COMPANIES ACT 1956

-
Preliminary
IPCC, Paper 2, Law Ethics & Communication ,Chapter 6, Unit 1
Dr. V.Seshadri
Company-Meaning


company formed
and registered under
this Act (company
Act,1956) or an
existing company.
Section 3(1)(i)
Existing Company-Meaning
Means a company formed and registered under any
of the previous company laws namely:
(1) INDIAN COMPANIES ACT 1866 (2)INDIAN
COMPANIES ACT 1882
(3)INDIAN COMPANIES ACT 1913
(4) REGISTRATION OF TRANSFERRED
COMPANIES ORDINANCE 1942
Kinds of company
1. Private company-Kinds
Section 3(1)(iii) Private company:
A private company is a company with a paid up capital of Rs.1,00,000
or more and which by its articles
a) restricts transfer of shares,
b) limits number of members to 50,
c) prohibits invitation to public to subscribe to shares or debentures.
d) prohibits acceptance or deposits from public.
Privileges and Exemptions Enjoyed by
Private Company-Kinds
May allot shares without issuing prospectus or statement in lieu of prospectus (Sec 70)
Need not hold statutory meeting or file statutory report(sec165)
There is no restriction on the overall managerial remuneration it may pay (Sec
198)
Provisions of section 81 or further issue of capital do not apply.
Consent of Central Government for increasing the remuneration of directors is not
necessary(sec 310)
Consent o central government for advancing loans to director is not necessary(sec295)
Privileges and Exemptions Enjoyed
by Private Company
No restriction on powers of Board of directors(sec 293)
It can commence business immediately on incorporation
without a certificate of commencement of business (sec 149)
With two persons a pvt company can be formed.
Central government is not empowered to prevent a change in the
composition of Board of Directors(sec409).
PROCEDURE FOR CONVERSION OF A PUBLIC
COMPANY INTO A PRIVATE COMPANY
A Public company may be converted into a private company by
passing special regulation, altering its articles and obtaining the
approval of central government.

 The company concerned shall take a decision in its Board
meeting to fix the date, time and place for convening General
meeting.

 Special resolution shall be passed in general meeting to alter the
articles of association to include the restrictions contained in
section 3 (i) (iii).

 The special resolution so passed should be binding on dissenting
shareholders provided it is made bona fide, in the interest of the
company as a whole and is also consistent with the object of the
memorandum of association .

PROCEDURE FOR CONVERSION OF A PUBLIC
COMPANY INTO A PRIVATE COMPANY
 A copy of the special resolution along with a copy of statement
of material facts must be filed with the registrar within 30 days
from the date of passing special resolution.

 An application shall be made with the central government and
their approval obtained within 3 months from the date of passing
special resolution.

 After obtaining the central government approval, a printed copy
of altered articles shall be filed with the Registrar within one
month form the date of order of approval.

 The company shall ensure that the altered articles as a whole
conform to the requirements of the Act regarding private
company.
 Registrar will issue a fresh certificate of incorporation.


PROCEDURE FOR CONVERSION OF PRIVATE COMPANY
INTO PUBLIC COMPANY
 Decision shall be taken in Board meeting to convene general meeting
at a particular date, time and place.

 Memorandum needs to be amended for change its name by removing
the word “Private” by a special resolution.

 Articles shall be altered by passing special resolution for deleting the
requirement of a private company under section 3(i)(iii).

 A copy of the special resolution shall be filed with the registrar within
30 days





PROCEDURE FOR CONVERSION OF PRIVATE COMPANY
INTO PUBLIC COMPANY

 It becomes the public company on the date of alteration.

 Number of shareholders shall be increased to 7 and the number
of directors to 3

 Statement in lieu of prospectus shall be filed with registrar within
30 days form the date of special resolution

 Registrar will issue a fresh certificate of incorporation .




2. Public Company-Kinds
Section 3(1)(iv) Public
company:
•A company which is not a private
company and has a paid up capital of
Rs.5,00,000 or more and includes a
private company which is a subsidiary
of public company.

3. Licensed Company: Kinds
Section 25 Licensed company:
•Central government allows a company to dispense
with the words “pvt ltd” or “ltd” in the name of the
company provided the following conditions are
fulfilled:
1. it is formed for promoting commerce, trade, arts,
science, religion, charity or other useful purpose or
object.
2. it intends to apply profits if any in promoting its
objects.
3. it prohibits payment of dividend to its members.

4. Government Company :Kinds
Section 6(1)(iii) Government company:
• Any company. in which 51% or more of the paid up capital is
held by
1.Central Government. or,
2.State Government, or,
3. partly by central Government and partly by one or more state
Government.

• It includes the company which is subsidiary of Government.
company.

NOTE: a Government company is not a government. If even
all its shares are owned by the Government. and its property, Its
not a Government. company.
5. Listed Company: Kinds
Section 2(23A) Listed
company:
•Means a public company which has
listed any of its securities in any of the
recognized stock exchanges.
Such a company is required to enter
into a listing agreement in the format
prescribed by SEBI.
6. Holding or a Subsidiary Company:
Kinds
•If one company controls the composition of
Board Of Directors in another company the
former is a holding company and the latter is a
subsidiary company.
•The composition of the Board Of Directors is
deemed to be controlled by another company if
that another company at its discretion appoint
or remove all or majority of the directors in
other company without the approval of the
other company.
Section 4 Holding or subsidiary
company:
6. Holding or a Subsidiary
Company: Kinds
Holding or subsidiary company-control
If one company holds more than half in the nominal value of the equity share
capital or more than half in the voting rights of another company, the former
company is the holding company (for this purpose, the shares held by a company
in its own right and not merely in a fiduciary capacity must be considered. Similarly
the shares held by any person or its nominees or its subsidiary shall be included.
However the shares held by it or its nominee or its subsidiary in its fiduciary
capacity shall be excluded) and the latter company is the subsidiary company.
6. Holding or a Subsidiary
Company: Kinds
Holding or subsidiary company-control
A subsidiary of a subsidiary company is the
subsidiary of the parent company.
•example: if x is the subsidiary of y and z is the
subsidiary of x then z is the subsidiary of y.
Problem
The paid up capital of AVS Private Limited is Rs. 1
Crore consisting of 8 lacs equity capital of Rs.10/-
each and 2 lacs preference capital of Rs.10/-each
all fully paid up.Out of this XYZ Private Ltd holds 3
lacs equity capital and BCL Private Ltd holds
150000 equity shares. XYZ Private Ltd and BCL
Private Ltd are the subsidiaries of TSR Private Ltd.
With reference to the provisions of Companies Act
examine whether AVS Private Ltd is the subsidiary
of TSR (P) Ltd.Would your answer be different if
TSR (P) Ltd has 8 out of 10 directors on the Board
of Directors of AVS Private Ltd?
Solution
For the purpose of determining the “holding” nature of a company only the equity shares
held by it in other company shall be taken into account.
As per Section 4(1)(b)(ii) shares held by subsidiary companies shall be treated as held
by holding company.
Since the combined holding of equity shares of AVS Company by XYZ (P)Ltd and BCL
Pvt Ltd which are subsidiaries of TSR Private Ltd is 4.5 lacs shares which is more than
50% of the total paid up capital of AVS Private Limited is the subsidiary of TSR Private
Limited. Since TSR Pvt Limited has more than the majority directors in AVS Pvt Ltd and
thereby controls the composition of its Board Of Directors,there is no different answer
except to confirm that TSR (P)Ltd is the holding company of AVS (P)Ltd.
Kinds
Holding or subsidiary company:
As per section 42: a subsidiary company cannot be a member of the holding company
and
1. any allotment of share or transfer of share in a company who is subsidiary shall be
void.
2. if it is already a member then it cannot exercise voting rights.


7.Producer Company: Kinds
 It means a company having-
objects specified in (sec 581),
having any10 or more individuals, each being a producer
or 2 or more production institutions or a combination of
both can form a producer company.
 It shall use the words producer company Limited along
with its name.
NOTE: Producer company is neither a public company nor
private Company but, for the application of the Act it
shall be deemed as private Company.


8.Foreign Company: kinds
Section 591 Foreign company:
 It means a company incorporated outside India and
having an established place of business in India.
 If 50% or more of the paid up capital of foreign co. is
held by Indian citizens or one or more Indian companies
then the foreign company shall comply with the
requirements of The Indian companies Act as if it is a
company incorporated in India.


Characteristic Features of a Company:
A.SEPARATE LEGAL ENTITY:

1. company is a legal person, an artificial person created
by law.
2. It can sue and can be sued in its own name.
3. It can acquire, hold, transfer, sell or mortgage property
in its own name.
4. It is distinct from the members who formed it and its
assets are not the assets of the members and vice-
versa.






A creditor of the company can look only to the assets of
the company and cannot look beyond the company.
(solaman vs. solaman)
Maccura –Vs-Northern Assurance
Company Ltd

M owned the entire share capital of
the company. The company asset
was timber lying on M’s land. M
insured the timber in his own name.
Timber was destroyed in fire. Held
that the insurance Company was not
liable because the asset was the
Company’s asset and not of M’s.
2.Limited Liability
 The liability of the members is limited only to the extent
to which they have undertaken to subscribe to the
shares of the company.
However, the limited liability of the members of the
limited company will be unlimited in the following
circumstances:
 Where the number of members of the company is reduced below
the statutory minimum number of 7/2 as the case may be and the
company carried on business with such reduced membership for
more than 6 months, then the members will be personally liable for
all the acts of the company beyond 6 months.
 Where in the course of winding up of the co. it appears that some
business was carried on with the intention to defraud the creditors,
the court may declare such persons liable without reference to the
limited liability.


3. Transerability of Shares
THE GREATEST OBJ ECT OF FORMING A COMPANY
IS ITS EASY TRANSFERABILITY OF SHARES. THE
RIGHT TO SHARE TRANSFER IS AN ABSOLUTE
RIGHT INHERENT IN THE OWNERSHIP OF THE
SHARE ITSELF. BUT, IT MAY BE REASONABLY
RESTRICTED BY MEANS OF A CONTRACT WHICH
MAY BE FOUND IN THE ARTICLES OF
ASSOCIATION.
Usually, the articles of the Pvt. Company contains a PRE
EMPTION clause, which means that a shareholder may
transfer his shares only to an existing shareholder of a
company.

Illegal Association:Section11

No company or association or partnership consisting of
more than 10 persons in case of banking business and
more than 20 persons in case of any other business can
be formed unless it is registered under the Companies
Act failing which it shall be termed as an illegal
association. Sec 11: this section does not apply to a joint
family as such carrying business. However, if two joint
families join hands to carry on business, this section
shall apply.
Section 11 Contd.
 NOTE: In such a case, for the purpose of reckoning the
number of members, minor member shall be excluded
and both male and female members shall be included.

EXAMPLE: A HUF consisting of a father, and 5 major
sons and another HUF consisting of father and 5 major
sons and 1 minor son jointly carried on banking
business. Is association legal?

This association is illegal because the total number of
members exceeds 10 ,(that is 12) in this case excluding
minor.

Effects of Illegal Association

1) Every member is personally liable for all liabilities
incurred in the business.
2) Members are punishable with a fine of Rs.10,000
3) Such an association cannot enter into a contract.
4) Such an association cannot sue, and cannot be sued
by its members or the outsiders.
5) It cannot be wound up.
6) Member of an illegal association cannot sue for
partition or dissolution or accounts.
7) The illegality cannot be cured by the subsequent
reduction in the number of members.
8) However, the profits earned by the illegal association
are liable for assessment of income tax.

Promoter
A) A promoter is not an agent. He is not a trustee nor a
servant.
B) He is a person who initiates or undertakes to form a
company with reference to a given project and takes
necessary steps to accomplish the purpose.
C) The relationship between the company and the
promoter is essentially a s a FIDUCIARY relationship.
D) The status of the promoter is terminated with the
formation of the Board Of Directors.
E) A promoter shall not make secret profits; he is not
entitled for remuneration unless there is a written
provision in the contract itself.


Promoter
F) It is the duty of the promoter to disclose all material facts
to the persons who are induced by him to join the
company.
G) Promoter is liable both civil and criminal for the
misstatement in the prospectus.
H) He is liable to the original allottee besides to pay a fine
up to Rs. 50,000 or undergo imprisonment for 2 years or
both. (section 62 & 63)
I) If there are more than 1 promoter all of them are jointly
and severally liable.
J ) In case of death of the promoter, his estate would be
liable.


Preliminary or Pre Incorporation
Contracts
a) These are contracts made prior to the incorporation of
the company.
b) These contracts are made by the promoter.
c) The legal position of such contracts can be studied with
reference to passing of Specific Relief Act 1963(SRA).
Preliminary or Pre Incorporation Contracts:
Scenario 1: Position Before 1963
 Pre incorporation contracts never bind the company
since it was a non-entity before incorporation.

 A company cannot even ratify such contracts on its
coming into existence.

 The company is not entitled to sue on preliminary
contracts. Promoter is personally liable.

Preliminary or Pre Incorporation Contracts:
Scenario 2: Position After 1963 Section 15H
 SRA provides that when the promoters of a public company have
made contracts before incorporation for the purpose of the
company and the contracts are warranted in terms of incorporation,
the company may enforce it.
 The term WARRANTED IN TERMS OF INCORPORATION means
within the scope of companies “object” as stated in the
Memorandum Of Association.
NOTE: (sec 19): of SRA further provides that a third party can sue on
preliminary contracts provided
1) The contract is warranted in terms of incorporation and
2) The company has adopted the contract.

Provisional / Post Incorporation
Contracts

 These are contracts made by the public company after
incorporation.
 Private Company does not make such contracts.
 If the certificate of commencement of business is
obtained, the contracts bind the company, if not, the
contacts becomes void.

Distinction between preliminary &
Provisional contracts
PRELIMINARY
CONTRACTS
PROVISIONAL
CONTRACTS
Applicability Both to public and private
companies
Public companies only
When entered? Made prior to
incorporation
Made after incorporation
Who enters into
contract?
promoter Company itself
PRELIMINARY CONTRACTS PROVISIONAL
CONTRACTS
acceptance Company shall accept/adopt the
contracts and communicate to
those concerned.
No
acceptance/adoption
required. Contract
binds the company the
moment it obtains the
certificate of
commencement of
business.
Ministry of Corporate Affairs: Mca 21

1) MCA 21 is a project designed by MCA and TCS to fully
automate all the process relating to enforcement and
compliance of all legal requirements under companies
Act.
2) It came into effect from 15 sep 2006 and from that date
physical filing of documents has been discontinued and
electronic filing has been made mandatory.
3) However, winding up procedures are not covered and
approvals are being issued physically.

Services Available Under MCA21
A) Registration and incorporation of the company.
B) Filing of annual return and balance sheet.
C) Filing of forms for change of name or address or director
details.
D) Registration and verification of charges.
E) Application for various statutory services from MCA.
F) Inspection of documents.

Advantages of E-filing
1) Instant registration of the company.
2) Simplified methods of filing documents.
3) Total transparency.
4) Easier and better compliance of regulations.
5) Authentic and reliable filing process.
6) Centralized data base management.
7) Better service availability.
8) Better compliance management.
9) Economical and time saving.
10)Better monitoring, control and supervision.

Formation of Company
Requirements:
 7 persons are required to form a public
company
 2 persons are required to form a private
company
 For persons to be appointed as directors,
DIN(Director Identification Number) shall be
obtained
 Digital signatures shall be obtained for
authorised signatories
Formation of Company
 Application shall be made in the prescribed
form with the prescribed fee to the Registrar
for name approval
 After getting name approval application in the
prescribed form with the prescribed fee shall
be filed with the Registrar with the following
documents

Formation of Company
1. Memorandum of association
2. Articles of association
3. Agreement if any with the person to be
appointed as Managing Director or Manager
4. A declaration signed by advocate or
Chartered Accountant in practice or a
person named in the articles as Director or
Manager or Secretary
5. In Case of public company having share
capital consent of Directors to act as
directors and take up qualifying shares
Formation of Company
 The Registrar will issue a certificate of
incorporation which is the conclusive
evidence for compliance of requirements for
valid incorporation
CERTIFICATE OF
INCORPORATION: SECTION 35:

section 35 provides that the certificate of incorporation is the
conclusive evidence to the effect that all the requirements have
been complied with the registration of the company. once the
certificate is issued it cant be taken back.
CASE LAW: (Moosa vs. Ibrahim)
MOA was signed by 2 adult members and a guardian for 5 minors.
The company was registered. Held, the registration was valid since
certificate of incorporation provides conclusive evidence.
CASE LAW: (J ublee cotton mills vs. Lewis)
A certificate of incorporation was dated 6th J an. but was issued on
8th J an. shares were allotted to a person by the company on 6th
J an. held, that the allotment was valid.

SECTION 35 PREVENTS REOPENING OF matters
prior to incorporation and also matters connected or
incidental thereto.
However, if the company was incorporated for illegal
purpose, the company would be prohibited from carrying
on its business.

NATIONAL COMPANY LAW
TRIBUNAL
 The central government shall constitute a National Company
Law Tribunal by issuing a NOTIFICATION in the official
gazette.

 The Tribunal shall consist of a president and such number of
J udicial and Technical members not exceeding 62 to be appointed
by the central government.

 The president of the Tribunal has been or is qualified to be a
J udge of High Court.


NATIONAL COMPANY LAW
TRIBUNAL
 The judicial members shall have held a J udicial post for at least
15 years in India or has been at least 10 years as an advocate of
High Court or 15 years service in Central or State Government in
Group ‘A’ or equivalent post and out of which at least 3 years
service as member of Indian Company Law Service or Indian
Legal Service.

 The technical members should have experience of at least 15
years in Group ‘A’ or equivalent service in central or state
Government out of which at least 3 years in Indian Company
Law Service Accounts Branch or in senior Administrative service
or 15 years practice as Chartered Accountant or Cost Accountant
or Company Secretary or a Preceding Officer of Labour Court or
Tribunal.



NATIONAL COMPANY LAW
TRIBUNAL
 President and other members shall hold office for a period of 3 years.
Subject to the maximum age of 67 years in the case of president and 65
years in the case of other members.

 The members of the Tribunal may be vested with all financial and
administrative powers to be exercised in accordance with the Rules to
be framed in this regard.

 In the event of occurrence of vacancy in the office of President, the
senior most member shall act as President.

 The president or member may, by giving notice in writing to the
Central Government resign his office.

NATIONAL COMPANY LAW
TRIBUNAL
 The Central Government may in consultation with the Chief
J ustice of India may remove the President or any member from
office in the event of insolvency , conviction, physical or mental
incapacity, acquisition of prejudicial financial or other interst and
abuse of position of the president or member as the case may be.

 The powers of Tribunal may be exercised by the Benches to be
constituted by President consisting of one judicial member and
one technical member.

 Tribunal has power to pass orders, rectify its mistake if any
within two years from the date of order and also to review its
own order.


NATIONAL COMPANY LAW
TRIBUNAL
 Appeal against the order of the Tribunal may be filed by the
aggrieved party before the National Company Law Appellate
Tribunal which consists of the Chairman and not more than 2
members to be appointed by the Central Government.

Doctrines
 Doctrine of lifting of corporate veil
 Doctrine of ultra vires.
 Doctrine of constructive Notice
 Doctrine of Indoor Management

Doctrine of Lifting of Corporate Veil

1) Corporate veil protects the members by way of
limited liability.
2) Liability of the company may be unlimited and the co.
is liable for directors actions. Company is thus considered as a
separate legal person.
3) People behind the company, i.e., directors, managers, etc, cannot be
made liable for the acts of the companies.
4) Corporate veil is a shield given to the company.
5) Lifting the corporate veil means to look beyond the company and
identify the persons who are controlling the company.


Doctrine of Lifting of Corporate Veil
The advantages of the incorporation should be
allowed only to those who want to make an honest
use of the company.
In the case of, dishonest and fraudulent use of this
facility, the court will lift the corporate veil, and
identify the persons who are behind the scene and
are responsible for dishonest and fraudulent
transactions.

Circumstances of Lifting the Corporate
Veil

Statutory Provisions
1) REDUCTION in the number of members (section 45)
2) Fraudulent conduct (section 546)
3) Misrepresentation: every member who authorized the
issue of prospectus containing misstatement Is liable to
those who subscribed to the shares in pursuance of
such misrepresentation. Besides, he is liable for
criminal liability by way of imprisonment up to 2 years
or fine up to Rs.50,000 or both.
4) Failure to return application money: if minimum
subscription is not received within 120 days from the
date of issue prospectus, the entire application amount
shall be refunded within 10 days. Failing which, interest
at 6% is payable. Directors are personally liable.

Statutory Provision:Contd.
5. Misdescription of name: when an officer or a director of a
company signs a negotiable instrument on behalf of the
company, he shall be personally liable, if, the name of
the company is either not mentioned or not properly
mentioned.

Judicial Interpretation
Case Laws:
1) PROTECTION OF REVENUE
(Re: Dinshaw Menekjee petit) :
A millionaire formed four private companies and transferred all his
investments to these companies in lieu of shares. The dividend
and interest income received by the companies was given to
him as a pretended loan. The companies had no business, the
companies are created ostensibly to receive dividend and
interest income. The companies were mere “sham”,
“Cloak”. Held, the companies are nothing more than
the assessee himself. This was possible only after lifting
the corporate veil.

2) PREVENTION OF FRADULENT CONDUCT: (GILFORD
MOTOR CO. VS. HARNE)
There was a contract between the company and Harne,
that Harne should not engage himself directly or
indirectly in the motor business during his employment in
the company.
But Harne formed a private company along with his wife
and started doing the same motor business. Gilford
motor company sued Harne for breach of contract.
Harne argued that he was different from the private
company. After lifting the corporate veil of the private
company the court found that Harne was the main man
behind the private company and held that he was liable
for breach of contract.

Determination of Enemy Character of the Co.
(Daimler Vs. Continental Tyre and Rubber Co.)

Continental tyre company was incorporated in England
as an English company by Germans. The company
incurred a trade debt and a suit was filed for recovery of
the debt. At that time war broke out between England
and Germany. It was argued that the suit was not
maintainable as the company was an enemy company.
After calling for the records of the company the court,
observed that though the company was incorporated in
England it was controlled both administratively and
financially by Germans and accordingly held that the
company was an enemy company.

Determination of the Agency Character
of the Co. (RE: Fg Films Ltd.)


The company was incorporated in Bombay in British India and shot
a film called “monsoon”. The company applied for license to the
board of trade for screening the film. The license was refused on the
ground it was not an English film.
Against the refusal the company filed a suit on lifting the corporate
veil of the company the court found that the theme of the film, the
technical know how for shooting the film and the financial and
administrative requirements were all supplied by the American film
corporation.
The film was therefore an American film and not an English film.

Doctrine of Ultra Vires:

1) ultra- outside,
2) vires- power.
3) Ultra vires- outside the power of the company.
4) The powers of the company are given in the object
clause of the Memorandum Of Association.
5) Any act of the company beyond the ambit of the
object clause of MOA without an alteration in MOA
would be ultra vires.
6) The objective of ultra vires is to protect the interest of
the investors and creditors.
7) The memorandum states affirmatively what a
company can do and what a company cannot do.
8) The corporate life of the company cannot be spent for
any purpose than those specified in the MOA.

Case Laws:
(Ashbury Railway Carriage and Iron Co. Ltd.
vs. Riche):

The object clause of MOA of the company stated as
“mechanical engineers and general contractors.” the
company entered into a contract to lay railways line in
Belgium. The act of the company was challenged. The
company argued that it could do the job as the general
contractors, and also that the contract was subsequently
ratified by special resolution in the general meeting.
Rejecting the arguments of the company the court held
that the ultra vires transactions cannot be ratified, even
by the whole body of share holders.


2) (GERMAN DATES CO. :RE)
A company formed to produce coffee out of dates with German
patent. The company could not obtain German patent; but it
obtained Swedish patent, and started producing coffee with dates in
Germany. Two shareholders challenged the act of the company.
Held, the company should be wound up because the main
substratum failed.
3) (AL MUDALIAR AND OTHERS VS. LIC OF INDIA):
the appellants were directors of untied India Insurance
Company.They were also trustees of a private Trust. The company
gave Rs.2 lacs as donation to the trust. The trustees were asked to
refund the money as the donation was ultra vires company. The
trustees filed an appeal and argued that the donation was given out
of dividend account payable to share holders and that there was a
nexus between the donation and trust.The court did not agree since
the dividend account is property of the company unless it is
distributed individually to the share holders through dividend
warrants.


Effect of Ultra Vires:

1) The ultra vires transactions are ab-intio void.
2) Such transactions cannot be ratified.
3) Directors are personally liable for such transactions.
4) Members can get injunction orders from court against
such transactions.
5) If the company’s money has been used ultra vires to
purchase a property, the company has a right to hold
and protect the property since it represents company’s
funds.


Doctrine of Constructive Notice:

1) Notice means knowledge.
2) Constructive notice means deemed knowledge.
3) Memorandum Of Association and Articles Of Association of the
company are registered documents. Sec 610 declares these
documents as public documents.
4) Every person dealing with a company is presumed to have read
these documents and has knowledge about the company.
5) He is estopped from saying that he has no knowledge about the
company.
6) The articles of the company make it clear that all the deeds shall
be executed by two directors and one of them shall be the
Managing Director.

( Kotla Venkatasamy Vs. Rama Murthy)
The plaintiff accepted a document offered as security
signed by 2 persons other than MD. Held, the plaintiff
could not get any relief under the document since he
was aware of the provisions in the Articles Of
Association of the company.
THE doctrine is a defense available to the company
against the outsider. In other words, it is a presumption
in favour of the company.


Doctrine of Indoor Management
 It deals with internal procedure.
 The procedure followed by the co. is purely internal.
Outsiders dealing with the company are not required to
verify the regularity of internal proceedings.
 The doctrine is a defense available to the outsider
against the co. In other words, it is a presumption in
favor of the outsider.

Royal British Bank Vs. Tarquand).
the Doctrine is Also Known as Tarquand Rule:

The articles of the company empowered the directors to
borrow money after getting the approval of the
shareholders by special resolution in the general
meeting. Without getting the shareholders approval the
company. borrowed money from Tarquand on behalf of
the company and issued bond to him. On maturity
Tarquand claimed money but company refused stating
that the bond was void due to want of approval.
Tarquand sued the company. HELD, the company was
liable since obtaining the approval of shareholder is an
internal procedure which Tarquand was not required to
verify.

Exceptions to Tarquand rule
He could presume what ought to be followed by the
company was being followed by the company. The
doctrine is not applicable to the persons acting on behalf
of the company.
The rule does not apply to the transactions which are
illegal and void ab-initio.
EXECPTIONS:
1) (HOWARD vs. PATENT IVORY CO. LTD.)
Persons having knowledge of irregularity, directors of the
company were authorized to borrow upto 1000 pounds
beyond which approval of shareholders was necessary.
Directors passed resolution to borrow and they
themselves lent 3000 pounds to the company.
The co. went into liquidation, held, directors could get
only 1000 pounds.

2) FORGERY: (RUBEN vs. GREAT FINGAL
CONSOLIDATED)
secretary of the company forged the signature of the
directors and issued share certificate. Held, share
certificate was invalid. The benefit of Tarquand rule is
not applicable to illegal transactions like forgery.
3) NEGLIGENCE: (AL UNDEWOOD vs. BANK OF
LIVERPOOL)
A sole director and principal shareholder of a company
remitted into his own bank account the cheques drawn in
favour of the company. Held, the bank was liable since it
was negligent and the benefit of Tarquand rule is not
applicable.

Memorandum of Association
Section 2(28)
MEMORANDUM :Definition
Means memorandum of association of a company as
originally formed and altered from time to time in
pursuance of any other previous company law or under
this Act.
Memorandum affirmatively states what a company can
do and negatively states what a company cannot
do.(nothing can go beyond the object clause of the
MOA)

Schedule I
SCHEDULE
I
TABLE A TABLE B TABLE C TABLE D TABLE E
Schedule I : Contents
 TABLE A: Format for AoA of a company limited by
shares
 TABLE B: Format for MoA of a company limited by
shares
 TABLE C: Format for MoA and AoA of a company limited
by GUARANTEE only
 TABLE D: Format for MoA and AoA of a company limited
both by SHARES and GUARANTEE.
 TABLE E: Format for MOA and AOA for UNLIMITED
COMPANIES
Contents of MoA
 Name clause (Section 13(1)(a))
 Registered office clause/situation clause (Section
13(1)(b))
 Object clause indicating main objects, incidental or
connected objects and other objects. (Section 13(1)(d))
 Liability clause (Section 13(2))
 Capital clause (Section 13(4))
 Association or Subscription or Attestation clause(Section
13(4)(c))
MoA- Contents
 MEMORANDUM should be printed, divided into paragraphs,
consecutively numbered and signed by each subscriber.
NAME CLAUSE:
Except to sec 25 company all other companies shall use the words
ltd. or pvt. ltd. Or producer ltd. as the case may be along with their
names.
Since a company is a juristic person it needs to have a name. No
company can be registered with a name which in the opinion of the
central government is an undesirable name.
A name which is too similar or too identical with the name or trade
mark of an existing company shall be deemed as an undesirable
name.

NAME CLAUSE:
 If an undesirable name is inadvatently given to a
company, the central govt. may direct the company to
rectify the name.
Such directions shall be given within a year. The
company shall carry out the direction within 3 months
failing which, it is liable to pay a fine of Rs. 1,000.
 Rectification can be carried out with the approval of the
shareholders by an ordinary resolution in general
meeting.
 The company may change its name at any time.
Procedure for Change in Name-Approval
in Board Meeting
Convene board meeting for
getting the consent for
name change.
Obtain approval from roc for
new name by submitting
prescribed form 1 A with
prescribed fee RS. 1000
Convene board meeting for
noting name approval and
fixing date for GM.
Procedure for Change in Name:
Approval in General Meeting
Convene GM-obtain approval of
share holders- special resolution
File a copy of special
resolution with prescribed form
with roc within 30 days from
the date of passing the
resolution.
Effect of Name Change
 Registrar of companies will issue a fresh certificate of incorporation
and the new name will come into effect from the date of issue of
certificate.
EFFECT OF NAME CHANGE:
The change in name will not affect the rights and obligations of the
company in any manner including the legal proceedings instituted by
or against the company.<sec 23>.
Change in name does not amount to a change in constitution of a
company. All the rights and obligations of the company with old
name would pass on to the company with new name.
(ECONOMIC INVESTMENT CORPORATION vs. CIT)
As per sec 147 the name of the company shall be displayed outside
its registered office in a conspicuous place, failing which the
company is liable to pay a fine of Rs.500 per day till the default
continues.


Registered Office Clause:

MOA will only mention the name of the state in which the
registered office of a company is situated.
Sec 146. requires every company to have a registered
office at the time of commencement of the business or
within One month from the date of incorporation which
ever is earlier.
It is the office-
1) which determines the jurisdiction of the company.
2) where the records and other statutory books are kept
and notices and communications can be sent.
3) AGM shall be held at the registered office or at the
same city or town or village where the registered office is
located.

Changing the registered office
 SEC 147 makes it mandatory for the co. to publish the address of the
registered office in a conspicuous place outside the registered office.
 CHANGING THE REGISTERED OFFICE:
WITHIN CITY:



CONSENT OF BOD
FILE PRESCRIBED FORM 18 WITH ROC
WITHIN 30 DAYS INDICATING
COMPLETE ADDRESS
ADVERTISEMENT MAY BE
ISSUED IN THE NEWSPAPER.
CITY TO CITY WITHIN STATE:
1) Consent of Board Of Directors.
2) General Meeting shall be convened and approval of shareholders
shall be obtained by special resolution.
3) A copy of special resolution with the prescribed form 18 shall be
filed with the roc.
4) A newspaper advertisement may be issued.
ROC TO ROC WITHIN STATE:
1) Board approval shall be obtained for referring the matter to the
regional director.
2) Application shall be filed with prescribed form with regional
director.
3) Regional director is required to conform within 4 weeks.


ROC to ROC Within Same State: Contd.
4) Company shall file with the ROC a copy of the order of Regional
Director within 2 months.
5) Roc should issue certificate within one month.
FROM ONE STATE TO ANOTHER STATE:
Situation clause in the MoA will be altered only in the event of
changing the registered office from one state to another.
The procedure is:
1) Convene board meeting for approval and call for general meeting.
2) Issue notice with explanatory note for the GM to the share holders.
3) Get special resolution passed.
4) File the copy of the resolution with prescribed form with ROC
within 30 days.

From One State to Another State; Contd.
5)Prepare a list of creditors and send them notice by registered post.
6) Release an advertisement in the national daily, and in one local
newspaper.
7) File a petition before the CLB within one month from the date of
advertisement or within 2 months from the date of perparation of the
list of creditors.
8) Send the notice to the state government where the registered office
is situated.
9) Then the company law board will hear to the petition and after
looking into the objections, if any, it will conform the change.
10) CLB will confirm if it is satisfied that the following requirements of
sec 17(1) a to g: are complied with.

From One State to Another State: Contd.
 To Attain Its Objects By New And Improved Means.
 To Enlarge Or Change The Local Area Of Operation.
 To Carry On The Business More Efficiently And
Economically.
 To Carry On Some Business Which Can Be More
Advantageously Combined With The Existing Business
And Carried On Efficiently And Economically.
 To Restrict Or Abandon Any Of Its Objectives.
 To Sell Or Dispose of Whole Or Part Of An Undertaking.
 To Amalgamate With Any Other Company Or Person.
From One State to Another State: Contd.
11) The order of the CLB shall be filed with the ROC of the
state from where the company is moving within 3 months
from the date of order.
12) CLB may extend the time by another one month.
13) Within 30 days from the date of shifting to other state
the co. shall file prescribed form 18 with complete
address of the registered office with the roc of the other
state.
Failure to register with ROC will make the whole
exercise void and inoperative.

Object Clause: 13(1)(c)(d)

 It defines the purpose and indicates the sphere of
activities of the company.
 The doctrine of ultra vires is precisely based on the
object clause of the MOA.
 Any act beyond the object clause is ultra vires.
The object clause of MOA shall contain:
1) In respect of company incorporated before companies
(Amendment) Act 1965, the main objects.
2) In case of company incorporated after companies
(Amendment) Act 1965, the main object, ancillary
object, other objects.

 As per sec 149 (2A) no company can commence any
business under other objects unless prior approval of
shareholders is obtained in General Meeting by way of
special resolution.
 Where special resolution has not been passed then
central government may permit the company to
commence any business under ‘other objects’ provided-
1)Board of directors has applied for permission.
2) number of votes polled in favour of resolution
exceeds the number of votes polled against the resolution.

Procedures For Alteration:
Since object clause is a condition of MOA it can be
altered only in the manner prescribed in sec 17.That is
the conditions laid down in sec 17(1) a) to g) shall be
fulfilled. Subject to this, object clause can be altered by
observing the following procedure:
1) BOD shall pass a resolution to alter the object clause.
2) Notice shall be issued to the shareholders for general
meeting with an explanatory note.
3) approval of the shareholders shall be obtained by
special resolution.
4) Copy of the resolution with the prescribed form 23 shall
be filed with ROC within 30 days.
5) Roc will issue a certificate which is the conclusive
evidence for valid alteration which take place
immediately from the date of issue.




Liability Clause:
 Generally the liability of the members is limited.
Liability clause cannot be altered to the prejudice of the
shareholders.

 Liability of the members cannot be increased without
their consent.

 In the case of unlimited liability, the liability can be made
limited by passing a special resolution in the General
Meeting and obtaining a fresh certificate of registration.

 However, registration as a limited company does not
affect its debts, liabilities, obligation, contracts, etc( sec
32).

 liability of the members can be unlimited if a situation
arises under sec 45.

CAPITAL CLAUSE:

This clause lays down the maximum limit beyond which
the company cannot issue shares without altering the
capital clause of the MOA.
AUTHORISATION in the AOA is mandatory for bringing
amendment to capital clause.
If authorized in the articles, ordinary resolution is enough
for amending the capital clause.
If not authorized in the articles, then special resolution is
required first to amend the AOA, to authorize such
change in the capital clause.
A copy of the resolution shall be filed with the ROC with
prescribed form within 30 days.

Articles of Association
ARTICLES means AOA of a company as originally formed and
altered from time to time in accordance of any previous company
law or under this Act.
ARTICLES regulate the internal management of the company.
It plays a subsidiary role to MOA.
ALTERATION OF AOA:
Subject to provisions of this Act and conditions contained in MOA, a
company may by special resolution alter its Articles.
A copy of the special resolution shall be filed with the Roc within 30
days from the date of resolution.
No alteration can be made which has the effect of converting a
Public company into a Pvt. Company without the approval of central
government.


CONTENTS OF ARTICLES
Table A Schedule I

REGULATIONS FOR MANAGEMENT OF A
COMPANY LIMITED BY SHARES
 Share capital and variation of
Rights
 Lien on shares
 Calls on shares
 Transfer of shares
 Transmission of shares
 Forfeiture of shares
 Conversion of shares into stock
 Share warrants
 Alteration of capital
 General meetings
 Proceedings at general meetings
 Votes of members
 Board of directors
 Proceedings of board
 Appointment of manager or
secretary
 The seal of the company
 Declaration of dividends and
transfer of profits to reserves
 Maintenance of accounts
 Capitalization of profits
 Winding up
 Indemnity to the officer or agent
of the company

Limitation on Companies Power to Alter
Articles:
1) Alteration should not be inconsistent, with the companies Act,
2) Alteration should not be inconsistent with the MOA.
3) It should not be inconsistent with any alteration made by Company
Law Board (under sec 397) (oppression) or under sec
398(mismanagement).
4) Alteration should not be opposed to public policy.
5) Alteration should be bonafide and should be in the benefit of the
company as a whole.
6) Alteration should not have the effect of increasing the liability of
the members without their written consent.
7) Alteration should not have the effect of nullifying a contractual
obligation.
8) Alteration cannot be made converting a public company into a pvt.
Company without the approval of central govt.
9) Alteration should not take retrospective effect. It should take effect
only from the date of alteration.

Distinction Between MoA And AoA
MOA AOA
IT IS THE BASIC, ESSENTIAL,
FUNDAMENTAL AND PRIMARY
DOCUMENT REGARDED AS
CHARTER.
IT IS A SECONDARY DOCUMENT
SUBSIDIARY TO MOA.
IT LAYS DOWN THE AREA AND
LIMIT BEYOND WHICH ACTIVITIES
OF A COMPANY CANNOT GO.
IT PROVIDES REGULATIONS
WITHIN THAT AREA.
Distinction Between MoA And AoA
MoA AoA
IT CAN BE ALTERED IN CERTAIN
CIRCUMSTANCES AND IN THE
MANNER PROVIDED IN THE ACT.
IT CAN BE ALTERED BY SPECIAL
RESOLUTION IN THE GENERAL
MEETING
ACTS OF THE COMPANY WHICH
ARE ULTRA VIRES MOA CANNOT
BE RATIFIED EVEN BY THE WHOLE
BODY OF SHAREHOLDERS.
ACTS WHICH ARE ULTRA VIRES
AOA, BUT INTRA VIRES
MOA(WITHIN THE POWER OF
MANAGEMENT) CAN BE RATIFIED
BY THE MEMBERS.
It contains Fundamental conditions
based on which a company was
incorporated for the benefit of
creditors, Shareholders and general
public
It binds company with members also
members inter se (ie., among
members)
Thank you