UNIT 5

● Doctrine of ultra-vires:
● The term ‘ultra-vires’ means beyond one’s power or authority. Where exercise of powers
vested in a person arises, the question arises as to whether a person is acting within the
limits of authority conferred on him. If the person exercising the powers goes beyond the
jurisdiction of his powers, the person is said to have acted ultra-vires .
● The doctrine of ultra-vires contemplates -
- That the person exercising the power is not having an unlimited or infinite power
to do all acts of things at his will and pleasure, and
- That the person exercising the power derives the same from some other person
on behalf of whom the person acts.
- The person may be delegated by an express or implied act on the said person/s.

● As far as a company is concerned, any act done beyond the objects mentioned in the
MOA is ultra-vires, null and void.
● The acts of the company are subject to the provisions contained in the Act in terms of
which it is incorporated and its two-constitutional documents, viz, the MOA and AOA.
● Ashbury Rly. carriage & Iron Co. Ltd. V. Riche (1875)
● Lakshmanaswami Mudaliar V. LIC (AIR 1963 SC)
● The court observed that an ultra vires contract, which is ultra vires the MOA, remains an
ultra-vires contract, even if all the shareholders agree to it.
● Where any act of the company is ultra-vires the MOA, it is void and has no legal effect. It
cannot be ratified even if all the shareholders unanimously agree to ratify it. Such an act
does not bind neither the company nor the other party can use it.
● Effect of ultra-vires transactions:
● Void ab initio
● Suit for injunction
● Right of subrogation
● Directors personal liability
● Liability for torts and crime
● Exceptions to the doctrine of ultra-vires:
● If an act is ultra-vires the powers of the directors but intra-vires the company, the
company is liable and it can ratify it
● If an act is ultra-vires the articles but intra-vires the MOA the articles can be altered to
give effect to such act
● If an act is within the powers of the company but is irregularly done, consent of all
shareholders will validate it.
● If a company takes ultra-vires loans and uses it to discharge intra-vires debts, the lender
gets the right of subrogation
● If a person borrows money from a subrogation under ultra-vires contract, the company
can sue him for recovery of the money. It has a right to protect its property.
● In Evans V. Brunner, Mond & Co., (121), a company engaged in manufacture of
chemicals, proposed to devote a substantial sum of money to the encouragement of
scientific education. It was proved that this act would ultimately benefit the company, but
a shareholder objected on the ground that it was beyond the powers of the company.
The court held that the proposal was fairly incidental to the company's object.
● In Forest V. Manchester Rly Co. (1801), a railway company had the authority to keep
boats to be supplied for a ferry. It employed the boats for excursion trips to the sea when
these were not wanted for the ferry. The court held that the use of the boats was
incidental to the main purpose and was within the powers of the company.

● Doctrine of Indoor Management:

● The doctrine of constructive notice proved too inconvenient for business transactions
and hindered the smooth flow of business.
● It was replaced by the Doctrine of indoor management in 1856 in the Royal British Bank
V. Turquand Case.
● According to this doctrine, “any person dealing with the company having satisfied himself
that the proposed contract is not inconsistent with the MOA and AOA. He is not bound to
inquire into the regularity of any internal proceedings of the company. He is bound to
presume that the provisions of articles have been observed and complied with, by the
officers of the company.”
● It is not the duty of the outsider to see that the company carries out its own internal
regulation
- Royal British Bank V. Turquand, (1856)
● Exceptions to doctrine of indoor management:
● The doctrine of indoor management will not protect the outsider and the company will
not be liable in the following circumstances:
- Where the outsider had knowledge of irregularity
- No knowledge of memorandum and articles-
- Rama corporation V. proved Tin & General Investment Co. (1952)
- Forgery -
- Rouben V great fingal consolidated (1906)
- Negligence -
- Anand behari lal V. dinshaw & co. ltd. AIR 1942

● Section 6 gives overriding force and effect to the provisions of the act. A provision
contained in the memorandum, articles, agreement or resolution to the extent to which it
is repugnant to the provisions of the Act, will be regarded as void.

● Prospectus
● Prospectus is a disclosure document inviting the public, to subscribe for the securities of
the company, to enable the inventors to take rational investment decisions and to protect
their rights, by giving various materials facts and prospectus about the company.
● Section 2(70) defines a prospectus as “any document described or issued as a
prospectus and includes a red herring prospectus referred to in section 32 or shelf
 prospectus referred to in section 31 or any notice, circular, advertisement or other
document inviting offers from the public for the subscription or purchase of any securities
of a body corporate.”
● A document should have following ingredients to constitute a prospectus:
- There must be an invitation to the public
- The invitation must be made “by or on behalf of the company or in relation to an
intended company”
- The invitation must be “to subscribe or purchase”
- The invitation must relate to any securities of the company

● A document is deemed to be issued to the public, if the invitation to subscribe for share
capital is such as to be open to any one who brings his money and applies in prescribed
form, whether the prospectus was addressed to him or not.
● The first remedy against the company is to rescind the contract. A person who takes
securities on the faith of a prospectus containing false statements, ay apply to the Court
for setting contract aside, and striking off his name from register of members. He may
also claim his money back.
● The second remedy against the company is to sue for damages for deceit. The allottee
may recover damages from the company for any loss he may have suffered if the
invitation to take securities from the company and the persons making it on behalf of the
company have fraudulently misrepresented material facts.
● The allottee cannot both retain the securities and get damages against the company. In
actual practice, however, suits for damages against the company are rarely filed.
Damages are generally claimed from the directors, promoters and other persons who
authorised the issue of the prospectus.
● The test is not who receives the document, but who can apply for the securities in
response to the invitation contained in it.
● However, an issue will not be “public” if-
- It is directed to a specific person or a group of persons, and
- It is not calculated to result in the securities becoming available to other persons.

● Advertisement in newspaper to invite application for purchase of remaining shares of a

company is prospectus (Pramatha Nath Sanyal V. Kali Kumar Dutt, AIR 1925 Cal 714).
● A single private communication does not satisfy the term “issue” (Nash V. Lynde 1929
AC 158).

● Contents of Prospectus
● According to sec 26 the prospectus of a public company must be signed and dated and
contain all the necessary information as stated under:
● Name and registered address of the office, its secretary, auditor, legal advisor, bankers,
trustees, etc.
● Date of the opening and closing of the issue
● Statements of the Board of Directors about separate bank accounts where receipts of
issues are to be kept and details of utilization and non-utilization of receipts of previous
issues.
● Consent of the directors, auditors, bankers to the issue, experts opinions.
● Authority for the issue and details of the resolution passed for it
● Procedure and time scheduled for the allotment and issue of securities.
● The capital structure of the in the manner which may be prescribed
● The objective of a public offer
● The objective of the business and its location
● Particulars related to risk factors of the specific project, gestation period of the project,
any pending legal action and other important details related to the project.
● Minimum of directors, their remuneration and extent of their interest in the company
● Reports for the purpose of financial information such as auditor’s report, report of profit
and loss of the five financial years, business and transaction reports, statement of
compliance with the provisions of the Act and any other report.

● Golden Rule for framing of Prospectus

● The golden rule for framing of a prospectus was valid down by Justice Kindersley in New
Brunswick & Canada Rly. & Land Co. V. Muggeridge (1860). Everything must be stated
with strict and scrupulous accuracy. In a word, the true nature of the company’s venture
should be disclosed.
● In Rex V. Kylsant (1932), the prospectus though true in itself was rendered false in the
context in which it was stated.
● A half truth, for instance, represented as a whole truth may tantamount to false
statement (Lord Halsbury In Aarons Reefs V. Twisa).
● Thus, the persons issuing the prospectus must include in the prospectus all the relevant
particulars, which are required to be stated compulsorily but should also voluntarily
disclose any other information within their knowledge which might in any way affect the
decision of the prospective investor to invest in the company.

● Filing of Copy with the registrar

● According to Sec 26(4), the prospectus is not to be issued by a company or on its behalf
unless on or before the date of publication, a copy of the prospectus is delivered to the
registrar for registration.
● The copy should be signed by every person whose name has been mentioned in the
prospectus as a director or proposed director or the assigned attorney on his behalf

● Registration of prospectus
● Section 26(7) states about the registration of a prospectus by the registrar. The registrar
can register a prospectus when:
- It fulfills the requirements of section 26 and
- It contains the consent of all the persons named in the prospectus in writing

● Issue of prospectus after registration

● If a prospectus is not issued before 90 days from the date from which a copy was
delivered before the registrar, then it is considered to be invalid.

● Types of Prospectus
● There are 4 types of a prospectus, which are as under:
● Abridged Prospectus
● According to Section 2(1), abridged prospectus means a memorandum containing
salient features of a prospectus as may be specified by the SEBI on this behalf. It means
that a company cannot issue application form for purchase of securities unless such
form is accompanied by an abridged prospectus.
● Deemed Prospectus
● According to section 25(1), where a company allots or agrees to allot any securities of
the company with a view to all or any of those securities being offered for sale to the
public. Any document by which such offer for sale to the public is made is deemed to be
a prospectus by implication of law.
● Shelf Prospectus
● According to section 31, shelf prospectus is a prospectus in respect of which the
securities or class of securities included therein are issued for subscription in one or
more issues over certain persons without the issue of a further prospectus. Only the
companies (Eg. financial institutions, banking companies) which have been prescribed
by the SEBI can issue a Shelf prospectus with the Registrar.
● Red Herring Prospectus (RHP)
● According to section 32, an RHP means a prospectus which does not have complete
particulars on the price of the securities offered and quantum of securities to be issued.
● A company may issue an RHP prior to the issue of a prospectus. The company shall file
RHP with the Registrar at least 3 days prior to the opening obligations as are applicable
to a prospectus and any variation between the RHP and a prospectus shall be
highlighted as variations in the prospectus.

● Liability for Untrue/Misstatement in Prospectus

● Where an untrue statement occurs in a prospectus, there may arise (i) civil liability (ii)
criminal liability.
● Every person who is a director of the company at the time of the issue of the prospectus,
every promoter of the company and every person, including an expert, who has
authorised the issue of a prospectus, shall be liable.
● What is an Untrue/Mis-statement?
● Whether a statement is untrue or not is to be judged by the context in which it appears
and the totality of impression it would create.
● Further, where any inclusion or omission of any matter in a prospectus is likely to
mislead, the prospectus shall be deemed, in respect of such omission, to be a
prospectus in which an untrue statement is included.
● The expression “included” with reference to a prospectus means included in the
prospectus itself or contained in any report or memorandum appearing on the face
thereof or by reference incorporated therein or issued therewith.
● Even if every word included in the prospectus is true, the suppression of material facts
may cause the prospectus to be fraudulent.

● Criminal Liability for Misstatement in the prospectus

● Where a prospectus is issued which includes any statement which is untrue or
misleading the investor, then every person who authorised the issue of prospectus shall
be punishable with imprisonment for a term which may not be less than 6 months but
which may extend to 10 years; or a fine not less than the amount involved in fraud bt it
may extend to three times the amount of fraud; or with both
● Onus for Proof of Misstatement
● The burden of proof lies upon an allottee that he has been misled by the misstatement in
the prospectus. He must prove:
- The misrepresentation was of a fact
- It was in respect of a material fact. What is a material statement of fact will
depend upon the circumstances of each case.
- He acted on the misrepresentation and
- He suffered damages in consequence.

● Remedies for Misstatement in Prospectus

● A company is responsible for a statement in prospectus only if it is shown that the
prospectus was issued by the company, or by someone with the authority of the
company, e.g. the board of directors. The company is also liable for misstatement in
prospectus even though the prospectus is issued by the promoters & the Board ratifies
and adopts the issue of prospectus.