NATURE OF COMPANY

A company in common parlance means group of persons associated to attain a common purpose either
social or technical or economic.

It is an artificial person which has no body and no soul neither conscience nor it suffers from any
imbecilities of the body. It is not visible, it is visible only in the eyes of law.

Statutory Definition: Sec 2(20) of companies Act 2013, Company means company

-Incorporated under this Act or

-Under any previous Act.

CAHARCTERSTICS OF COMPANY:

1) SEPARATE LEGAL ENTITY: A company is in law regarded as a separate legal entity ,separate
from its members .In other words it has independent corporate existence .Any of its members can
enter in to contract with it like any other person can do. Its members are not liable for its acts nor is it
liable for the acts for its members. Company’s money or property belongs to company and not to its
members.

2) LIMITED LIABILITY: A company may be a company limited by shares or a company limited

by guarantee. In a company limited by shares the liability of members is limited to the unpaid amount
of share capital .for example if the member has a share of face value Rs 10 and paid the share capital
of value Rs 6 his liability cannot be more then Rs 4 .If the share is fully paid the liability is nil.
However in case of company limited by guarantee the liability of member can not exceed the amount
guaranteed means amount they have undertaken to contribute to the assets of company in the event of
its winding up.

3) PERPETUAL SUCCESSION: A company is a juristic person with perpetual succession .It is not
susceptible to “the thousand natural shocks that flesh its hires to” as such it never dies; nor does its life
depends up on life of its members. It is not affected by the insolvency of its members nor on mental
disorder or retirement. It is formed by the process of law and can be put to end only by the process of
law .Members may come and go but the company will go on forever (until dissolved).IT
CONTINUES TO EXIST EVEN IF ALL ITS HUMAN MEMBERS ARE DEAD.

If all members present in a general meeting of a private company and hydrogen bomb blasts there and
all human members die there even then company will continue to exist; thus even hydrogen bomb can
not finish a company.

Perpetual succession therefore means that company’s existence exist even change in composition of
its members .Thus it is not affected by the constant change in the membership ;it is like a river whose
parts of which it is made of change every second but it is still a single river.

4) COMMON SEAL: Since a company has no physical existence, it works through its agents and all
such contracts are entered under the seal of company, COMMON SEAL ACTS AS SIGNATURE OF

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COMPANY. (Affixing seal of a company on documents, authorization papers, agreement etc. is no
longer be mandatory.)

5) TRANSFERABILITY OF SHARES: The capital of company is divided in to parts called shared

these shares are subject to some restrictions are freely transferable & no member is permanently
wedded to company.

6) SEPERTAE PROPERTY: A company is a legal person distinct from its members and capable of
purchasing, selling property in its in name. Although the capital is contributed by its shareholder but
the property is in the name of company.

7) CAPACIY TO SUE: A company can sue and be sued in its corporate name.

VEIL OF INCORPORATION: From juristic point of view company is a legal person distance from
its members .This principle is referred to as Veil of incorporation. The court in general considers itself
bound by this principle. The effect of this principle is that there is fictional veil (and not a wall)
between company and its members.

LIFTING AND PIERCING OF CORPORATE VEIL.

The human ingenuity started using veil of incorporation as a curtain for fraud and improper conduct
thus it became necessary for the court to break through and lift this corporate veil and look at ,who are
real beneficiary behind this corporate veil.

LIFTING AND PIERCING OF CORPORATE VEIL ALSO REFFERED TO AS

EXECPTIONS TO VEIL Of INCORPORATION.

Various cases where corporate veil is lifted:

1) Protection of revenue: The court may ignore the corporate existence if it is used for tax evasion.
Tax planning is different than tax evasion.

Sir Dinshaw Maneckjee Petit

X, having huge dividend and interest income, formed four private companies. He agreed
with each of such companies to hold a block of investment as an agent for the company.
The income received was credited to the accounts of the company but the company gave
it back to X as a pretended loan. In this way, X divided his income with a view to reduce
his tax-burden. In a legal proceeding against X, the court ignored the company and
concerned itself directly with X.

2) Prevention of fraud or improper conduct: The legal personality may be disregarded in the
interest of justice if it is used for improper conduct.
Jones Vs Lipman
Mr Lipman contracted to sell a house at 3 Fairlawn Avenue to Mr Jones for £5,250. He changed his
mind and refused to complete. To try and avoid a specific performance order, he conveyed it to a
company formed for that purpose alone, which he alone owned and controlled.

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3) Determination of character of company whether it is enemy company: A company may assume
a enemy character if the persons in its de facto control are the residents of enemy country, in such case
the court may lift the corporate veil.
In the law relating to trading with the enemy where the test of control is adopted. The
leading case in point is Daimler Co. Ltd. vs. Continental Tyres & Rubber Co if the public interest is
not likely to be in jeopardy, the Court may not be willing to crack the corporate shell. But it may rend
the veil for ascertaining whether a company is an enemy company. It is true that, unlike a natural
person, a company hasn’t mind or conscience; therefore, it cannot be a friend or foe. It may, however,
be characterized as an enemy company, if its affairs are under the control of people of an enemy
country. For the purpose, the Court may examine the character of the persons who are really at the
helm of affairs of the company.

4) Where the company is a sham: The court lifts the veil where company is a mere cloak or sham.
Gilford motor company ltd v Horne.
H was appointed the managing director of A & Co. on the term that he must not, at any
time during the tenure of his office as such, or afterwards, entice away the customers of
A & Co. Subsequent to the cessation of H.s employment under an agreement he set up a
business in the name of H & Co. which solicited the customers of A & Co. Evidence
showed that H & Co. was formed to enable H to commit a breach of his covenant against solicitation
& Co. and H be restrained from doing so.

5) Company avoiding legal obligations: Where company is used to avoid the legal obligations court
may disregard the legal personality. Where it was found that the sole purpose for the formation of the
company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the
Supreme Court upheld the piercing of the veil to look at the real transaction (The Workmen
Employed in Associated Rubber Industries Limited, Bhavnagar vs. The Associated Rubber
Industries Ltd., Bhavnagar and another). The facts of the case are that “A Limited” purchased
shares of “B Limited” by investing a sum of `Rs 4,50,000. The dividend in respect of these shares was
shown in the profit and loss account of the company, year after year. It was taken into account for the
purpose of calculating the bonus payable to workmen of the company. Sometime in 1968, the
company transferred the shares of B Limited, to C Limited a subsidiary, wholly owned by it. Thus,
the dividend income did not find place in the Profit & Loss Account of A Ltd., with the result that the
surplus available for the purpose for payment of bonus to the workmen got reduced. Here a company
created a subsidiary and transferred to it, its investment holdings in a bid to reduce its liability to pay
bonus to its workers. Thus, the Supreme Court brushed aside the separate existence of the subsidiary
company. The new company so formed had no assets of its own except those transferred to it by the
principal company, with no business or income of its own except receiving dividends from shares
transferred to it by the principal company and serving no purpose except to reduce the gross profit of
the principal company so as to reduce the amount paid as bonus to workmen.

6) Company act as agent of shareholders: Where company act as a trustee or agent of shareholders,
shareholders will be liable for the acts of agents. In the case of Merchandise Transport Limited vs.
British Transport Commission (1982), a transport company wanted to obtain licences for its
vehicles, but could not do so if applied in its own name. It, therefore, formed a subsidiary company,
and the application for licence was made in the name of the subsidiary. The vehicles were to be
transferred to the subsidiary company. Held, the parent and the subsidiary were one commercial unit
and the application for licences was rejected.

7) Protecting public policy : The court lifts the corporate veil to protect public policy and to prevent
such transactions which are against public policy.

NOTES BY CA TARUN DUTT +91-9897924702 3

Statutory exceptions:
1) "Sec 3A. If at any time the number of members of a company is reduced, in the case of a public
company, below seven, in the case of a private company, below two, and the company carries on
business for more than six months while the number of members is so reduced, every person who is a
member of the company during the time that it so carries on business after those six months and is
cognizant of the fact that it is carrying on business with less than seven members or two members, as
the case may be, shall be severally liable for the payment of the whole debts of the company
contracted during that time, and may be severally sued therefor.".
(Insertion of new section 3A. Members severally liable in certain cases.)

SEPARATE LEGAL ENTITY: A company is in law regarded as a separate legal entity ,separate
from its members .In other words it has independent corporate existence .Any of its members can
enter in to contract with it like any other person can do.Its members are not liable for its acts nor it is
liable for the acts for its members .company’s money or property belongs to company and not to its
members.

1) In Salomon vs. Salomon & Co. Ltd. [1897] The House of Lords laid down that a company is a
person distinct and separate from its members. In this case one Salomon incorporated a company
named .Salomon & Co. Ltd., with seven subscribers consisting of himself, his wife, four sons and one
daughter. This company took over the personal business assets of Salomon for £ 38,782 and in turn,
Salomon took 20,000 shares of £ 1 each, debentures worth £ 10,000 of the company with charge on
the company’s assets and the balance in cash. His wife, daughter and four sons took up one £ 1 share
each. Subsequently, the company went into liquidation due to general trade depression. The unsecured
creditors contended that Salomon could not be treated as a secured creditor of the company, in respect
of the debentures held by him, as he was the managing director of one-man company, which was not
different from Salomon and the cloak of the company was a mere sham and fraud. It was held
.The Company is at law a different person altogether from the subscribers to the memorandum, and
though it may be that after incorporation the business is precisely the same as it was before and the
same persons are managers, and the same hands receive the profits, the company is not in law the
agent of the subscribers or trustees for them. Nor are the subscribers, as members, liable, in any
shape or form, except to the extent and in the manner provided by the Act..

Thus, this case clearly established that company has its own existence and as a result, a shareholder
cannot be held liable for the acts of the company even though he holds virtually
the entire share capital.

NOTES BY CA TARUN DUTT +91-9897924702 4

 KINDS OF COMPANIES
Companies may be classified in following types:
Incorporated companies: An incorporated company is that which is formed and registered under this
act or any previous Act .Sec 2(20)

Unincorporated companies: Unincorporated companies are for all intends and purposes large
partnerships .These are not regarded as distinct entities separate from the members constituting them.
There share is transferable but liability of members is unlimited. These companies continue even after
the death of its members. No association or partnership consisting of more than such number of
persons as may be prescribed shall be formed for the purpose of carrying on any business that has for
its object the acquisition of gain by the association or partnership or by the individual members
thereof, unless it is registered as a company under this Act or is formed under any other law for the
time being in force: Provided that the number of persons which may be prescribed shall not exceed
one hundred.
CLASSIFICATION ON THE BASIS OF INCORPORATION:
1) Statutory companies: These are companies which are formed and registered under special Act of
legislature eg. The Reserve Bank of India, The state bank of India, LIC etc. They are mostly
concerned with public utilities and are of national importance.
2) Registered Companies: These are the companies which are formed under companies Act 2013 or
were registered under earlier companies act.

CLASSIFICATION ON THE BASIS OF LIABILITY:

1) Companies with limited liability
a) Company limited by share.
b) Company limited by guarantee.

2) Companies with unlimited liability.

Company limited by shares: When the liability of the members of a company is limited by
its memorandum of association to the amount (if any) unpaid on the shares held by them, it is
known as a company limited by shares. It thus implies that for meeting the debts of the company, the
shareholder may be called upon to contribute only to the extent of the amount, which remains unpaid
on his shareholdings. His separate property cannot be encompassed to meet the company’s debt.

Company limited by guarantee: Company limited by guarantee is one having the liability of its
members limited by the memorandum to such amount as the members may respectively
undertake by the memorandum to contribute to the assets of the company in the event of its being
wound up. Thus, the liability of the member of a guarantee company is limited by a
stipulated sum mentioned in the memorandum. Members cannot be called upon to contribute
beyond that stipulated sum. Such amount is considered as RESERVE CAPITAL ,it can not be charged
nor can be called during life time of company.

Unlimited company: A company having not any limit on the liability of its members is
NOTES BY CA TARUN DUTT +91-9897924702 5
termed in the Act as unlimited company. In such a company the liability of a member ceases when he
ceases to be a member.

The liability of each member extends to the whole amount of the company’s debts and
liabilities but he will be entitled to claim contribution from other members. In case the company
has a share capital the articles of association must state the amount of share capital and the
amount of each share. So long as the company is a going concern the liability on the shares is the only
liability which can be enforced by the company, though the liability of the members is unlimited so
far as creditors are concerned.

CLASSIFICATION ON THE BASIS OF NUMBER OF MEMBERS

1) Private company
2) Public company
3) One person company

Sec 2(68)“private company” means a company which by its articles,—

(i) restricts the right to transfer its shares;
(ii) limits the number of its members to two hundred:
Provided further that—
(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,
shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company;

Note: Joint share holders are considered as on single member.

Sec 2(71)“Public company”:

A public company means accompany
a) Which is not a private company
b) Is a subsidiary of a company which itself is not a private company. A company which is a
subsidiary of a company, not being a private company, shall be deemed to be public company for the
purposes of this Act even where such subsidiary company continues to be a private company in its
articles.
A public limited company may be
a) Listed public limited company
b) Unlisted public limited company

Sec 2(62) “One Person Company” means a company which has only one person as a member.
Sec 3 of the act provides legal sanctity for creating private company in the form of OPC with only on
member.Sec12(3) of the act also proposes that whenever the name of such a company appear the
words ‘one person company’ shall be part of name. In this case the word “one person company” shall
be mentioned in brackets below the name. Also one person company shall have minimum of one
director.

Section 2(85) Small company

NOTES BY CA TARUN DUTT +91-9897924702 6
‘‘small company’’ means a company, other than a public company,—
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount
as may be prescribed( not be more than five crore rupees); and
(ii) turnover of which as per its last profit and loss account does not exceed two crore
rupees or such higher amount as may be prescribed ( not be more than twenty crore
rupees):
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;

Sec 2(6) Associate company, in relation to another company, means a company in which that other
company has a significant influence, but which is not a subsidiary company of the company having
such influence and includes a joint venture company.
Explanation.—For the purposes of this clause, “significant influence” means control of at least twenty
per cent of total share capital, or of business decisions under an agreement;

Sec 2(42) foreign company

means any company or body corporate incorporated outside India which—
(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) conducts any business activity in India in any other manner.

Sec 455- Dormant Company

Where a company is formed and registered under this Act for a future project or to hold an asset or
intellectual property and has no significant accounting transaction, such a company or an inactive
company may make an application to the Registrar in such manner as may be prescribed for obtaining
the status of a dormant company.
(Inactive company” means a company which has not been carrying on any business or
operation, or has not made any significant accounting transaction during the last two financial
years, or has not filed financial statements and annual returns during the last two financial years)

Sec 406 Nidhi-

In this section, “Nidhi” means a company which has been incorporated as a Nidhi with the object of
cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending
to, its members only, for their mutual benefit, and which complies with such rules as are prescribed by
the Central Government for regulation of such class of companies.

Sec 2(11) Body corporate” or “corporation”

includes a company incorporated outside India, but does not include—
(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in this Act), which the Central
Government may, by notification, specify in this behalf;

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CLASSIFICATION ON THE BASIS OF CONTROL
1) Holding company Sec2(46)
2) Subsidiary Company.Sec2(87)

Sec 2 (46) “holding company”, in relation to one or more other companies, means a company of
which such companies are subsidiary companies.

Sec 2(87) “subsidiary company” or “subsidiary”, in relation to any other company

(that is to say the holding company), means a company in which the holding company—

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or together with
one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of
subsidiaries beyond such numbers as may be prescribed.

Explanation.—For the purposes of this clause,—

(a) a company shall be deemed to be a subsidiary company of the holding company even if the control
referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding
company;
(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another
company if that other company by exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors.

Note: Holding and subsidiary are separate legal entities.

CLASSIFICATION ON THE BASIS OF OWNERSHIP

1) Government Company Sec 2(45)
2) Non Government Company

Sec 2(45) “Government company” means any company in which not less than fifty one per cent of
the paid-up share capital is held by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly by one or more State Governments, and
includes a company which is a subsidiary company of such a Government company.
For government companies: World" in the case of public limited company for the last words
private limited company" in the case of private limited company shall be omitted in the case of
government company.

ASSOCIATIONS NOT FOR PROFIT Sec (8)

Formation of companies with charitable objects etc

Where it is proved to the satisfaction of the Central Government that a person or an association of
persons proposed to be registered under this Act as a limited company—
(a) has in its objects the promotion of commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment or any such other object;
(b) intends to apply its profits, if any, or other income in promoting its objects; and
NOTES BY CA TARUN DUTT +91-9897924702 8
(c) intends to prohibit the payment of any dividend to its members,

the Central Government may, by license issued in such manner and on such conditions as it deems fit,
allow that person or association of persons to be registered as a limited company under this section
without the addition to its name of the word “Limited”, or as the case may be, the words “Private
Limited , and thereupon the Registrar shall, on application, in the prescribed form, register such
person or association of persons as a company under this section.

The company registered under this section shall enjoy all the privileges and be subject to all the
obligations of limited companies.
A firm may be a member of the company registered under this section. A company registered under
this section shall not alter the provisions of its memorandum or articles except with the previous
approval of the Central Government.

The Central Government may, by order, revoke the license granted to a company registered under this
section if the company contravenes any of the requirements of this section or any of the conditions
subject to which a license is issued or the affairs of the company are conducted fraudulently or in a
manner violative of the objects of the company or prejudicial to public interest, Central Government
will direct the company to convert its status and change its name to add the word “Limited” or the
words “Private Limited”, as the case may be, to its name and thereupon the Registrar shall register the
company accordingly Provided that no such order shall be made unless the company is given a
reasonable opportunity of being heard.

Public Financial Institutions (PFI):

By virtue of Section 2(72) of the Companies Act, 2013, the following institutions are to be regarded
as public financial institutions:

(i) The Life Insurance Corporation of India, established under the Life Insurance Corporation Act,
1956;

(ii) The Infrastructure Development Finance Company Limited,

(iii) specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal)
Act, 2002 (iv) institutions notified by the Central Government under section 4A(2) of the Companies
Act, 1956 so repealed under section 465 of this Act;

(v) Such other institution as may be notified by the central Government in consultation with the
Reserve Bank of India

Conditions for an institution to be notified as PFI:

No institution shall be so notified unless—

(A) It has been established or constituted by or under any Central or State Act; or

(B) Not less than fifty-one per cent of the paid-up share capital is held or controlled by the Central
Government or by any State Government or Governments or partly by the Central Government and
partly by one or more State Governments.

NOTES BY CA TARUN DUTT +91-9897924702 9

MODE OF REGISTRATION/INCORPORATION OF COMPANY PROMOTERS:

The Companies Act, 2013 defines the term “Promoter” under section 2(69) which means a person—
(a) Who has been named as such in a prospectus or is identified by the company in the annual return
referred to in section 92; or
(b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder,
director or otherwise; or
(c) In accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act.

In simple terms we can say,

1) Persons who form the company are known as promoters.

2) It is they who conceive the idea of forming the company.

3) They take all necessary steps for its registration.

4) It should, however, be noted that persons acting only in a professional capacity e.g., the solicitor,
banker, accountant etc. are not regarded as promoters.

FORMATION OF COMPANY: Section 3 of the Companies Act, 2013 deals with the basic
requirement with respect to the constitution of the company. In the case of a public company, any 7 or
more persons can form a company for any lawful purpose by subscribing their names to memorandum
and complying with the requirements of this Act in respect of registration. In exactly the same way, 2
or more persons can form a private company and one person where company to be formed is one
person company.

Documents to file with registrar (Sec7)

There shall be filed with the Registrar within whose jurisdiction the registered office of a company is
proposed to be situated, the following documents and information for registration, namely:—
(a) The memorandum and articles of the company duly signed by all the subscribers to the
memorandum.
(b) A declaration by an advocate, a chartered accountant, cost accountant or company secretary in
practice, who is engaged in the formation of the company, and by a person named in the articles as a
director, manager or secretary of the company, that all the requirements of this Act and the rules made
there under in respect of registration and matters precedent or incidental thereto have been complied
with.
(c) An affidavit(for the words "an affidavit", the words "a declaration" shall be substituted.) from each
of the subscribers to the memorandum and from persons named as the first directors, if any, in the
articles that he is not convicted of any offence in connection with the promotion, formation or
management of any company and that all the documents filed with the Registrar for registration of the
company contain information that is correct and complete and true to the best of his knowledge and
belief.

NOTES BY CA TARUN DUTT +91-9897924702 10

The Registrar on the basis of documents and information filed shall register all the documents and
information referred to in that subsection in the register and issue a certificate of incorporation in the
prescribed form to the effect that the proposed company is incorporated under this Act.

CERTIFCATE OF INCORPORATION
When the requisite documents are filed with registrar, registrar shall satisfy himself that the statutory
requirements regarding incorporation have been complied with. In exercising this duty registrar is not
required to Act as investigating agency ,the only duty cast on him before he registers the company is
to see that requirements of sec 7 are complied with.
If he is satisfied as to the compliance of statutory requirement he retains the documents and files them
and issues the certificate of registration. On and from the date mentioned in the certificate of
incorporation issued under the Registrar shall allot to the company a corporate identity number,
which shall be a distinct identity for the company and which shall also be included in the certificate.

Effect of registration (Sec 9)

From the date of incorporation mentioned in the certificate of incorporation
1) Subscribers to the memorandum and all other persons, as may, from time to time, become members
of the company.
2) It shall be a body corporate by the name contained in the memorandum.
3) It would be capable of exercising all the functions of an incorporated company under this Act.
4) Would have perpetual succession and a common seal.
5) Get power to acquire, hold and dispose of property, movable and immovable, tangible and
intangible.
6) Power to contract and to sue and be sued, by the said name.

EFFECT OF MEMORANDUM AND ARTICLES: As per section 10 of the Companies Act, 2013,
where the memorandum and articles when registered, shall bind the company and the members
thereof to the same extent as if they respectively had been signed by the company and by each
member, and an agreement to observe all the provisions of the memorandum and of the articles. All
monies payable by any member to the company under the memorandum or articles shall be a debt due
from him to the company.

CLASSIFICATION OF CAPITAL

In relation to a company limited by shares, the word capital means share-capital, i.e., the capital or
figure in terms of so many rupees divided into shares of fixed amount. In other words, the
contributions of persons to the common stock of the company form the capital of the company. The
proportion of the capital to which each member is entitled, is his share. A share is not a sum of
money; it is rather an interest measured by a sum of money and made up of various rights contained in
the contract.

(a) Nominal or authorised or registered capital: This form of capital has been defined in section
2(8) of the Companies Act, 2013. “Authorised capital” or “Nominal capital” means such capital as is
authorised by the memorandum of a company to be the maximum amount of share capital of the
company. It is usually fixed at the amount, which, it is estimated, the company will need, including
the working capital and reserve capital, if any.

(b) Issued capital: Section 2(50) of the Companies Act, 2013 defines “issued capital” which means
such capital as the company issues from time to time for subscription. It is that part of authorised
NOTES BY CA TARUN DUTT +91-9897924702 11
capital which is offered by the company for subscription and includes the shares allotted for
consideration other than cash.

(c) Subscribed capital: Section 2(86) of the Companies Act, 2013 defines “subscribed capital” as
such part of the capital which is for the time being subscribed by the members of a company.

(d) Called-up capital: Section 2(15) of the Companies Act, 2013 defines “called-up capital” as such
part of the capital, which has been called for payment. It is the total amount called up on the shares
issued.

(e) Paid-up capital is the total amount paid or credited as paid up on shares issued. It is equal to
called up capital less calls in arrears.

SHARES

Section 2(84) of the Companies Act, 2013 defines the term ‘share’ which means a share in the share
capital of a company and includes stock. A share thus represents such proportion of the interest of the
shareholders as the amount paid up thereon bears to the total capital payable to the company. It is a
measure of the interest in the company’s assets to which a person holding a share is entitled.

Shares are a movable property: According to section 44 of the Companies Act, 2013, the shares or
debentures or other interests of any member in a company shall be movable property transferable in
the manner provided by the articles of the company.

Shares shall be numbered: Section 45 provides, every share in a company having a share capital,
shall be distinguished by its distinctive number. This implies that every share shall be numbered.
However, this shall not apply to a share held by a person whose name is entered as holder of
beneficial interest in such share in the records of a depository.

Kinds of share capital:- Section 43 of the Companies Act, 2013 provides the kinds of share capital.
According to the provision the share capital of a company limited by shares shall be of two kinds,
namely:—

Equity share capital Preference share capital

(1) with voting rights; or
(2) with differential rights as to dividend, voting
or otherwise
Equity share capital means all share capital which
is not preference share capital.
‘‘Preference share capital’’ means that part of the
issued share capital of the company which carries
a preferential right with respect to—
(a) payment of dividend, either as a fixed amount
or an amount calculated at a fixed rate, which
may either be free of or subject to income-tax;
and
(b) repayment, in the case of a winding up or
repayment of capital

NOTES BY CA TARUN DUTT +91-9897924702 12

MEMORANDUM OF ASSOCIATION
The memorandum of association of company is in fact its charter; it defines its constitution and
the scope of the powers with which it has been established under the Act. It is the very purpose for
which the company is formed.
A fundamental document A memorandum of association is a document of great importance in
relation to company which is proposed to be formed. It contains the fundamental conditions up on
which the company is to be formed. It is the charter of the company and defines the reason for its
existence (raison d’etre). It lays down the area of operation of company. It also regulates the area of
operation of the company. It also regulates the external affairs of company in relation to outsiders.

PURPOSE OF MEMORANDUM OF ASSOCIATION

1) The prospective shareholder shall know the field on pr purpose for which their money is
going to be used by the company and what risk they are taking in making that investment.
2) The outsider dealing with the company shall know with certainty as to what object the
company are and as to whether the contractual relation in to which they contemplate to enter
with the company is within the object of company.

Contents of memorandum: [Section 4]

The memorandum of a company shall state—
(a) the name of the company with the last word “Limited” in the case of a public limited company, or
the last words “Private Limited” in the case of a private limited company: (Provided that nothing in
this clause shall apply to a company registered under section 8)

(b) the State in which the registered office of the company is to be situated;

(c) the objects for which the company is proposed to be incorporated and any matter considered
necessary in furtherance thereof;

(d) the liability of members of the company, whether limited or unlimited, and also state,—
(i) in the case of a company limited by shares, that liability of its members is limited to the amount
unpaid, if any, on the shares held by them; and
(ii) in the case of a company limited by guarantee, the amount up to which each member undertakes to
contribute—
(A) to the assets of the company in the event of its being wound-up.
(B) to the costs, charges and expenses of winding-up and for adjustment of the rights of the
contributories among themselves;

(e) in the case of a company having a share capital,—

(i) the amount of share capital with which the company is to be registered and the division thereof into
shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to
subscribe which shall not be less than one share; and
(ii) the number of shares each subscriber to the memorandum intends to take, indicated opposite his
name;

(f) in the case of One Person Company, the name of the person who, in the event of death of the
subscriber, shall become the member of the company.

NOTES BY CA TARUN DUTT +91-9897924702 13

1) The memorandum must be printed, divided into paragraphs, numbered consecutively, and signed
by at least seven persons (two in the case of a private company and one in the case of One Person
Company) in the presence of at least one witness, who will attest the signatures. The particulars about
the signatories to the memorandum as well as the witness, as to their address, description, occupation
etc., must also be entered.
2) It is to be noted that a company being a legal person can through its agent, subscribe to the
memorandum. However, a minor cannot be a signatory to the memorandum as he is not competent to
contract. The guardian of a minor, who subscribes to the memorandum on his behalf, will be deemed
to have subscribed in his personal capacity.

DOCTRINE OF ULTRA VIRES

A company has power to do all such acts as are:
a) Authorized by Companies act
b) Essential to the attainment of the objects specified in the memorandum of association and
reasonably fair and incidental to the attainment of the objects.
Every thing else is ultra vires , Ultra means beyond and Vires means powers hence the term ultra
vires means beyond powers.It means doing of act which is beyond the legal authority of company.

Ultra -vires acts are void: If an act is ultra vires , it does not create any legal relationship .Such an
act is absolutely void and even whole body of share holder cannot ratify it and make it binding on the
company.It is not necessary that an ultra vires act is illegal it may or may not be.

Ashbury Rly. Carriage and iron Co. Ltd.v. Riche

The facts of the case are: The main objects of a company were:

(a) To make, sell or lend on hire, railway carriages and wagons;

(b) To carry on the business of mechanical engineers and general contractors.

(c) To purchase, lease, sell and work mines.

(d) To purchase and sell as merchants or agents, coal, timber, metals etc.

The directors of the company entered into a contract with Riche, for financing the construction of a
railway line in Belgium, and the company further ratified this act of the directors by passing a special
resolution. The company however, repudiated the contract as being ultra-vires. And Riche brought an
action for damages for breach of contract. His contention was that the contract was well within the
meaning of the word general contractors and hence within its powers. Moreover it had been ratified
by a majority of shareholders. However, it was held by the Court that the contract was null and void.
It said that the terms general contractors was associated with mechanical engineers, i.e. it had to be
read in connection with the company’s main business.

An ultra vires contract can never be made binding on the company. It cannot become “Intravires” by
reasons of estoppel, acquiescence, lapse of time, delay or ratification.
NOTES BY CA TARUN DUTT +91-9897924702 14
The whole position regarding the doctrine of ultra vires can be summed up as:

(i) When an act is performed, which though legal in itself, is not authorized by the object clause of
the memorandum, or by the statute, it is said to be ultravires the company, and hence null and void.
(ii) An act which is ultravires, the company cannot be ratified even by the unanimous consent of all
the shareholders.

(iii) An act which is ultravires the directors, but intravires the company can be ratified by the
members of the company through a resolution passed at a general meeting.

(iv) If an act is ultravires the Articles, it can be ratified by altering the Articles by a Special
Resolution at a general meeting.

ARTICLES OF ASSOCIATION

The articles of associations or just articles are the rules and regulations bye-laws for the internal
management of the company. They are framed with the object to carry out the aims and objects as set
out in memorandum of association.
Articles means articles of association as originally framed or as altered from time to time in pursuance
of this act.

Next in importance to memorandum: The articles are next in importance to

memorandum which contains the fundamental conditions alone on which the company is allowed to
incorporate. They are subordinate to and controlled by memorandum.

Section 5 of the Companies Act, 2013 seeks to provide the contents and model of articles of
association. The section lays the following law

(1) Contains regulations: The articles of a company shall contain the regulations for management of
the company.

(2) Inclusion of matters: The articles shall also contain such matters, as are prescribed under the
rules. However, a company may also include such additional matters in its articles as may be
considered necessary for its management.

(3) Contain provisions for entrenchment: The articles may contain provisions that articles may be
altered only if conditions or procedures complied with.

(4) Forms of articles: The articles of a company shall be in respective forms specified in Tables, F,
G, H, I and J in Schedule I as may be applicable to such company.

(7) Model articles: A company may adopt all or any of the regulations contained in the model
articles applicable to such company.

NOTES BY CA TARUN DUTT +91-9897924702 15

The following are the key differences between the Memorandum of Association vs. Articles of
Association:

1. Objectives: Memorandum of Association defines and limits the objectives of the company whereas
the Articles of association lays down the rules and regulations for the internal management of the
company. Articles determine how the objectives of the company are to be achieved.

2. Relationship: Memorandum defines the relationship of the company with the outside world and
Articles define the relationship between the company and its members.

3. Alteration: Memorandum of association can be altered only under certain circumstances and in the
manner provided for in the Act. In most cases permission of the Regional director or the Tribunal is
required. The articles can be altered simply by passing a special resolution.

4. Ultra Vires: Acts done by the company beyond the scope of the memorandum are ultra-vires and
void. These cannot be ratified even by the unanimous consent of all the shareholders. The acts ultra-
vires the articles can be ratified by a special resolution of the shareholders provided they are not
beyond the provisions of the memorandum.

CONSTRUCTIVE NOTICE OF MEMORANDUM AND

ARTICLES
Every outsider dealing with the company is deemed to have notice of contents of memorandum of
association and articles of associations .These documents on registration with registrar assumes the
nature of and character of public documents. This is known as constructive notice of memorandum
and articles. The memorandum and articles are accessible to all and it is the duty of the person dealing
with the company to inspect these documents and see that whether it is with in the powers of company
to enter in to contracts or not. Same is the case with special resolutions as its copy is to be filed with
registrar.
It is the presumption that outsider has read the document. Thus anyone who is dealing with the
company has the presumption that that he not only have read the document but also understood them
properly.
The doctrine of memorandum of association is however not a positive doctrine it is a negative doctrine
as it operates against the outsider and not against the company. It prevents the company from alleging
that he did not know the act is ultra vires.

DOCTRINE OF INDOOR MANAGEMANT

There is one limitation to the doctrine of constructive notice of memorandum and articles. The
outsider dealing with the company are entitled to assume that as far as internal proceedings are
concerned every thing has been regularly done. They have presumed to read the documents but not
presumed to check that every thing has been regularly done. This limitation of doctrine of constructive
notice is known as Doctrine of indoor management. Also known as:
(a) The rule of “Royal British bank Vs Turquand , or
(b) Just Turquand rule.

(Royal British bank Vs Turquand)

NOTES BY CA TARUN DUTT +91-9897924702 16
The directors of the company had issued a bond to T. They had powers under the articles to issue such
bond provided they were authorized by the resolution passed by the share holder at a general meeting
of the company. No such required resolution was passed Held T could recover the amount on the
bond from the company as he was entitled to assume that the resolution was passed.

Exceptions to the Doctrine of Indoor Management:

1) Knowledge of irregularity: Where the person dealing with the company has actual or constructive
notice of irregularity as regards internal management, he cannot claim the benefits of doctrine of
indoor management.
2) Negligence: Where the person dealing with the company could discover the irregularity if he had
made the proper inquiries he cannot claim the benefits of rule of indoor management. The benefit
cannot be claimed at that place where circumstance surrounding the contract is so suspicious that
invite inquiry.
3) Forgery: The rule of doctrine of indoor management does not apply where person relies on the
document that turns out to be forged since nothing can validate the forgery of officer of company.
4) Acts outside the apparent authority: If the officer of the company enters in to contract which is
outside the apparent authority means act is clearly outside scope of his authority the company is not
bound.

NOTES BY CA TARUN DUTT +91-9897924702 17