in a separare bank account in
a scheduled bank and should not be used for any other purpose except adjustment against
allotment of securities, and repayment when the company is unable to allot [§42(6)
proviso]
 Specific Addressal: Private placement shall only be made to such persns whose names
are recorded by the company before the invitation. Such persons will receive the offer by
name. Company must maintain a complete record of such offers and complete
information about such offers must be filed with the Registrar within 30 days of offer
being made → name, PAN, class of security, date of allotment, etc.[§42(3)]
 Advertisements: no company making private placement may release any public
advertisements or utilize any media, marketing, distribution channels, or agents to inform
the public at large about such issue [§42(7)]
 Return of allotment: whenever a company makes any allotment of securities under this
Section, it shall file with the Registrar within fifteen days a return of allotment in such
manner as may be prescribed, including the complete list of all security-holders, with
their full names, addresses, number of securities allotted and such other relevant
information as may be prescribed [§42(8)]
o If a company defaults in filing such return within fifteen days, the company, its
promoters and directors shall be liable to a penalty for each default of one
thousand rupees for each day of the default (which shall not exceed twenty five
lakh total) [§42(9)]
 Maintenance of Record: Complete record of private placement offer needs to be
maintained and copy of this, along with the offer letter needs to be filed with the Registrar
with the fee [R.14(3) of the Prospectus and Allotment of Securities Rules]
 Penalty: If an offer is made or money accepted in contravention of these provisions, then
the company + its promoters & directors will be liable for penalty → may extend to
amount involved in offer or two crore rupees, whichever is lower + company must refund
all money with interest to subscribers [§42(10)]

PUBLIC OFFER

 §23 explanation "**public offer"** includes initial public offer (IPO) or further public
offer of securities to the public by a company, or an offer for sale of securities to the
public by an existing shareholder, through issue of a prospectus.
TYPES OF PROSPECTUS

💡 Deemed Prospectus, Shelf Prospectus, Red Herring Prospectus

DEEMED PROSPECTUS

§25(1) refers to a deemed prospectus. It provides that when a company allots of agrees to
allot any securities with the view of offering some/all to the public:

 any document by which the offer for sale of securities is made shall be "deemed" to be
prospectus issued by the company, and
 the document is deemed to be a prospectus of a company for all purposes and all the
provision of content and liabilities of a prospectus will be applied to it.
 it is enough if this document is signed obo the company by 2 directors or 1/2 partners
 recall: advertisement in newspaper to invite application for purchase of remaining shares
of a company is prospectus → would be a deemed prospectus
 document should contain particulars like net amount of consideration to be received by
sale of securities, time and place of offer, persons making the offer, etc.
 no prospectus can be issued without informing the ROC

SHELF PROSPECTUS

§25(1): Shelf Prospectus means a prospectus in respect of which the securities or class of
securities included therein are issued for subscription in one or more issues over a certain
period without the issue of a further prospectus

 Specific classes of companies, as prescribed by the SEBI can have this. The company
filing for shelf prospectus gets a validity period of one year and won't have to get the
prospectus approved again and again from the SEBI and ROC whenever it needs to raise
funds
 However, when the company undergoes material changes during the validity period of the
shelf prospectus which needs to be conveyed to the public and investors, it will issue an
information memorandum
 such an information memorandum, together with the shelf prospectus is deemed to be a
prospectus
RED HERRING PROSPECTUS

§32: Red-Herring Prospectus is a prospectus which does not include complete particulars of
the quantum or price of the securities included therein [will not have any information on the
number of shares that the company will be offering and the price/amount of each share]

 Same obligations applicable

 It is filed to the ROC and the SEBI, this is through a book-building process.
 Red herring prospectus contains either the floor price of securities offered or a price band
along with the range within which the bids can move → issued to attract investors
 the applicants bid for the shares quoting the price and the quantity that they would like to
bid at.
 SEBI (ICDR) Regulations prescribe certain disclosures to be made in the red-herring
prospectus.
 once the offer for securities is closed, a final prospectus stating therein the total capital
raised whether by way of debt or share capital, the closing price of the securities and any
other details which are not complete in the red-herring prospectus shall be filed with
SEBI in the case of listed public company and in any other case with the ROC only.

ABRIDGED PROSPECTUS

§2(1): Abridged Prospectus is a Memorandum, containing such salient features of a

prospectus as may be specified by the SEBI summary of prospectus

 a brief summary of the prospectus, which includes all useful and materialistic information
filed before the registrar.
 §33: no form of application can be issued for the purchase of any securities without
abridged prospectus → 33(1) an abridged prospectus must be included with the
documents for the purchase of securities issued by a company.
 exception to this is when the offer is made w.r.t the bona fide invitation to a person to
enter into an underwriting agreement w.r.t such securities, when offered debentures or
shares have already been issued on a recognised stock exchange, where securities aren’t
offered to the public, where the offer is made only to the existing members or debenture
holders of the company.