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Case Laws on Companies Act

Solomon Vs. Solomon & Co Ltd Facts of the Case Solomon carrying on the business of leather and shoe manufacturer as a sole proprietor sold the business to the newly created company Solomon & Co Ltd and received the consideration of 38,782 pounds in the form of 20,000 pounds as Shares and 10,000 pounds as Secured First Debentures and the balance in cash. Along with him, his wife, daughter and four sons become shareholders of Solomon & Co Ltd by taking a share of 1 pound. After a year, the company went into liquidation as its assets were 6,000 pounds and liabilities were 17,000 pounds. During the process of winding up, Solomon was settled on priority in full as he is the only person holding Secured Debentures. Contention: The case was filed by other creditors of the company (Solomon & Co Ltd) contending that Solomon was holding majority of the shares in the company and the company was functioning as per the desire of Solomon. Hence, Solomon should repay the unsecured creditors of the company out of his personal assets. Decision: The court held that the company being a Separate Legal Entity cannot be a trustee or agent of Solomon and hence the properties of Solomon cannot be used for the dues of the company. Possible Practical Questions: 1) Assets of Company to be used for liabilities of Shareholder Not Possible 2) All the 7 shareholders of the company have died in an accident. Will the company exists? Yes. (Company is a separate legal entity and having perpetual succession) 3) Will Private Limited Company responsible for the liabilities of a major shareholder Not Possible
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Daimler Co Ltd Vs. Continental Tyre & Rubber Co Ltd. Facts of the case Daimler Co Ltd (German Company) engaged in Tyre Industry created a New Company - Continental Tyre & Rubber Co Ltd in England for manufacturing of tyres from England and supply to Daimler Co Ltd. All the Shareholders, except one and Directors of Continental Tyre & Rubber Co Ltd (English Company) were German residents. During the time of First World War, the English Company asked for its dues from the German Company towards the supply of tyres. The German Company did not make the payment. Contention: The contention of the German Company for not making the payment was that all the shareholders except one are Germans and making the payment will amount to trading with an enemy. The English Company contended that as per Solomon Vs. Solomon, the company being a separate legal entity is separate from its owners. It cannot have the characters of its owners. Decision: The court held that though the company is a separate legal entity, the de facto control of the company is to be examined on deciding the legal entity. Hence, the Corporate veil segregating the owner and the company has to be lifted and based on control over the company, the owner and company is to be considered as one. The English Company (Continental Tyre & Rubber Co Ltd) was barred from getting its dues from German Company (Daimler Co Ltd) being an enemy. Possible Practical Questions: 1) Can trading with a company fully controlled by shareholders who are insolvent possible? No. (Contract with Insolvent, Insane person, Minor, Alien enemy not possible) Ramanujar Institutional Learning

Case Laws on Companies Act


Shyam Lal Roy Vs. Madhu Sudhan Roy Facts of the Case A Hindu Undivided Family consisting of a Father and Five major sons and another Hindu Undivided Family consisting of a Father, Five major sons and a minor son were carrying on banking business without registration. Contention: The provisions registration is not applicable to Hindu Undivided Family Decision: Any Association of persons joined together with the objective of doing business for profit needs to be registered under the Companies Act, if the number of members joined together exceeds 1) 10 in case of Banking Business 2) 20 in case of other business If the association satisfying the above criteria, is not registered under the Companies Act, it will be considered as Illegal Association. Here, in the given case, including the father and sons of two Hindu Undivided Family, the number of persons exceeds 10 and there are required to be registered under Companies Act. All the members of the HUF except the minor are considered as individual persons and the HUF as a whole is not be considered for deciding the number of persons for registration. Possible Practical Questions: 1) Can minor be considered as a member for deciding the number of persons required for a company No 2) Can a HUF represented by its Kartha be considered as a Individual shareholder of a company - Yes Ashbury Railway Carriage & Iron Co Ltd Vs. Riche Facts of the Case Ashbury Railway Carriage & Iron Co Ltd was incorporated with the main object of making, selling, lending on hire the railway coaches and all other kinds of railway amenities. The company entered into contract with Riche for financing his railway project. The contract was ratified by majority of the shareholders. But later, the company repudiated the contract with Riche and Riche filed a case for recovering the damage due to cancellation of the contract. Contention: The contention of Riche was that the contract with him was ratified by majority of the shareholders and the object of the company includes a clause for General Contract. Financing Contract with him can be covered under the General Contract Clause. Decision: It was held that the term General Contract has to be referred with specific reference to the main object of the company and in no way the company is having the main object of financing. Hence, the contract to finance is out of the powers of the Memorandum of Association and can only be construed as an Ultra-Vires Transaction. An Ultra-Vires Transaction is void and Riche cannot claim damages from the company. Possible Practical Questions: 1) Can a Company engaged in the business of Hospitality collect Caution Deposit from its customers for lodging Not Possible unless collection of Caution Deposit is included in MOA

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Case Laws on Companies Act


Kotla Venkataswamy Vs. Ramamurthy Facts of the Case The Articles of the Company provides that all the documents of the company needs to be signed by three persons 1) Managing Director 2) Secretary 3) Executive Director A Mortgage deed was signed only by the Secretary and the Executive Director. Contention: The lender under the Mortgage contended that the mortgage deed was signed by the authorities of the company and his claim of debt under the mortgage cannot be denied. Decision: Both the Memorandum of Association and Articles of Association of a company are public documents and any person contracting with the company should have the knowledge of the powers, conditions and procedures laid down in the Memorandum of Association and Articles of Association. This is termed as Doctrine of Constructive Notice. Person contracting with the company without the knowledge of the Memorandum & Articles of Association of the company, are transacting at their own risk and the company will not be responsible for such contracts. Hence, the lender under the Mortgage is not required to be paid for his debts. Possible Practical Questions: 1) Can a bank lend working capital loan to a reputed school for payment of its staff salary based on the request from the Principal of the School? No. Bank has to refer the MOA & AOA for the Authority of the Principal
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Royal British Bank Vs. Turquand Facts of the Case The Articles of Association of the Company empowered the Directors of the company to issue bond and borrow the required money as approved by the shareholders in a general meeting. The directors borrowed from Turquand under a Bond but failed to get the approval for the Bond amount from the shareholders. Contention: The contention of the case was that since the directors have not received the approval of the shareholders, it is an ultra-vires transaction and the company is not liable for the debt due amount under Bond to Turquand. The contention of Turquand was that the Directors of the Company are authorised by the Articles of Association to borrow under Bond. Getting approval of the shareholders is within the management affairs of the company, which he cannot insist for. Decision: It was held that the company is liable for the debt amount due under the Bond to Turquand since he believed on the authority being provided by the Articles of Association to the directors. Besides, it is reasonable for Turquand to believe that the company will pass appropriate resolution in the general meeting of the company and get their ratification for the borrowings under the Bond. Possible Practical Question: 1) Can the Authority given under Articles of Association to Directors to raise the required finance from any source as approved by Shareholders be used for giving Unsecured loan to the company by any Financing company Yes

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Case Laws on Companies Act


Erlanger Vs. Sombrero Phosphate & Co Facts of the Case Erlanger was the head of a syndicate which purchased an island in West Indies which contains various mines of phosphate. The purchase price was 55,000 pounds. Knowing the facts of the rich phosphate content of the island, Erlanger promoted a new company. The new company entered into an purchase agreement with the syndicate for purchasing the Island for 1,10,000 pounds. X represented the syndicate and sold the Island to the newly created company for 1,10,000 pounds. Contention: The contention of the shareholders of the newly promoted company is that Erlanger (promoter of the company) knowing the price of the island (55,000 pounds) allowed the syndicate to sell the island to the company at a higher price (1,10,000 pounds). Hence, the sale has to be repudiated. Decision: Erlanger being a promoter of the company holds a fiduciary position towards the company and should not make any profit in any transaction with the company. He should have disclosed the facts of the transaction to the shareholders of the newly formed company. Hence, the contract of sale will be rescinded and Erlanger should repay the money to the company. Possible Practical Questions: 1) Can a promoter make a profit in the transaction of sale of his own land to the promoted company, provided he discloses the facts of profit to the shareholders? Yes, it is possible provided the shareholders approve the sale by knowing the profit amount. Kelner Vs. Baxter Facts of the Case The promoters of a Hotel Company which is in the final stage of starting a hotel signed an agreement on 27th January for purchase of wine for the proposed hotel. The company was incorporated on 20th February. The wine was consumed during the course of the business after the incorporation of the company. Later, the company went into liquidation before settling the debts due for the wine consumed. Contention: It was contented that the promoters of the company who signed the purchase agreement are personally liable for the contract though the wine was consumed during the course of business after incorporation. Decision: The promoters of the company are personally liable for the preliminary contracts signed even before the company is incorporated. They can exonerate their liability, only if the contract contains a clause that their liability will cease on approval of the agreement by the company and the approval of the shareholders is received for the agreement in the name of the company. Possible Practical Questions: 1) Can a contract to supply mineral water signed by the promoters of a software company is valid, if approved by the shareholders of the company after incorporation of the company Yes. The company has to pay the dues 2) Can a promoter make a profit in preliminary contracts provided he discloses the facts to the shareholders and the shareholders also accepted it ? Yes

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Case Laws on Companies Act


Nash Vs. Lynde Facts of the Case The documents containing the details of the proposed issue of shares were sent in an envelope containing a heading as STRICTLY CONFIDENTIAL by the Managing Director of the Company to another Director of the Company. The envelope also contained the share application form. That another Director sent the same to one of his relatives. That relative applied for the shares. Contention: The Contention was that sending of the documents containing the details of the proposed issue of shares to the relative of the another director is an invitation to the public to subscribe for the shares and the provisions of the Companies Act, with respect to Prospectus for the issue of shares is applicable and the company is liable for the penal action towards non issue of prospectus. Decision: The court held that circulation of documents relating to the issue of shares to a limited circle of persons or to the relatives of the directors does not amount to an invitation to the public. Hence, it is not required to issue prospectus and comply with the requirements of disclosure in prospectus. Probable Practical Questions: 1) A company was formed by a capton of a local cricket team. He circulated his idea of the company to his teammates and requested for his contribution for the company in the form of shares. Will the request by the Caption amount to invitation to the public? No. Here, the request is being made to a limited circle of persons his teammates, who will respond since because he is the caption of the team. Palaniappa Vs. Official Liquidator (Pasupathi Bank Ltd) Facts of the Case Palaniappa, the father of a minor daughter applied for shares in Pasupathi Bank Limited in the name of her daughter stating clearly that she is a minor and he is signing the documents as a guardian to her and on behalf of her. Shares were allotted in the name of the Minor Daughter with his father as Guardian. Later the Bank went into liquidation and the official liquidator included the name of the father (Guardian of the Minor Daughter) in the list of Contributories. Contention: The contention of the Official Liquidator is that the share application form is signed by Palaniappa Father of the Minor Daughter and thus he had contracted with the company. Hence, his name should be included in the list of contributories. The contention of Palaniappa is that the real beneficiary of the shares is his minor daughter and any contract with the minor is void. Hence, he is not required to contribute. Decision: The Court held that any contract with a minor is void. Hence, the shares in the name of the minor cannot be called towards contribution. The father of the minor daughter, signed on behalf of the minor daughter and it will be presumed that the minor daughter only contracted with the company. Hence, the father cannot be included in the list of contributories. Probable Practical Questions: 1) Can a minor on becoming major contribute for the company? Yes. On becoming major, a minor is having the choice to stay with the company or not to stay with the company. Based on choice opted, minors contribution will be decided. Ramanujar Institutional Learning

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Case Laws on Companies Act


Meenakshi Mills Ltd Vs. ROC Facts of the Case Meenakshi Mills Limited raised a loan from Bank by pledging its Fixed Deposit with that bank. The pledge was not registered with the Registrar of Companies (ROC). On filing of Annual Balance Sheet with the ROC, the Registrar noted that an amount of ` 36,57,804 was shown in the liabilities side under Secured Loan, secured by Fixed Deposit with Bank. Contention: The Registrar of Companies contended that the above charge on Assets towards secured loan was not registered under the Companies Act. Decision: The Court held that Fixed Deposits are in the nature of Movable Assets and pledging of movable assets as a security for raising loan is exempted from Registration of Charges under Companies Act. Probable Practical Questions: 1) Is fixed charge on Stock in trade to be registered with ROC? No. Only floating charge on the properties of the company including Stock in Trade is only required to be registered 2) Is Pledging of Book Debts needs to registered for charge? Yes. Though Book Debts are movable assets, it is specifically listed for registration of charges (Refer Study Material Registration of charges for full list) Damodara Reddi Vs. Indian National Agencies Ltd Facts of the Case There were only six shareholders in the Company and all of them were directors. In the Board Meeting of the directors, they have allotted shares to two outsiders, who were applied for the shares in the company. Articles of Association of the company provided that the outsiders should be allotted shares only through the approval of shareholders in the general meeting. Later, the Auditors of the company filed a case on behalf of the company against the directors towards the appointment of outsiders as shareholders by passing a resolution only in Board Meeting. Contention: The contention of the Auditors is that based on the Articles of Association of the company, outsiders should be allotted shares only through approval of Shareholders in the General Meeting. Since the Directors have allotted shares based on Board resolution the allotment of shares in the name of the outsiders should be cancelled. Decision: The Court held that in this case the members of the board and the members of the company are the same. Hence, the resolution passed at the Board Meeting can be considered as resolution passed at the General Meeting. Therefore, the shares allotted to the outsiders cannot be cancelled and their names will not be removed from the Register of Members.

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Case Laws on Companies Act


Cousins Vs. International Brick Co Ltd Facts of the Case Cousins, a member of the company, gave proxy form to another person and authorised him to vote on behalf of him in the general meeting of the company. The proxy based on the authorization of Cousins, went to the meeting. But, on the day of the meeting, Cousins also attended the meeting. During the time of resolution, both Cousins and Proxy voted for the resolution and the vote of Cousins was rejected stating that his proxy vote only be considered. Contention: The contention of the company is that once the proxy form is given, the shareholder will be deprived from his right to vote. Only the Proxy is eligible to vote in the company and only his vote will be considered. Decision: The court held that Proxy is appointed to attend the meeting since the shareholder is unable to attend the meeting. He is casting his vote on behalf of the shareholder and as per the guidance of the shareholder. Once, the shareholder himself attends the meeting, there is no need for proxy and the proxy form issued will gets cancelled automatically. Therefore, any votes casted by the proxy becomes invalid, when the shareholder himself is present and casting his vote. Probable Practical Questions: 1) Will all the resolutions approved by a proxy be considered as approved by the Shareholder himself? Yes. Proxy attends a meeting on behalf of the shareholder and all his acts will bind the shareholder and also considered as the acts of the shareholder.
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