Company Law Notes - Anirudh Belle

Company Law (Notes) / Jindal Global Law School / 2017
FEATURES OF A COMPANY
1. Separate Legal Personality: It is a different ‘person’ from the members who compose it. –
Capable of owning property, incurring debts, borrowing money, having a bank account,
employing people, entering into contracts and suing or being sued in the same manner as an
individual. – The Company does not hold its property as an agent or trustee for its members
Case: Kondoli Tea Co. Ltd., Re, ILR (1886) 13 Cal 43.
Facts: Certain persons transferred a tea estate to a Company and claimed exemptions from ad
valorem duty on the ground that they themselves were the shareholders in the Company and,
therefore, it was nothing but a transfer from them in one name to themselves in another name.
Held: Rejecting this view, the Court held that “The Company was a separate person, a separate
body altogether from the shareholders and the transfer was as much a conveyance, a transfer of
property, as if the shareholders were totally different persons from the Company.
Case: Salomon v. Salomon and Co. Ltd., (1897) A.C.
Facts: Salomon transferred his business of boot making, initially run as a sole proprietorship,
to a Company (Salomon Ltd.), incorporated with members comprising of himself and his
family. The price for such transfer was paid to Salomon by way of shares, and debentures
having a floating charge (security against debt) on the assets of the Company. Later, when the
Company's business failed and it went into liquidation, Salomon's right of recovery (secured
through floating charge) against the debentures stood aprior to the claims of unsecured
creditors, who would, thus, have recovered nothing from the liquidation proceeds. – To avoid
such alleged unjust exclusion, the liquidator, on behalf of the unsecured creditors, alleged that
the Company was sham, was essentially an agent of Salomon, and therefore, Salomon being
the principal, was personally liable for its debt. In other words, the liquidator sought to overlook
the separate personality of Salomon Ltd., distinct from its member Salomon, so as to make
Salomon personally liable for the Company's debt as if he continued to conduct the business as
a sole trader.
Issue: The case concerned claims of certain unsecured creditors in the liquidation process of
Salomon Ltd., a Company in which Salomon was the majority shareholder, and accordingly,
was sought to be made personally liable for the Company's debt. Hence, the issue was whether,
regardless of the separate legal identity of a Company, a shareholder/controller could be held
liable for its debt, over and above the capital contribution, so as to expose such member to
unlimited personal liability.
Held: The Court of Appeal, declaring the Company to be a myth, reasoned that Salomon had
incorporated the Company contrary to the true intent of the then Companies Act, 1862, and that
the latter had conducted the business as an agent of Salomon, who should, therefore, be
responsible for the debt incurred in the course of such agency. – The House of Lords, however,
upon appeal, reversed the above ruling, and unanimously held that, as the Company was duly
incorporated, it is an independent person with its rights and liabilities appropriate to itself, and
that "the motives of those who took part in the promotion of the Company are absolutely
irrelevant in discussing what those rights and liabilities are". Thus, the legal fiction of
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Anirudh Belle / LL.B. 2016 (Class of 2019) / Jindal Global Law School
"corporate veil" between the Company and its owners/controllers was firmly created by the
Salomon case.
2. Limited Liability: The Company, being a separate person, is the owner of its assets and bound
by its liabilities. – The liability of a member as shareholder, extends to the contribution to the
capital of the Company up to the nominal value of the shares held and not paid by him. –
Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at 731, has
observed: ‘The statutes relating to limited liability have probably done more good than any
legislation of the last fifty years to further the commercial prosperity of the country. They have,
to the advantage of the investor as well as of the public, allowed and encouraged aggregation
of small sums into large capitals which have been employed in undertakings of “great public
utility largely increasing the wealth of the country”.
Exceptions to the Principle of Limited Liability: 1. A Company has been incorporated by

furnishing false or incorrect information or representation or by suppressing any material fact
or information. – 2. Business of the Company has been carried on with an intent to defraud
creditors of the Company or any other persons or for any fraudulent purpose. – 3. Unlimited
Company. – 4. A prospectus has been issued with intent to defraud the applicants for the
securities of a Company. – 5. Company fails to repay the deposit or part thereof or any interest
thereon. – 6. Where the report made by an inspector states that fraud has taken place in a
Company and, from such fraud, any Director, key managerial personnel, other officer of the
Company or any other person or entity, has taken undue advantage or benefit.
3. Perpetual Succession: Perpetual succession means that the membership of a Company may
keep changing from time to time, but that shall not affect the Company’s continuity. –
Membership of a Company can change either by transfer or transmission. Transfer (occurs by
act of parties): If a member transfers her shares in a Company and the transferee is entered in
the register of members, the transferee becomes a member. Transmission (occurs by operation
of law): a) If a member dies, automatically, by operation of law, her legal representatives will
become members; and b) If a member becomes insolvent, by operation of law, her assignee
will become a member of the Company. – A Company’s life is determined by the terms of its
Memorandum of Association. – It may be perpetual, or it may continue for a specified time to
carry on a task or object as laid down in the Memorandum of Association.
4. Transferability of Shares: Section 44 of the Companies Act, 2013 enunciates this principle
by providing that the shares held by the members are movable property and can be transferred
from one person to another in the manner provided by the Articles of Association. – If the
Articles do not provide for the transfer of shares and the Regulations contained in Table “F” in
Schedule I to the Companies Act, 2013, are also expressly excluded, the transfer of shares will
be governed by the general law relating to transfer of movable property.
5. Delegated Management with a Board Structure: Members of the Company do not have
effective and intimate control over the workings of the Company’s management; they elect
their representatives (so to say) onto the Board of Directors of the Company to conduct
corporate functions through managerial personnel employed by the latter.
6. Common Seal: The Common Seal acts as the official signature of a Company. – The name of
the Company must be engraved on its common seal. A rubber stamp does not serve the purpose.
– A document not bearing the common seal of the Company, when such document is a
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resolution passed by the Board that requires, for its execution, the common seal of the Company
to be affixed to it, is not authentic and shall have no legal force behind it.
7. Capacity to Sue and Be Sued: A Company, as a person distinct from its members, may even
sue one of its own members. – A Company has a right to seek damages where defamatory
material published about it, and which affects its business. – The Company is not liable for
contempt committed by its officer(s).
8. Contractual Rights: A Company, being a legal entity different from its members, can enter
into contracts for the conduct of business in its own name. A shareholder cannot enforce a
contract made by the Company she holds shares in; neither is she a party to the contract, nor is
she entitled to the benefit derived from of it. – A shareholder cannot be sued on contracts made
by her Company.
9. Limitation of Action: A Company cannot go beyond the powers stated in its Memorandum of
Association. The Memorandum of Association of the Company regulates its powers and fixes
the objects of the Company and provides the edifice upon which the entire structure of the
Company rests.
10. Voluntary Association for Profit: A Company is a voluntary Association for profit. It is
formed for the accomplishment of some stated goals and whatsoever profit is gained is divided
among its shareholders or saved for the future expansion of the Company. – Exception: Section
8 Company.
11. Termination of Existence: A Company, being an artificial juridical person, does not die a
natural death. It is created by law, carries on its affairs according to law throughout its life and
ultimately is effaced by law. Generally, the existence of a Company is terminated by means of
winding up. – However, to avoid winding up, companies often adopt strategies like
reorganization, reconstruction and amalgamation.
12. Separate Property: The Company is the real personality in whom all its property is vested,
and by whom it is controlled, managed and disposed of. – A member does not even have an
insurable interest in the property of the Company. – Mrs. Bacha F. Guzdar v. The
Commissioner of Income Tax, Bombay, A.I.R. 1955 S.C. 74: The Supreme Court in this case
held that though the income of a tea Company is entitled to be exempted from Income-tax up
to 60%, being partly agricultural, the same income when received by a shareholder in the form
of dividend cannot be regarded as agricultural income for the assessment of income-tax.
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DOCTRINE OF LIFTING OF OR PIERCING THE CORPORATE

VEIL
The separate personality of a Company is a statutory privilege and it must be used for legitimate
business purposes only. – The advantages of incorporation are allowed only to those who want
to make an honest use of the ‘Company’. – Where a fraudulent and dishonest use is made of
the legal entity, the individuals concerned will not be allowed to take shelter behind the
corporate personality. The Court will break through the corporate shell and apply the
principle/doctrine of what is called as “lifting of or piercing the corporate veil”. – The Court
will look behind the corporate entity and take action as though no entity separate from the
members existed and make the members or the controlling persons liable for debts and
obligations of the Company.
The Companies Act, 2013 itself contains some provisions which lift the corporate veil to reach
the real forces of action: Section 7(7) deals with punishment for incorporation of Company by
furnishing false information; – Section 251(1) deals with liability for making fraudulent
application for removal of name of Company from the register of companies; Section 339 deals
with liability for fraudulent conduct of business during the course of winding up; Section 34
deals with criminal liability for misstatements in the prospectus – Section 35 deals with civil
liability for misstatement in the prospectus – Section 12(8) deals with penalty for not complying
with requisite formalities in registering a Company – Section 216 deals with investigation of
the ownership of a Company.
Case: Re. Sir Dinshaw Manakjee Petit, A.I.R. 1927 Bombay 371
(Where it was found that the sole purpose for which the Company was formed was to evade
taxes, the Court will ignore the concept of separate entity and make the individuals concerned
liable to pay the taxes.)
Facts: The facts of the case are that the assesse was a wealthy man enjoying large dividend and
interest income. He formed four private companies and agreed with each to hold a block of
investment as an agent for it. Income received was credited in the accounts of the Company but
the Company handed back the amount to him as a pretended loan. This way he divided his
income in four parts in a bid to reduce his tax liability.
Held: But it was held “the Company was formed by the assesse purely and simply as a means
of avoiding supertax and the Company was nothing more than the assesse himself. It did no
business, but was created simply as a legal entity to ostensibly receive the dividends and
interests and to hand them over to the assesse as pretended loans”. The Court decided to
disregard the corporate entity as it was being used for tax evasion.
Case: Daimler Co. Ltd. v. Continental Tyre and Rubber Co.
(Where the conduct conflicts with public policy, courts lift the corporate veil for protecting the
public policy.)
The respondent Company was floated in London for marketing tyres manufactured in Germany.
The majority of the Company’s shares were held by German nationals also residing in
Germany. During World War I, the Company filed a suit against Daimler Co. Ltd., the
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appellant, for the recovery of trade debt. The appellant Company contented that the respondent
Company was an alien enemy Company (Germany being at war with England at the time) and
that the payment of the debt would amount to trade with the enemy, leading to an action against
public interest. The court agreed with the appellant and held that where the Company formed
is against public interest or public policy, for the purpose of determining the characters of the
members, the corporate veil may be lifted.
Case: Macaura v. Northern Assurance Company (1925) AC 619
A member does not even have an insurable interest in the property of the Company. A person
was the holder of nearly all the shares, except one, of a timber Company and was also a
substantial creditor. He insured the Company’s timber in his own name. The timber having
been destroyed by fire, insurance Company was held not liable to him. The Company was the
owner of the timber and not the member in question.
Case: Prest V Petrodel Resources Ltd & Others [2013] UKSC 34
Introduction: Since Salomon v Salomon, it has been well established in UK law that a
Company has a separate personality to that of its members, and that such members cannot be
liable for the debts of a Company beyond their initial financial contribution to it. However,
there have been circumstances in which the courts have been prepared to "pierce the veil" of
corporate personality to find the members of the Company liable for Company actions in certain
circumstances. The law in this area has been rife with conflicting principles and many
commentators felt that the Supreme Court decision in Prest v Petrodel provided a unique
opportunity to resolve the "never ending story" of when the corporate veil can be pierced.
Facts: The divorcing couple, Mr and Mrs Prest, were wealthy. They owned a substantial
matrimonial home in the UK and a second home in Nevis. Mrs Prest contended that her
husband's wealth vastly exceeded this and argued that properties held by several companies
which Mr Prest "wholly owned and controlled" were in reality owned by him. It should be noted
that although the matrimonial home itself was also owned by one of the companies, it was
established in the Court of Appeal that this was held on trust for Mrs Prest and did not form
part of the appeal to the Supreme Court. – The case was originally heard in the family court as
an application for ancillary relief by the wife in a case of divorcing spouses, where it was held
by Moylan LJ that although there was no general principle by which the corporate veil could
be pierced, this was possible under Section 24(1)(a) of the Matrimonial Causes Act. Three of
the companies of which Mr Prest was the majority shareholder appealed to the Court of Appeal,
in which the majority criticised not only Moylan LJ's dicta but the general practice of the family
courts to use the MCA to pierce the corporate veil and asserted that in the absence of abuse of
the Salomon principle, the law did not permit this. Patten LJ asserted that this practice "amounts
almost to a separate system of legal rules unaffected by the relevant principles of English
property and Company law" and must cease. Mrs Prest appealed the decision to the Supreme
Court.
Issues: The issue for the Supreme Court was how to ensure that, particularly in cases of
divorcing spouses and in single-man companies, Company law could not be used as a tool to
conceal assets or avoid liability in relation to those assets, whilst maintaining the integrity of
the Salomon principle.
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Held: The Supreme Court unanimously overturned the Court of Appeal's decision. The leading
judgment was given by Lord Sumption, who observed that the law relating to the circumstances
in which it would be permissible for the courts to pierce the corporate veil was characterised
by "inadequate reasoning". Despite this confusion in the law, Lord Sumption asserted that the
position established in Adams v Cape Industries, is that the doctrine of veil piercing required
some dishonesty on the part of the Company member and was not simply a device that could
be employed to ensure justice in a particular case. His Lordship went on to observe that this
principle had been affirmed Trustor AB v Smallbone (No 2) in which it was also established
that the dishonesty must involve Company law being used as a sham or façade to disguise the
true ownership of property. – Lord Sumption asserted however that the terms “sham” or
“façade” should be replaced with “evasion” and “concealment”. Where there has been
concealment of liability, he argued, there will be no need to pierce the corporate veil because,
as Lord Neuberger agreed, all that would be required would be to look behind the veil to
establish the true actors. Lord Sumption asserted that this was the position adopted by Lord
Neuberger in VTB, although he argued that due to the fact that the court in that case had not
needed to pierce the veil, it could not be used as an authority in Prest. The judgement in Prest
therefore clarified that piercing the corporate veil would only be possible when Company
law had been used to evade liability, although this alone would not be enough, and that
even where such impropriety had arisen, it would usually be possible to apply another
area of law in order to grant a remedy, in this case the application of trust principles to
ensure Mrs Prest was entitled to a beneficial interest in the properties. Prest therefore
established that although it is possible that the corporate veil may be pierced in some
circumstances, it is not clear what these circumstances are beyond the fact that the remedy
is only a last resort and as such it seems that the decision failed to take advantage of the
opportunity to clarify the law.
Case: State of U.P. & Ors v. Renusagar Power Co. & Ors. (1988) 4 SCC 59
Facts: M/s Hindustan Aluminium Corporation Ltd., (HINDALCO) established an aluminum

factory at Renukut in Mirzapur District, U.P. in 1959. It is the case of the respondents that it
was induced to do so on the assurance that cheap electricity and power would be made available.
M/s Renusagar Power Co. Ltd. a wholly owned subsidiary of HINDALCO was incorporated in
1964. It had its own separate Memorandum and Articles of Association. This was done so that
power plant under Renusagar could generate and provide electricity to HINDALCO. –
Renusagar was supplying electricity to Hindalco, alone. Steps for the expansion of the power
in Renusagar so as to match the power requirement of Hindalco's expansion were taken by
Hindalco. Applications for all the necessary sanctions and permissions were made by Hindalco.
Permissions and sanctions were first intimated to Hindalco even though Renusagar was in
existence. Changes in the sanctions and/or permissions were obtained by Hindalco and not
Renusagar. Hindalco consumed about 255 MW power out of which 250 M W came from
Renusagar. – U.P. Electricity (Duty) Act in 1953, enforced a duty on the consumption of
electrical energy in the State of U.P. An amendment to the Act provided for different rates of
charge on consumption and sale of electrical energy in different capacities. Therefore, the duty
levied on sale of electrical energy by licensees was different from the duty levied on generation
of electrical energy that was generated for self-consumption. Renusagar applied to the UP govt.
for an exemption but this was denied. Issue: Whether Renusagar Power Co. was the same as
the consumer i.e. Hindalco? Was the wholly owned subsidiary Company the “own source of
generation” for Hindalco or a licensee?
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Held: Renusagar was brought into existence by Hindalco who consumed all of the power
generated. There were no other transmission lines going anywhere. The capacity of Renusagar
was made specifically for the requirements of Hindalco. Further, power lines to Hindalco from
the state grid were cut on the basis that it had its own power source. Renusagar has no
independent existence- it cannot sell power to anyone but Hindalco. The concept of lifting the
corporate veil is a changing concept. In the expanding horizon of modern jurisprudence,
lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend
primarily on the realities of the situation. The veil on corporate personality, even though
not lifted sometimes, is becoming more and more transparent in modern Company law
jurisprudence. – “Own source of generation” is an expression connected with the question of
lifting or piercing the corporate veil. The following three factors must be considered: (1)
Renusagar Power Co. was the wholly owned subsidiary of Hindalco. The former was under the
complete control of the latter, even with regard to its day-to-day affairs. This includes the
undertaking of various obligations for the running of the subsidiary Company; (2) Renusagar
Power Co. did not indicate its independent volition at any point in time. Hindalco was the sole
consumer of the electrical energy generated by Renusagar Power Co.; (3) Renusagar Power Co.
only generated electrical energy to the extent required by Hindalco. – Lifting the corporate veil
the court held that Renusagar Power Co. was the own source of generation for Hindalco. Thus,
Hindalco and Renusagar must be considered to be one and the same entity as Hindalco seemed
to take an advantage of a regulation which otherwise, would not be available to it. The rate of
sale was different for self consumption and what Renusagar was doing here was a sale of
electricity – which was shown as self-consumption.
Case: Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613

Facts: In 2007, the Indian tax department issued a show-cause notice to Vodafone to explain
why tax was not paid on payments made to HTIL for acquiring stake in CGP which had the
effect of indirect transfer of assets situated in India. Capital gains should have been taxed as the
purchase was intended to buy Indian asset. Vodafone filed a writ petition in the Bombay HC
challenging the jurisdiction of the tax authorities – Bombay HC, ruled that where the underlying
assets of the transaction between two or more offshore entities lies in India, it is subject to
capital gains tax under relevant income tax laws in India. Vodafone appealed before the SC.
Issue: Can the corporate veil be lifted to know the real essence of the transfer?
Held: When it comes to taxation of a Holding Structure, at the threshold, the burden is on the
Revenue to allege and establish abuse, in the sense of tax avoidance in the creation or use of
such structure(s). In the application of a judicial anti-avoidance rule, the Revenue may invoke
the “substance over form” principle or “piercing the corporate veil” test only after it is able to
establish, on the basis of the facts and circumstances surrounding the transaction, that the
impugned transaction is a sham or tax avoidant. – To give an example, if a structure is used for
circular trading or round tripping or to pay bribes then such transactions, though having a legal
form, should be discarded by applying the test of fiscal nullity. Similarly, in a case where the
Revenue finds that in a Holding Structure, an entity which has no commercial/business
substance, has been interposed only to avoid tax then in such cases applying the test of fiscal
nullity it would be open to the Revenue to discard such inter-positioning of that entity.
However, this has to be done at the threshold. In this connection, we may reiterate the “look at”
principle which states that the Revenue or the Court must look at a document or a transaction
in a context to which it properly belongs to. – It is the task of the Revenue/Court to ascertain
the legal nature of the transaction and while doing so it has to look at the entire transaction as
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a whole and not to adopt a dissecting approach. Thus, whether a transaction is used principally
as a colourable device for the distribution of earnings, profits and gains, is determined by a
review of all the facts and circumstances surrounding the transaction – The Revenue cannot
start with the question as to whether the impugned transaction is a tax deferment/saving device
but that it should apply the “look at” test to ascertain its true legal nature - Applying the above
tests, we are of the view that every strategic foreign direct investment coming to India, as an
investment destination, should be seen in a holistic manner. – While doing so, the
Revenue/Courts should keep in mind the following factors: the concept of participation in
investment, the duration of time during which the Holding Structure exists; the period of
business operations in India; the generation of taxable revenues in India; the timing of the exit;
the continuity of business on such exit. In short, the onus will be on the Revenue to identify the
scheme and its dominant purpose. – The corporate business purpose of a transaction is evidence
of the fact that the impugned transaction is not undertaken as a colourable or artificial device.
The stronger the evidence of a device, the stronger the corporate business purpose must exist
to overcome the evidence of a device. Applying the above tests to the facts of the present case,
we find that the Hutchison structure has been in place since 1994. It operated during the period
1994 to 11.02.2007. It has paid income tax ranging from `3 crore to `250 crore per annum
during the period 2002-03 to 2006. This indicates “continuity” of the telecom business on the
exit of its predecessor, namely, HTIL. Thus, it cannot be said that the structure was created or
used as a sham or tax avoidant. It cannot be said that HTIL or VIH was a “fly by night”
operator/short time investor. – If one applies the look at test discussed hereinabove, without
invoking the dissecting approach, then, in our view, extinguishment took place because of the
transfer of the CGP share and not by virtue of various clauses of SPA. In a case like the present
one, where the structure has existed for a considerable length of time generating taxable
revenues right from 1994 and where the court is satisfied that the transaction satisfies all the
parameters of participation in investment then in such a case the court need not go into the
questions such as de facto control vs. legal control, legal rights vs. practical rights, etc.
Case: State of Rajasthan v. Gotan Lime Stone Khanji Udyog Pvt. Ltd.
Facts: Gotan Limestone Khanji Udhyog (GLKU), a partnership firm, held a mining lease for
mining limestone at village Dhaappa, Nagaur. The said lessee applied for transfer of the lease
in favour of Gotan Limestone Khanji Udhyog Pvt. Ltd. (GLKUPL) which was nothing but the
change in the form of GLKU i.e. a case of a partnership becoming a limited Company on 28th
March, 2012. The partners of the firm and Directors of the Company were the same. – The
newly formed private limited Company to which the mining leases were transferred, instead of
operating the mining lease itself sold its entire shareholding to another Company allegedly for
Rs. 160 crores which is alleged to be the sale price of mining lease. The Company subsequently
became a subsidiary of Ultra Tech Cement Limited Company (UTCL) which was quoted on
the Bombay Stock Exchange. There were also allegations that the partnership firm had not
revealed the true facts that led to the sale of the Company. – Ultimately, the competent authority
held that the transfer of mining rights was in violation of Rule 15 of the Rajasthan Minor
Mineral Concession Rules, 1986 (the Rules) the sum and substance being that the erstwhile
partners of the firm which was original lessee, had in effect transferred the lease in favour
UTCL. – Issue: The question was whether in the sale of the shares to UTCL, whether it was a
sale of a Company or whether it was in substance a sale of mining lease which amounted to
violation of Rule 15?
Held: The Supreme Court held that there were two transactions ostensibly, i.e. (a) transfer of
lease from the firm to the Company, with the permission of the competent authority, and (b)
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transfer of shares to UTCL., realistically, it was nothing but a transfer of mining lease to UTCL
without the approval of the State Government. In other words, the lessee has achieved indirectly
what could not be achieved directly by concealing the real nature of the transaction. – The
Supreme Court further held that the principle of lifting the corporate veil as an exception to the
distinct corporate personality of a Company or its members is well recognized not only to
unravel tax evasion but also where protection of public interest is of paramount importance and
the corporate entity is an attempt to evade legal obligations and lifting of veil is necessary to
prevent a device to avoid welfare legislation. Citing the case of State of U.P. v. Renusagar
Power Co. [1988] 4 SCC 59 in which it was noted that “It is high time to reiterate that in the
expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers
are unlimited. It must, however, depend primarily on the realities of the situation. The aim of
the legislation is to do justice to all the parties. The horizon of the doctrine of lifting of corporate
veil is expanding………”. – In the present case, the original lessee sought transfer merely by
disclosing that the partnership firm was to be transformed into a private limited Company with
the same partners continuing as Directors and there was no direct or indirect consideration
involved. – It was specifically declared that no pecuniary advantage was being taken in the
process which is clearly false. The permission to transfer the lease in favour of a private limited
Company was granted on that basis. Thus, it was a case of suppression of facts. Once it is held
that transfer of lease is not permissible without permission of the competent authority, the
competent authority was entitled to have full disclosure of facts for taking a decision in the
matter so that a private person does not benefit at the expense of public property. The original
lessee did not disclose that the real purpose was not merely to change its partnership business
into a private limited Company as claimed but to privately transfer the lease by sale to a third
party. Therefore, sale of shareholding by GLKUPL to UTCL is a private unauthorized sale of
mining lease which being in violation of rules is void. GLKUPL has been formed merely as a
device to avoid the legal requirement for transfer of mining lease and to facilitate private benefit
to the parties to the transaction, to the detriment of the public.”
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TYPES OF COMPANIES
1. Public Company [S.2(71) r/w S.3(1)(a)]
2. Private Company [S.2(68) r/w S.3(1)(b)] – Section 14 (1): If a Private Company alters its
Articles in such manner that they do not include the restrictions and limitations as laid down in
Section 2(68), it shall cease to a private Company from the date on which such alteration took
place. – Section 149(1) further lays down that a private Company shall have a minimum number
of two Directors. – The only two subscribing members to the MoA may also be the two
Directors of the private Company.
3. One Person Company [S.2(62) r/w S.3(1)(c) + Provisos to S.3] – Privileges of OPC: S.
2(40) The financial statement, with respect to One Person Company, may not include the cash
flow statement; S. 67(2) Financial assistance can be taken by the member from the OPC for
purchase of or subscribing to its own shares; S. 92(1) The annual return shall be signed by the
Company secretary, or where there is no Company secretary, by the Director of the Company;
S. 96(1) Need not hold annual general meeting; S. 121(1) Need not prepare a report on Annual
General Meeting; Holding of actual meetings are not required; S. 134(1) Financial statement
and Board’s report can be signed only by one Director; S. 149(1) One person Company need
not to have more than one Director on its Board; S. 149(4) Need not to appoint Independent
Directors on its Board; S. 152(6) Retirement by rotation is not applicable; S. 164(3) Additional
grounds for disqualification for appointment as a Director may be specified by way of Articles;
S. 173 (5) It is required to hold at least one meeting of the Board of Directors in each half of a
calendar year and the gap between the two meetings should not be less than ninety days.
4. Small Company [S.2(85)] – Privileges of Small Company: S. 2(40) The financial statement,
with respect to Small Company may not include the cash flow statement; S. 67(2) Financial
assistance can be given for purchase of or subscribing to its own shares or shares in its holding
Company; S. 92(1) The annual return shall be signed by the Company secretary, or where there
is no Company secretary, by the Director of the Company; S. 121(1) Need not prepare a report
on Annual General Meeting; S. 149(4) Need not appoint Independent Directors on its Board;
S. 152(6) A proportion of Directors need not to retire every year; S. 164(3) Additional grounds
for disqualification for appointment as a Director may be specified in the Articles; S. 173 (5) It
is required to hold at least one meeting of the Board of Directors in each half of a calendar year
and the gap between the two meetings should not be less than ninety days. – 5. Association
not-for-profit [S.8] – 6. Government Company [S.2(45)], – 7. Foreign Company [S.2(42)
r/w S.379] – 8. Holding Company [S.2(46)] and Subsidiary Company [S.2(87)], – meaning
of ‘Control’ [S.2(27)] – r/w S.19, – 9. Associated Company [S.2(6) r/w S.2(76)] – 10.
Dormant Company [S.455(1) and (6) r/w exceptions in S.2(40) and S.173(5)] – 11. Producer
Company [S.581A(I)]
Page 10 of 61
Classification Based on Liability
1. Unlimited Liability Companies: In this type of Company, the members are liable for the
Company's debts in proportion to their respective interests in the Company and their liability is
unlimited. Such companies may or may not have share capital.
2. Companies limited by guarantee: A Company that has the liability of its members limited
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, is known as a Company limited
by guarantee. The members of a guarantee Company are, in effect, placed in the position of
guarantors of the Company's debts up to the agreed amount.
3. Companies limited by shares: A Company that has the liability of its members limited by
the Memorandum to the amount, if any, unpaid on the shares respectively held by them is
termed as a Company limited by shares.
Page 11 of 61
FUNDAMENTAL RIGHTS OF A COMPANY
The question arises as to whether a Company is a juristic ‘person’ and consequently, is the
Company a ‘citizen’ and subsequently, if so, would a Company be capable of protection under
Part III of the Constitution. – The word ‘person’, while has not been defined in the Companies
Act, 1956, it has been mentioned in the General Clauses Act, 1897 as well as the Indian Penal
Code as inclusive of body corporates. It means a legal entity that is recognized by law as the
subject of rights and duties. Thus, it is well established that a Company is held to be a ‘person’
in every sense of the term. Therefore, the answer to the question of whether a juristic person
like a Company is a citizen naturally depends upon the meaning of the word ‘citizen’ in Part III
of the Constitution where it has not been defined. While it determines the persons who are
Indian citizens at the commencement of the Constitution, it empowers the Parliament by Article
11 to regulate by legislation questions relating to acquisition and termination of citizenship and
all other allied matters. In pursuance of that power, the Parliament has enacted the Indian
Citizenship Act, 1955. – While the Indian Citizenship Act, 1955 has denied personality to
artificial persons such as companies, the leading case on this issue is State Trading Corporation
v. Commercial Tax Officer. The majority judgement, delivered by Sinha C. J. (as he then was)
held that the word ‘citizen’ is intended to refer only to natural persons and that, therefore a
juristic body like a corporation cannot claim the status of a ‘citizen’ for the purpose of invoking
fundamental rights under Part III of the Constitution. In fact, this had been the opinion of the
apex court in Tata E. & L. Co. Ltd. v. State of Bihar, where the then Chief Justice
Gajendragadkar held that in such a case where Part III of the Constitution was to apply to
companies, lifting the corporate veil would not come to any use as because then the members
of the Company would be able to do indirectly what they could not have done directly. – In
addition, it has been held in Heavy Engineering Mazdoor Union v. State of Bihar that a
Company was not a citizen under the Constitution of India. A Company may, however, claim
protection of those fundamental rights that are available to all persons, whether citizens or not.
Also, the fundamental rights of the shareholders as citizens are not lost when they associate to
form a Company. When their fundamental rights are impaired by State action, their rights as
shareholders are protected. The reason is that the shareholder’s rights are equally and
necessarily affected if the rights of the Company are affected. – Hence, as of now, the debate
seems well settled- that an artificial person cannot claim protection of fundamental rights under
Part III of the Constitution. However, a Company is a ‘person’ in the general sense of the term
and should be treated as such.
Case: R.C. Cooper v. Union of India 1970 AIR SC 564

A shareholder, a depositor or a Director is not entitled to move a petition for infringement of
the rights of the Company, unless by the state action impugned by him, his rights are also
infringed. The test in determining whether the shareholders’ right is impaired is not formal, it
is essentially qualitative, if the state action impairs the right of the shareholders as well as of
the Company, the court will not, concentrating merely upon the technical operation of the
action, deny to itself jurisdiction to grant relief. In applying this proposition, the court in Bennet,
Coleman & Co Union of India (1972) 2 SCC 788, extended the rule by stating: “It is now clear
that the fundamental rights of citizens are not lost when they associate to form a Company.
When their fundamental rights as shareholders are impaired by state action their rights as
shareholders are protected. The reasons is that the shareholders’ rights are equally and
necessarily affected if the rights of the Company are affected.
Page 12 of 61
Organisation Sole Partnership LLP One person Private Public

proprietorship Company Company Company
Ownership Individual Partners Partners Individual 2 to 7 Shareholders

shareholders in excess of 7
Liability Unlimited Unlimited- Limited to Limited to Limited to Limited to

Each Partner the extent of shareholding shareholding shareholding
is jointly and partner’s
severally contribution.
liable
Management Owner Partners Partners Board of Board of Board of

Directors Directors Directors
Succession None None after Separate Separate Separate Separate
death of all legal entity- legal entity- Legal Entity Legal Entity
partners will continue but requires a
after death of nominee
partners
Formation Minimal Optional Compulsory Considerable Considerable Considerable

registration registration paperwork. paperwork. paperwork.
but minimal Application Application Application
paperwork to RoC to be to RoC to be to RoC and
made made SEBI to be
made
Profits Individual Partners Partners Individual Shareholders Shareholders
Page 13 of 61
INCORPORATION, MoA & AoA
Section 3 – Formation of a Company, Section 4 – MoA, Section 5 – AoA, Section 6 – Act to

override Memorandum, Articles, etc., Section 7 – Incorporation of a Company, Section 8 –
Formation of Company with charitable objects, Section 9 – Effect of registration, Section 10 –
Effect of MoA and AoA, Section 12 – Registered office of the Company, Section 13 –
Alteration of MoA, Section 14 – Alteration of AoA, Section 16 – Rectification of Company’s
name.
Memorandum of Association: Memorandum and Articles of Association are the most

essential pre-requisites for incorporating any form of Company under the Act. – Section 3 of
the Act, which provides the mode of incorporation of a Company and states that a Company
may be formed for any lawful purpose by subscribing their name(s) to a Memorandum. –
The Memorandum of Association is a document which sets out the constitution of a Company
and is therefore the foundation on which the structure of the Company is built. It defines
the scope of the Company’s activities and its relations with the outside world.
Doctrine of Ultra Vires: Whatever is not stated in the Memorandum as the objects or powers
is prohibited by the doctrine of ultra vires. As a result, an act which is ultra vires is void, and
does not bind the Company. – The general rule is that an act which is ultra vires the Company
is incapable of ratification. An act which is intra vires the Company but outside the authority
of the Directors may be ratified by the Company in proper form. – The rule is meant to protect
shareholders and the creditors of the Company. If the act is ultra vires (beyond the powers of)
the Directors only, the shareholders can ratify it. If it is ultra vires the Articles of Association,
the Company can alter its Articles in the proper way. – Purpose of the doctrine: The purpose of
this doctrine is two-fold: 1) to protect the investors so that they may know for what purpose
their money will be employed and 2) to protect the creditors, so that the fund to which they
must look for repayment is not dissipated in unauthorized activities. – Rational of the doctrine:
The rationale behind the doctrine is competency to enter into a contract. For an individual, such
competency is determined by age, soundness of mind, etc. A Company, however, being an
artificial person does not have a body or mind. “It does not have a body to be injured or a soul
to be damned.” Hence, contractual competency for a corporation is determined by its own
charter, namely the MoA. “The Memorandum states affirmatively what the Company can do ;
it states negatively what the Company cannot do. The corporate life cannot be spent for any
other purpose other than those specified in the Memorandum:” Ashburry Railway Carriage Co.
v. Richie [1875] L.R. 7 H.L. 653
Case: Ashburry Railway Carriage Co. v. Richie [1875] L.R. 7 H.L. 653
Facts: The object of the Company was, inter alia, to build railway coaches. The AoA to carry
on any object, provided a proper resolution was passed. The Company entered into a contract
to construct a railway line in Belgium. This act of the Directors was ratified by a resolution.
When a dispute arose, the question before the court was whether the Memorandum or Articles
was the superior document.
Page 14 of 61
Held: The Memorandum is the superior document and the Articles are subordinate to it. Where
there is a conflict between the MoA and the AoA, the MoA shall prevail. The MoA defines the
scope and ambit of the Company. It deals with the relationship of the Company with its
outsiders. Within the stipulates of the MoA, the Company can make its own internal regulations
which are called AoA. Further, the rationale behind the doctrine of ultra vires was laid down
in this case (see quote above).
Case: Lakshmanaswami Mudaliar v. L.I.C. AIR 1963 SC 1185

This is a Supreme Court judgement which laid down the meaning of incidental or ancillary
object. Facts: The appellants were Directors of United India Life Insurance Company. They
were also trustees of a trust to be formed. The Company passed a resolution whereby a sum of
Rs. 2 Lakhs was given as donation to the trust. When L.I.C. took over the life insurance
business, it was found that the transaction was ultra vires the Company. The trustees asked to
refund the amount. The appellants contended as follows: 1) The donation was given out of the
shareholders’ dividend account. The shareholders’ dividend account was the property of the
shareholders and they were free to do anything with their amount. The Supreme Court negatived
this contention and held that shareholders’ dividend account is the property of the Company
and continued to be so until the dividend has been declared and its destination has been
determined. 2) The appellants again argued that giving donation to the trust was an incidental
object. According to them, the object of the trust was to promote education in art, science and
commerce including the study of insurance. The court negatived this contention too, following
the case of Tomkinson v. S. E. Railway Co. In that case, a railway Company gave a donation of
1,000 GBP to the Imperial institute to be formed and claimed it to be an incidental object.
According to the railway Co., if the institution came into existence it would increase their
passenger traffic. The Supreme Court, in the present case, held that an incidental object should
have a proximate connection with the main object. Any casual or remote connection cannot be
construed as incidental.
Effect of Ultra Vires transaction:
1) Void ab initio The ultra vires acts are null and void ab initio. The Company is not bound by
these acts. Even the Company cannot sue or be sued upon.
2) Injunction: The members can get an injunction to restrain a Company wherein ultra vires
act has been or is about to be undertaken.
3) Personal liability of Directors: It is one of the duties of Directors to ensure that the corporate
capital is used only for the legitimate business of the Company and hence if such capital is
diverted to purposes alien to the Company’s Memorandum, the Directors will be personally
liable to replace it. In case of deliberate misapplication, criminal action can also be taken for
fraud. – Where a Company’s money has been used ultra vires to acquire some property, the
Company’s right over such property is held secure and the Company will be the right party to
protect the property. This is because, though the property has been acquired for some ultra vires
object, it represents the money of the Company.
Page 15 of 61
Effect of Ultra Vires transaction and Borrowing: An ultra vires transaction, being void, does
not vest the transferee with any right, nor does it divest the transferor. In other words, the
transferor does not lose any right and the transferee does not gain any right. Money taken by a
Company under an ultra vires borrowing cannot be recovered once it is spent by the Company.
However, the lender is not completely without any remedy. If the money is utilized by the
Company to purchase any particular asset, the lender will have a charge on that asset. This is a
charge created by the operation of law. If the money is kept in a separate account, the lender
can trace it to the hands of the Company. If the money is utilized to discharge an intra vires
debt, the lender will be surrogated to the rights of the creditor whose debt has been discharged.
Implied Powers: The powers exercisable by a Company are to be confined to the objects
specified in the Memorandum. While the objects are to be specified, the powers exercisable in
respect of them may be express or implied and need not be specified. – Every Company may
necessarily possess certain powers which are implied, such as, a power to appoint and act
through agents, and where it is a trading Company, a power to borrow and give security for the
purposes of its business, and also a power to sell. Such powers are incidental and can be inferred
from the powers expressed in the Memorandum.
Powers which are not implied: (1) acquiring any business similar to the Company’s own
business. [Ernest v. Nicholls]; (2) entering into an agreement with other persons or companies
for carrying on business in partnership or for sharing profit, joint venture or other arrangements.
Very clear powers are necessary to justify such transactions [Re European Society Arbitration
Act (1878)]; (3) taking shares in other companies having similar objects. [Re William Thomas
& Co. Ltd.]; (4) taking shares of other companies where such investment authorizes doing
indirectly that which will not be intra vires if done directly; (5) promoting other companies or
helping them financially [Joint Stock Discount Co. v. Brown]; (6) a power to sell and dispose
of the whole of a Company’s undertaking; (7) a power to use funds for political purposes; (8)
a not relating to the objects stated in power to give gifts and make donations or contribution for
charities the Memorandum; (9) acting as a surety or as a guarantor.
Articles of Association: In terms of Section 5(1), the Articles of a Company shall contain the
regulations for management of the Company. – The Articles of Association of a Company are
its bye-laws or rules and regulations that govern the management of its internal affairs and the
conduct of its business. – It deals with the rights of the members of the Company, defining the
powers of its officers and establishing a contract between the Company and the members and
between the members inter se. – They are subordinate to and are controlled by the
Memorandum of Association.
Entrenchment Provisions: The Articles may contain provisions for entrenchment to the effect
that specified provisions of the Articles may be altered only if conditions or procedures that are
more restrictive than those applicable in the case of a special resolution, are met or complied
with. [Section 5 (3)]. This provision acts as a protection to the minority shareholders and is of
specific interest to the investment community. This shall empower the enforcement of any pre-
agreed rights and provide greater certainty to investors, especially in joint ventures. The
provisions for entrenchment referred to in Section 5(3) shall be made either on formation of a
Company, or by an amendment in the Articles agreed to by all the members of the Company in
the case of a private Company and by a special resolution in the case of a public Company.
[Section 5 (4)]. Notice to the Registrar. [Section 5 (5)]
Page 16 of 61
Doctrine of Constructive Notice: The Memorandum and Articles, when registered, become
public documents and can be inspected by anyone on payment of nominal fee. – Therefore,
every person who contemplates entering into a contract with a Company has the means of
ascertaining and is consequently presumed to know, not only the exact powers of the Company
but also the extent to which these powers have been delegated to the Directors, and of any
limitations placed upon the exercise of these powers. – In other words, every person dealing
with the Company is deemed to have a “constructive notice” of the contents of its Memorandum
and Articles. – For example, if the Articles provide that a bill of exchange to be effective must
be signed by two Directors, a person dealing with the Company must see that it is so signed;
otherwise he cannot claim under it.
Doctrine of Indoor Management: It operates to protect outsiders against the Company. It

protects innocent parties who are doing business with the Company and are not in a position to
know if some internal rule has not been complied with. – Persons dealing with a Company
having satisfied themselves that the proposed transaction is not in its nature inconsistent with
the Memorandum and Articles, are not bound to enquire into the regularity of any internal
proceedings. – In other words, while persons contracting with a Company are presumed to
know the provisions of the contents of the Memorandum and Articles, they are entitled to
assume that the provisions of the Articles have been observed by the officers of the Company.
– It is no part of the duty of an outsider to see that the Company carries out its own internal
regulations.
Case: Royal British Bank v. Turquand (1856) 6 E&B 327

The Directors of a banking Company were authorized by the Articles to borrow on bonds such
sums of money as should from time to time, by resolution of the Company in general meeting,
be authorized to borrow. The Directors gave a bond to Turquand without the authority of any
such resolution. – It was held that Turquand could sue the Company on the strength of the bond,
as he was entitled to assume that the necessary resolution had been passed. – Lord Hatherly
observed : “Outsiders are bound to know the external position of the Company, but are not
bound to know its indoor management”.
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Section 176 Provides for the Validity of Acts of Directors - No act done by a person as a
Director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that
his appointment was invalid by reason of any defect or disqualification or had terminated by
virtue of any provision contained in this Act or in the Articles of the Company. – Provided that
nothing in this Section shall be deemed to give validity to any act done by the Director after his
appointment has been noticed by the Company to be invalid or have been terminated. – The
object of the Section is to protect persons dealing with the Company - outsiders as well as
members by providing that the acts of a person acting as Director will be treated as valid
although it may afterwards be discovered that his appointment was invalid.
Page 17 of 61
Exceptions to the doctrine of Indoor Management— Relief on the ground of ‘indoor

management’ cannot be claimed by an outsider dealing with the Company in the following
circumstances:
1) Where the outsider had knowledge of irregularity — Howard v. Patent Ivory Co. (38 Ch.
D 156): the Articles of a Company empowered the Directors to borrow upto one thousand
pounds only. They could, however, exceed the limit of one thousand pounds with the consent
of the Company in general meeting. Without such consent having been obtained, they borrowed
3,500 pounds from one of the Directors who took debentures. The Company refused to pay the
amount. It was held that the debentures were good to the extent of one thousand pounds only
because the Director had notice or was deemed to have the notice of the internal irregularity.
2) No knowledge of Memorandum and Articles — In Rama Corporation v. Proved Tin &

General Investment Co. (1952) 1All. ER 554: T was a Director in the Company. He, purporting
to act on behalf of the Company, entered into a contract with the Rama Corporation and took a
cheque from the latter. The Articles of the Company did provide that the Directors could
delegate their powers to one of them. But the people at Rama Corporation had never read the
Articles. Later, it was found that the Directors of the Company did not delegate their powers to
T. The Plaintiff relied on the rule of indoor management. It was held that they could not sue
because even they did not know that power could be delegated.
3)Forgery — The rule of indoor management does not extend to transactions involving forgery
or to transactions which are otherwise void or illegal ab initio. In the case of forgery, it is not
that there is absence of free consent but there is no consent at all. Consequently, it is not that
the title of the person is defective but there is no title at all. – Thus, where the secretary of a
Company forged signatures of two of the Directors required under the Articles on a share
certificate and issued the certificate without authority, the applicants were refused registration
as members of the Company. The certificate was held to be nullity and the holder of the
certificate was not allowed to take advantage of the doctrine of indoor management [Rouben v.
Great Fingal Consolidated (1906) AC 439].
4) Negligence — The ‘doctrine of indoor management’, in no way, rewards those who behave
negligently. Thus, where an officer of a Company does something which shall not ordinarily
be within his powers, the person dealing with him must make proper enquiries and satisfy
himself as to the officer’s authority. If he fails to make an enquiry, he is estopped from relying
on the Rule. – In the case of Underwood v. Benkof Liverpool (1924) 1 KB 775, a person who
was a sole Director and principal shareholder of a Company deposited into his own account
cheques drawn in favour of the Company. It was held that the bank should have made enquiries
as to the power of the Director. The bank was accordingly not entitled to rely upon the ostensible
authority of Director.
Members bound by the MoA and AoA: The Memorandum and Articles constitute a contract
binding the members of the Company. The members, as members, are bound to the Company.
Each member must, therefore, observe the provisions of the Memorandum and Articles. – In
Boreland’s Trustee v. Steel Brother and Co. Ltd. (1901) 1 Ch. 279, the Articles of a Company
Page 18 of 61
contained a clause that on the bankruptcy of a member his shares would be sold to other persons
and at a price fixed by the Directors. B, a shareholder was adjudicated bankrupt. His trustee in
bankruptcy claimed that he was not bound by these provisions and should be at liberty to sell
the shares at their true value. It was held that the trustee was bound by the Articles, as the shares
were purchased by B in terms of the Articles
Conflict between a shareholders’ agreement and AoA:

Shareholders’ Agreement (SHA): This is an agreement between the shareholders of a Company
that outlines the rights, duties, operational control and liabilities of the shareholders. Generally,
new businesses or start-ups, as well as large corporations undertake shareholder agreements,
though it is not mandatory to get a shareholders’ agreement. A shareholder agreement is not
enforceable either. In order to enforce agreements against third parties, it is necessary to include
the same clauses in an agreement in the by-laws of the Company.
It would be apt to note that conflicts between SHA and the Articles of a Company can be of
two types; first, where the conflict relates to the management of the Company (affirmative vote,
Board of Directors, accounts, etc.) and second, where the conflict relates to the transferability
of shares. As regards the latter, two main questions arise; 1) Whether a provision in an SHA
that is contrary to the Articles of the Company is valid and enforceable? 2) What are the possible
remedies for a shareholder against breach of an SHA by other shareholders even though such
action would not be construed as a breach under the Articles of the Company?
Case Laws:
In V.B. Rangaraj v. V.B. Gopalakrishnan and others, the Supreme Court took the view that the
provisions of a SHA imposing restrictions even when consistent with the Companies Act, are
to be authorised only when they are incorporated in the Articles of the Company.
In World Phone India Pvt. Ltd. and Ors. v. WPI Group Inc., USA, the Board of Directors of the
Company passed a resolution approving a rights issue in accordance with the Articles of the
Company, even though such an action required the affirmative vote of the Appellant in
accordance with a SHA entered into between the shareholders of the Company. The Company
Law Board had held that since the provisions of the SHA granting an affirmative vote to the
appellant were not incorporated in the Articles of the Company, the said provision is
unenforceable and the Board resolution approving the rights issue was valid. On appeal, Justice
Muralidhar of the Delhi High court held: “the legal position is that where the Articles of
Association are silent on the existence of an affirmative vote, it will not be possible to hold that
a clause in an agreement between shareholders would be binding without being incorporated in
the Articles of Association. The question to be asked is whether the provisions of an agreement,
that are not inconsistent with the Act, but are also not part of the Articles of Association, can
be said to be applicable. All that Section 9 states is that the clauses in the agreement that RE
“repugnant” to the Act shall be “void”. This does not mean that the clauses in the agreement
which are not repugnant to the Act would be enforceable, notwithstanding that they are not
incorporated in the Articles of Association.”
Thus, the court held that the provisions of the SHA, though silent in the Articles of the
Company, and not in contradiction with them, will not be enforceable. This ruling, as it stands,
brings in a lot of confusion to the issue of conflicts between SHAs and Articles of a Company,
Page 19 of 61
because the issues don’t stand resolved merely with the conflicting provisions being
unenforceable.
In Vodafone International Holdings BV v. Union of India & anr, three main observations were
made by the Supreme Court on the issue: a) That the Supreme Court does not subscribe to the
view in Rangaraj that restrictions in a SHA, though consistent with Company law, are to be
authorised only when they are incorporated in the Articles of the Company. (it is still doubtful
whether Rangaraj has been overruled as the Court didn’t explicitly say so) b) Shareholders can
enter into any arrangement in the best interests of the Company, but the only thing is that the
provisions of SHA shall not go contrary to the Articles of the Company. c) Breach of SHA
which does not breach the Articles of a Company is a valid corporate action, but the parties
agreed can get remedies under the general law for breach of any agreement and not under the
Companies Act.
In light of the above, a logical extension of the judgment in World Phone would be that even
though the provisions of an affirmative vote are not incorporated in the Articles of the
Company, and though the action of the Company in providing for a rights issue would be valid
under the Companies Act, such an action will still be in breach of the SHA for which the
aggrieved shareholder can pursue an action for breach of contract.
Page 20 of 61
SHARE CAPITAL, SHAREHOLDERS AND SHAREHOLDER

MEETINGS
Section 2(84) – “Shares”, Section 43 – Kinds of share capital, Section 44 – Nature of shares
and debentures, Section 45 – Numbering of shares, Section 46 – certificate of shares, Section
47 – Voting rights, Section 48 – Variation of shareholders’ rights, Section 2(55) – “Member”,
Section 2(69) – “promoter”, Section 96 – Annual General Meeting, Section 100 – Calling of
extraordinary general meeting, Section 101 – Notice of meeting, Section 102 - Statement to be
annexed to notice, Section 103 – Quorum for meetings, Section 104 – Chairman of meetings,
Section 105 – Proxies, Section 106 – Restriction on voting rights, Section 107 – Voting by
show of hands, Section 108 – Voting through electronic means, Section 109 – Demand for
poll, Section 110 – Postal ballot, Section 111 – Circulation of members’ resolution, Section
114 – Ordinary and special resolutions, Section 115 – Resolutions requiring special notice,
Section 116 – Resolutions passed at adjourned meeting, Section 117 – Resolutions and
agreements to be filed, Section 118 – Minutes of proceedings of general meeting, meeting of
Board of Directors and other meeting and resolutions passed by postal ballot, Section 123 –
Declaration of dividend.
Promoter [Section 2(69)]: The term “promoter” is not defined in law. – All the business
operations necessary to bring a Company into existence are called promotion. – The Promoter
is the first person who controls or influences the Company’s affairs. – A promoter cannot be
called an agent of the Company since the principal has not yet come into existence. – By the
same reasoning, she cannot be called a servant. – A promoter cannot be called a trustee of the
Company either as a trustee cannot sell her own property to the trust, but a promoter can sell
her property or business to the Company which she promotes. – Duties of a Promoter: Under
Common Law – a. Not to make any secret profits out of the promotion of the Company and b.
Disclose any interest that (s)he has in a transaction entered into by her/him on behalf of the
Company. | Duty under the Act – Section 34 and 35 for misstatements in prospectus.
Case: Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218

Facts: E was the head of a syndicate. The syndicate purchased an island in the West Indies,
which contained valuable mines of phosphates. The purchase price was 55,000 GBP. E formed
a Company to buy this island. X, a nominee of the syndicate contracted to sell the island to the
Company for 1,10,000 GBP.
Held: Since there was no disclosure of profits made by E and the syndicate, the Company was
entitled to rescind the contract and recover the purchase money from E and the syndicate. –
“Throughout the Companies Act, 1862 (25 & 26 Vict. c. 89) , the word “promoters” is not
anywhere used. It is, however, a short and convenient way of designating those who set in
motion the machinery by which the Act enables them to create an incorporated Company.
Neither does this Act in terms impose any duty on those promoters to have regard to the interests
of the Company which they are thus empowered to create. But it gives them an almost unlimited
power to make the corporation subject to such regulations as they please, and for such purposes
as they please, and to create it with a managing body whom they select, having powers such as
they choose to give to those managers, so that the promoters can create such a corporation that
Page 21 of 61
the corporation, as soon as it comes into being, may be bound by anything, not in itself illegal,
which those promoters have chosen.”
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Remedies against the promoter: Rescinding contract under contract’s law – Contract needs to
be valid under the Act | Under common law – a. The promoter was not in a fiduciary
relationship at the time of purchase of property but was at the time of sale to Company. b. The
promoter was in such a relationship both at the time of purchase and sale.
Pre-incorporation Contracts: A Company being an artificial person can contract only through
its agents. A contract will be binding on a Company only, if it is made on its behalf by any
person acting under its authority, express or implied. – The powers of the Company are defined
by its Memorandum of Association and any contract made beyond the limits laid down in the
Memorandum of Association, will be ultra vires to the Company and void even if all the
shareholders assent to it. – When the Company is being formed, the promoters, purporting to
act on behalf of the Company, enter into contracts for the purchase of property, or for securing
the services of managers or other experts. Such contracts are obviously made before the
incorporation of the Company. – There are two situations in the case of every Company
(whether public or private) in which contracts are made: a) Contracts made on behalf of the
Company before its incorporation—preliminary or pre-incorporation contracts. (b) Contracts
made after the Company becomes entitled to commence business. – Before the 2015
Amendment, there was an additional situation of provisional contracts, capable of ratification
by shareholders after incorporation but before commencement of business. – Preliminary
contracts are contracts purported to be made on behalf of a Company before its incorporation.
– Before incorporation, a Company is non-existent and has no capacity to contract.
Consequently, nobody can contract as agent on its behalf because an act which cannot be done
by the principal himself cannot be done by him through an agent. Hence, a contract by a
promoter purporting to act on behalf of a Company prior to its incorporation never binds the
Company because at the time the contract was concluded the Company was not in existence.
Therefore, it has no legal existence. Even if the parties act on the contract it will not bind the
Company. [Northumberland Avenue Hotel Co., (1886) 33 Ch.D.16 (CA)]. – Further even after
incorporation, such a purported contract cannot be ratified by the Company (Kelner v. Baxter
(1866) L.R. 2 C.P. 174]. The persons purporting to act as agents on behalf of the Company
would be personally liable.
Case: Kelner v. Baxter, (1866) LR 2 CP 174

Three persons A, B and C purported to enter into a contract as agents on behalf of a Company
before its incorporation for the purchase of certain goods from Kelner and signed it : “A, B and
C, Directors”. – The Company later obtained the certificate of incorporation but collapsed
before the money was paid for the goods which were supplied to it by Kelner. – It was held that
A, B and C were personally liable on the agreement and no subsequent ratification by the
Company would relieve them from that liability without the assent of Kelner.
--
Even if the Company takes some benefit from a contract purported to have been made before
its formation, the contract is not binding on the Company. The promoters alone, therefore,
remain personally liable for any contract they purport to make on behalf of the Company, unless
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the Company enters into the contract in terms of such agreement after incorporation. – A
Company cannot ratify a pre-incorporation contract, but it is open to it to enter into a new
contract after its incorporation to give effect to a contract made before its formation [Howard
v. Patent Ivory Co. (1888) 38 Ch.D.] – Since the pre-incorporation contract is a nullity, even
the Company cannot sue the vendor of property if he fails to carry out such a contract. – In
Pennington’s Company Law, the position is stated as follows: “Although a contract made
before the Company’s incorporation cannot bind the Company, it is not wholly denied of legal
effect. It takes effect as a personal contract with the persons who purport to contract on the
Company’s behalf and they are liable to pay damages for failure to perform the promises made
in the Company’s name, even though the contract expressly provides that only the Company’s
paid-up capital shall be answerable for performance”.
Specific Relief Act, 1963: In India, however, Sections 15 and 19 of the Specific Relief Act,
1963, have considerably alleviated the difficulty. – Section 15(h) provides that where the
promoters of a Company have, before its incorporation, entered into a contract for the purposes
of the Company, and such contract is warranted by the terms of incorporation, the Company
may, if it has accepted the contract, and has communicated such acceptance to the other party
to the contract, obtain specific performance of the contract. – Under Section 19(e) under similar
circumstances, specific performance may be enforced against the Company by the other party
to the contract.
Capital: Generally, capital is viewed as the money, which a Company has raised by issue of
its shares. It uses this money to meet its requirements by way of acquiring business premises
and stock-in-trade, which are called the fixed capital and the circulating capital respectively. –
The phrase “loan or borrowed capital” is sometimes used to mean money borrowed by the
Company and secured by issuing debentures. This, however, is not the proper use of the word
“capital”. – In relation to a Company limited by shares, the word “capital” means the share
capital i.e., the capital in terms of rupees divided into specified number of shares of a fixed
amount each. For e.g. share capital of a Company is `1,00,000 which can be divided into 10,000
shares of `10 each or 1,000 shares of `100 each, whichever is feasible to the Company. – In
Company Law, the “Capital” is the share capital of a Company, which is classified as:
Nominal, Authorised or Registered Capital: As per Section 2(8), “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; Issued Capital: As per Section 2(50),
“issued capital” means such capital as the Company issues from time to time for subscription.
It is that part of the authorised or nominal capital which the Company issues for the time being
for public subscription and allotment. This is computed at the face or nominal value; Subscribed
Capital: According to Section 2(86), “subscribed capital” means such part of the capital which
is for the time being subscribed by the members of a Company. It is that portion of the issued
capital at face value which has been subscribed for or taken up by the subscribers of shares in
the Company. It is clear that the entire issued capital may or may not be subscribed; Called up
Capital: As per Section 2(15), “called-up capital” means such part of the capital, which has
been called for payment. It is that portion of the subscribed capital which has been called up or
demanded on the shares by the Company; Paid-up Share Capital: As per Section 2(64), “paid-
up share capital” or “share capital paid-up” means such aggregate amount of money credited
as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and
also includes any amount credited as paid-up in respect of shares of the Company, but does not
include any other amount received in respect of such shares, by whatever name called.
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Preference and Equity Share Capital: As per the explanation to Section 43, ‘‘equity share
capital’’, with reference to any Company limited by shares, means all share capital which is not
preference share capital.
‘‘Preference share capital’’, with reference to any Company limited by shares, means that part
of the issued share capital of the Company which carries or would carry a preferential right
with respect to— a. payment of dividend, 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 winding up or repayment of capital, of the amount of the share capital paid-up or deemed to
have been paid-up, whether or not, there is a preferential right to the payment of any fixed
premium or premium on any fixed scale, specified in the Memorandum or Articles of the
Company;
“Equity share capital” may be with similar rights or equity shares with different voting rights
as described in Rule 4 of Companies (Share Capital and Debentures) Rules, 2014.
A preference shareholder stands midway between an equity shareholder and a debenture-
holder, in the matter of risk and in the mater of entrepreneurship. Debentures cannot be issued
with voting rights. Preference shareholders can vote only on resolutions which directly affect
the rights attached to their preference shares. Equity shareholders have participation in the
management of the Company; they have a right to vote, in respect of such capital, on every
resolution placed before the Company. There are three matters on which a preference
shareholder can vote along with the equity shareholder, namely: a) reduction of capital, b)
repayment of capital (this is return of capital in excess of want) and c) winding-up.
Share: Share may be defined as the proportion to which the shareholder is entitled in the profits
of the Company while it is a going concern and in the return of capital when the Company is
wound-up.
Nature of a share: a) A share is a right to a specified amount of the share capital of a Company,
carrying with it certain rights and liabilities while the Company is a going concern and in its
winding up. b) A share is the interest of a shareholder in the Company measured by a sum of
money, for the purposes of liability in the first place, and of interest in the second, but also
consisting of a series of mutual covenants entered into by all the shareholders inter se. c) A
share is a right to participate in the profits made by a Company, while it is a going concern and
which declares a dividend, and in the assets of Company when it is wound up. d) A share is not
a sum of money but a bundle of rights and liabilities. e) Section 44 of the Companies Act
provides that a share or other interest of any member in a Company is movable property
transferable in the manner provided by the Articles of the Company. f) In India, a share is
regarded as goods. According to the Sale of Goods Act, 1930, “Goods” refer to any kind of
movable property other than an actionable claim or money, and includes stocks and shares. g)
According to Section 45 of the Companies Act, 2013 every share in a Company having a share
capital shall be distinguished by its distinctive number but this provision shall not apply to a
share held by a person whose name is entered as a holder of beneficial interest in such share in
the records of a depository.
Issue of shares with differential voting rights: The Articles of Association to authorize the issue.
– An ordinary resolution is to be passed at a general meeting of the shareholders. If listed,
approval by shareholders through postal ballot is required. – It shall not exceed twenty-six
percent of the total post-issue paid up equity share capital including equity shares with
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differential rights issued at any point of time. – consistent track record of distributable profits
for the last three years. – No default in filing financial statements and annual returns for the last
three financial years. – No subsisting default in the payment of a declared dividend or
repayment of its matured deposits or redemption of its preference shares or debentures that have
become due. – No default in repayment of any term loan from a public financial institution or
State level financial institution or scheduled Bank that has become repayable or interest payable
thereon or dues with respect to statutory payments relating to its employees to any authority or
default in crediting the amount in Investor Education and Protection Fund to the Central
Government. – Not to be penalized by Court or Tribunal during the last three years of any
offence under specified legislations. – Details of the issue to be disclosed in the Board’s Report.
– Register of Members to contain the details of shares with differential voting rights.
Preference Share Capital v. Equity Share Capital: 1. Preference shares are entitled to a fixed
rate of dividend. v. The rate of dividend on equity shares depends upon the amount of profit
available and the funds requirements of the Company for future expansion etc. 2. Dividend on
the preference shares is paid in preference to the equity shares. v. The dividend on equity shares
is paid only after the preference dividend has been paid. 3. In case of winding up, preference
share holder get preference over equity share holders with regard to the payment of capital. v.
In case of winding up, equity share holder get payment of capital after the payment of capital
to preference shareholders. 4. Dividend on preference share may be cumulative. v. The dividend
on equity shares is paid only after the preference dividend has been paid and it is not cumulative.
5. The voting rights of preference shareholders are restricted. A preference shareholder can
vote only when his special rights as a preference shareholder are being varied, or on any
resolution for the winding up of the Company or for the repayment or reduction of its equity or
preference share capital or their dividend has not been paid for a period of two years or more
[Section 47(2)]. v. An equity shareholder can vote on all matters affecting the Company. 6. No
bonus shares/right shares are issued to preference share holders. v. A Company may issue rights
shares or bonus shares to the Company’s existing equity shareholders. 7. Redeemable
preference shares may be redeemed by the Company. v. Equity shares cannot be redeemed
except under a scheme involving reduction of capital or buy back of its own shares. 8. Voting
right of a preference shareholders on a poll shall be in proportion to his share in the paid-up
preference share capital of the Company. v. Voting right of an equity shareholders on a poll
shall be in proportion to his share in the paid-up equity share capital of the Company.
Dividend: Dividend means the portion of the profit received by the shareholders from the
Company’s net profits, which is legally available for distribution among the members.
Therefore, dividend is a return on the share capital subscribed for and paid to its shareholders
by a Company. – Dividend defined under Section 2(35) of the Companies Act, 2013, includes
any interim dividend. – Difference between dividend and interest.
Types of Dividend: Final Dividend: Dividend is said to be a final dividend if it is declared at
the annual general meeting of the Company. Final dividend once declared becomes a debt
enforceable against the Company. Final Dividend can be declared only if it is recommended by
the Board of Directors of the Company. In accordance with Section 134(3)(k), Board of
Directors must state in the Directors’ Report the amount of dividend, if any, which it
recommends to be paid. – Interim Dividend: Dividend is said to be an interim dividend, if it
is declared by the Board of Directors between two annual general meetings of the Company.
However, all the provisions relating to the payment of dividend shall be applicable on the
interim dividend also.
Page 25 of 61
Member [Section 2(55)]: A Company is composed of members, though it has its own separate
legal entity. The members of a Company are the persons who, for the time being, constitute the
Company, as a corporate entity. – In the case of a Company limited by shares, the shareholders
are the members. – The terms “members” and “shareholders” are usually used interchangeably,
being synonymous, as there can be no membership except through the medium of shareholding.
– As per Section 2(55), there are two important elements which must be present before a person
can acquire membership of a Company viz., (i) agreement to become a member; and (ii) entry
of the name of the person so agreeing, in the register of members of the Company. Both these
conditions are cumulative. [Balkrishan Gupta v. Swadeshi Polytex Ltd. (1985) 58 Com Cases
563]. – The person desirous of becoming a member of a Company must have the legal capacity
of entering into an agreement in accordance with the provisions of the Indian Contract Act,
1972.
1. Subscribers to the MoA: In the case of a subscriber, no application or allotment is necessary

to become a member. By virtue of his subscribing to the Memorandum, he is deemed to have
agreed to become a member and he becomes ipso facto member on the incorporation of the
Company and is liable for the shares he has subscribed – A subscriber to the Memorandum
cannot rescind the contract for the purchase of shares even on the ground of fraud by the
promoters. In Re. Metal Constituents Co., (1902) 1.Ch. 707. – In accordance with the provisions
of Section 10(2) of the Companies Act, 2013, all monies payable by any member to the
Company under the Memorandum or Articles shall be debt due from him to the Company. –
Further, a subscriber to the Memorandum must pay for his shares in cash.
2. By application and allotment: A person who applies for shares becomes a member when
shares are allotted to him, a notice of allotment is issued to him and his name is entered on the
register of members. – The general law of contract applies to this transaction. There is an offer
to take shares and acceptance of this offer when the shares are allotted. – An application for
shares may be absolute or conditional.
3. By transfer of shares: Shares in a Company are movable property as provided in Section 44

of the Companies Act, 2013 and are transferable in the manner provided in the Articles of the
Company and as provided in Section 56 of the Companies Act, 2013. – A person can become
a member by acquiring shares from an existing member and by having the transfer of shares
registered in the books of the Company, i.e. by getting his name entered in the register of
members of the Company.
4. By transmission of shares: A person may become a member of a Company by operation of

law i.e. if he succeeds to the estate of a deceased member. Membership by this method is a legal
consequence. – On the death of a member, his executor or the person who is entitled under the
law to succeed to his estate, gets the right to have the shares transmitted and registered in his
name in the Company’s register of members. – No instrument of transfer is necessary in this
case.
5. By acquiescence or estoppel: A person is deemed to be a member of a Company if he allows

his name, without sufficient cause, to be on the register of members of the Company or
Page 26 of 61
otherwise holds himself out or allows himself to be held out as a member. In such a case, he is
estopped from denying his membership. – He can, however, escape his liability by taking
prompt action for having his name removed from the register of members on permissible
grounds.
6. Holding Shares as Beneficial Owner in the Records of Depository: Every person holding
shares of the Company and whose name is entered as a beneficial owner in the records of the
depository shall be deemed to be a member of the concerned Company.
Rights of Members: When once a person becomes a member he is entitled to exercise all the
rights of a member until he ceases to be a member in accordance with the provisions of the Act.
– So long a person’s name stands registered in the books as a member, even if he has sold the
share and has given the share certificates and the blank transfer deed duly signed, he alone is
entitled to exercise the rights of membership [Balakrishna Gupta & Others v. Swadeshi Polytex
Ltd. and Others (1985) 58 Com Cases 563 (S.C.); and Life Insurance Corporation of India v.
Escorts Ltd. & Others (1986) 59 Com Cases 548 (S.C.)].
Individual Rights: Members of a Company enjoy certain rights in their individual capacity,
which they can enforce individually. These rights are contractual rights and cannot be taken
away except with the written consent of the member concerned. These rights can be categorized
as under:
1. Right to receive copies of the following documents from the Company: a) Abridged financial
statement and auditor’s report in the case of a listed Company (Section 136), b) Report of the
Cost Auditor, if so directed by the Government, c) Notices of the general meetings of the
Company (Sections 101-102).
2. Right to inspect statutory registers/returns and get copies thereof without payment on any fee
or on payment of prescribed fee. The members have been given right to inspect the following
registers etc.: a) Debenture trust deed (Section 71); b) Register of Charges and instrument of
charges (Sections 85 & 87); c) Copies of contract of employment with Managing or Whole-
time Directors); d) Shareholders’ Minutes Book (Section 119); e) Register of Contracts,
Companies and Firms in which Directors are interested (Section 189); f) Register of Directors
and key managerial personnel and their shareholding (Section 170);
3. Right to attend meetings of the shareholders and exercise voting rights at these meetings
either personally or through proxy (Sections 96, 100, 105 and 107).
4. Other rights - Over and above the rights enumerated at Item Nos. 1 to 3 above, the members
have the following rights:
a) To transfer shares (Sections 44 and 56 and Articles of Association of the Company);
b) To resist and safeguard against increase in his liability without his written consent;
c) To receive dividend when declared;
d) To have rights shares (Section 62);
e) To appoint Directors (Section 152);
Page 27 of 61
f) To share the surplus assets on winding up (Section 320);

g) Right of dissenting shareholders to apply to Tribunal (Section 48);
h) Right to be exercised collectively by passing a special resolution and intimating the same to
the Central Government for investigation of the affairs of the Company (Section 210);
i) Right to make application collectively to the Tribunal for relief in cases of oppression and
mismanagement (Sections 241);
j) Right to file class action suits before the Tribunal (Section 245);
k) Right of Nomination. (Section 72);
l) Right to file a suit or take any other action in case of any misleading statement or the inclusion
or omission of any matter in the prospectus. (Section 37).
Collective Membership Rights: Members of a Company have certain rights which can be
exercised by members collectively by means of democratic process, i.e. usually by majority of
members, unless otherwise prescribed. – Thus, the shareholders in the majority determine the
policy of the Company and exercise control over the management of the Company. However,
if and when the majority becomes oppressive or is accused of mismanagement of the affairs of
the Company, Section 241, read with Section 244, confers a right to not less than one hundred
members of a Company, or not less than one-tenth of the total number of its members,
whichever is less, or any member or members holding not less than one-tenth of the issued
share capital of the Company (but they must have paid all calls and others sums due on their
shares), and in the case of a Company not having a share capital, not less than one-fifth of the
total number of its members, to apply to Board under Section 241 for relief in cases of
oppression or for relief in cases of mismanagement, respectively. – Requisition to call EGM:
Section 100 of the Companies Act, 2013 confers on members, holding not less than one-tenth
of the paid-up share capital of a Company, the right to make a requisition to the Board of
Directors to call an extraordinary general meeting of the Company.
Voting Rights of Members: The right of attending shareholders’ meetings and voting there at
is the most important right of a member of a Company, as shareholders’ meetings play a very
important role in the Company’s life. Directors are appointed by the shareholders. – Section 47
provides that every member of a Company limited by shares and holding equity share capital
therein, shall have the right to vote on every resolution placed before the Company and his
voting right on a poll shall be in proportion to his share in the paid up equity share capital of
the Company.
Shareholders’ Pre-emptive Rights with regard to further issue of share capital (Right
Shares): To preserve the shareholders’ proportionate dividend, liquidation and voting rights,
pre-emptive rights are often recognized, but their existence and scope can be effected by
provisions in the Articles. – However, Section 62 of the Companies Act, 2013 secures
shareholders’ pre-emptive rights with regard to the further issue of share capital by the
Company.
Page 28 of 61
Case: Borland's Trustee v. Steel Brothers & Co Ltd [1901] 1 Ch 279 1901
Facts: Mr Borland was a shareholder. The Company’s Articles contained pre-emption rights,
such that on a shareholder’s bankruptcy, he had, on receiving a transfer notice from the
Directors, to transfer his shares to a manager or assistant at a fair value calculated in accordance
with the Articles. His trustee said that the transfer Articles were void because, among other
reasons, they amounted to a fraud upon the bankruptcy laws, and could not prevail when
bankruptcy had supervened, since the trustee was forced to part with the shares at less than their
true value, and the asset was not fully available for creditors.
Held: Farwell J said: ‘a simple stipulation that upon a man’s becoming bankrupt that which
was his property up to the date of the bankruptcy should go over to someone else and be taken
away from his creditors, is void as being a violation of the policy of the bankrupt law’. It was
a commercial arrangement, and the provisions were a fair agreement for the business of the
Company. They were binding equally on all shareholders. There was no suggestion of
fraudulent preference, and nothing obnoxious to the bankruptcy law in a clause which provided
that if a man became bankrupt he should sell his shares. The price was a fixed sum for all
persons alike, and no difference in price arose in the case of bankruptcy. The purpose was that
there should be in the Company, if it were so desired, none but managers and workers in Burma.
There was nothing repugnant in the way in which the value of the shares was to be ascertained.
It would have been different if there were any provision in the Articles compelling persons to
sell their shares in the event of bankruptcy at something less than the price that they would have
otherwise obtained, since such a provision would be repugnant to the bankruptcy law. – Farwell
J described the nature of a Company share: ‘It is the interest of a person in the Company, that
interest being composed of rights and obligations which are defined by the Companies Act and
by the Memorandum and Articles of Association of the Company.’ and one with limited
liability in a Company: ‘A share is the interest of the shareholder in the Company measured by
a sum of money, for the purpose of liability in the first place, and of interest in the second, but
also consisting of a series of mutual covenants entered into by all the shareholders inter se in
accordance …the Companies Act. The contract contained in the Articles of Association is one
of the original incidents of the share. A share is an interest measured by a sum of money and
made up of various rights contained in the contract, including the right to a sum of money of a
more or less amount.’
Right of Dissenting Members: Section 48(2) of the Companies Act, 2013 confers certain
rights upon the dissentient shareholders. – According to Section 48(2), where the rights of any
class of shares are varied, the holders of not less than ten per cent of the issued shares of that
class, being persons who did not consent to such variation or vote in favour of the special
resolution for the variation, can apply to the Tribunal to have the variation cancelled. – Where
any such application is made to the Tribunal, the variation will not be effective unless and until
it is confirmed by the Tribunal.
Nomination by Security holders (including members) (Section 72): Section 72(1) states that
every holder of securities of a Company may, at any time, nominate, in the prescribed manner,
any person to whom his securities shall vest in the event of his death.
Page 29 of 61
Liability of Members: The liability of a member depends on the nature of the Company. –
If the Company is registered with unlimited liability, every member is liable in full for all the
debts of the Company contracted during the period of his membership. – Where the Company
is limited by guarantee, each member will be bound to contribute in the event of winding up a
sum specified in the liability clause of the Memorandum of Association. – In case of Company
limited by shares, each member is bound to contribute the full nominal value of shares and his
liability ends there. If before the full nominal value of the shares is paid, the Company goes
into liquidation, the member becomes liable as contributory to pay the balance when called
upon to pay, by the liquidator of the Company. – If a member ceased to be a member of a
Company within one year prior to the commencement of the winding up of the Company he
is liable to pay on the shares which he held to the extent of the amount unpaid thereon, if: a) on
the winding up, debts exist which were incurred while he was a member, and b) it appears to
the Tribunal that the present members are not able to satisfy the contribution required from
them in respect of their shares.
--
Meeting: A meeting may be generally defined as a gathering or assembly or getting together

of a number of persons for transacting any lawful business. There must be at least two persons
to constitute a meeting. – Therefore, one shareholder usually cannot constitute a Company
meeting even if he holds proxies for other shareholders. – However, in certain exceptional
circumstances, even one person may constitute a meeting. – The primary purpose of a Meeting
is to ensure that a Company gives reasonable and fair opportunity to those entitled to participate
in the Meeting to take decisions as per the prescribed procedures.
Purpose of a Meeting: A Company, being an artificial person, cannot act by itself. It can act
only through its two principal organs – i.e. a) the Board of Directors and b) the shareholders.
The Board of Directors act collectively at Board Meetings. The Consent of shareholders is
obtained in General Meetings.
Member’s Meeting: Members of a Company or the Directors of a Company can exercise their
powers and can bind the Company only when they act as a body at a validly convened and held
meeting. An individual member or shareholder, irrespective of his shareholding cannot bind a
Company by his individual act. – In Companies Act 2013 a new concept of e-voting is
introduced. This is a method of voting via electronic means. – It is to be noted that every
gathering or assembly does not constitute a meeting. These must be convened and held in
perfect compliance with the various provisions of the Companies Act, 2013 and rules framed
under Chapter VII on Companies (Management and Administration) Rules, 2014. – The
meetings to be held for seeking approval to ordinary business and special business are called
annual general meeting and extraordinary general meeting. In certain cases, a Company may
have to hold a meeting of the members of a particular class of members. – Member’s Meeting:
Annual General Meeting, Extraordinary General Meeting, Class Meeting.
Case: LIC of India v. Escorts Ltd. [1986] 59 Comp Cas 548

Facts: Subsequent to the filing of the Writ Petition the Life Insurance Corporation of India who
along with other financial institutions held as many as 52% of the total number of shares in
the Company, issued a requisition dated 11.2.84 to the Company to hold an extra ordinary
general meeting for the purpose of removing nine of the part-time Directors of the
Company and for nominating nine others in their place. Alleging that the action of the Life
Page 30 of 61
Insurance Corporation of India was malafide and part of a concerted action by the Union of
India, the Reserve Bank of India and the Caparo Group Ltd. to coerce the Company to register
the transfer of shares and to withdraw the Writ Petition, the Writ Petitioners sought to suitably
amend the Writ Petition and to add prayers (ia), (ib), (ic) and (id) to declare the requisition to
hold the meeting arbitrary, illegal, ultra vires etc. The writ petition was amended.
Held: “Every shareholder of a Company has the right, subject to statutorily prescribed
procedural and numerical requirements to call an extra ordinary general meeting in
accordance with the provisions of the Companies Act, 1956. He cannot be restrained from
calling a meeting and he is not bound to disclose the reasons for the resolution proposed to be
moved at the meeting. Nor are the reasons for the resolutions subject to judicial review.” –
Concept of Corporate Democracy vests in the ability of the majority shareholders to call for
general meetings and elect Directors.
Case: Chandrakant Khare v. Shantaram Kale, (1989) 65 Comp Cas 121 SC

Facts: After the election of Members, the first meeting of the Aurangabad Municipal
Corporation was held on May 6, 1983 at 2 P.M. and the Municipal Commissioner announced
that the polling for the offices of Mayor, Deputy Mayor and Members of the standing
Committee would commence from 2.30 p.m. onwards. But at 2.30 P.M. some of the Councilors
belonging to the Opposition Party sat on the ballot boxes and some others surrounded the
Municipal Commissioner and demanded that the meeting be adjourned to a subsequent date.
The Councilors belonging to the ruling party demanded that the meeting and election be held
later on that day. Total confusion and bedlam prevailed and the rival groups started throwing
Chairs at each other, leading to a pandemonium. When the situation was brought under control,
the Municipal Commissioner announced that the meeting would continue and the elections
would be held at 4.30 p.m. The petitioner filed a protest at 4.15 p.m. stating that the meeting
had been adjourned by the Municipal Commissioner for the day and, therefore, the holding of
the meeting later on the same day would be improper and illegal. Thereafter, the opposition
group abstained from participating in the meeting held at 4.30 p.m., in which Mayor and Deputy
Mayor were elected and 8 as Members of the Standing Committee. – In a Writ Petition filed
before HC, the appellant questioned the election, on the basis that the meeting in which the
election was held, was invalid. The High Court held that the meeting was not adjourned for the
day or sine die, but was only postponed, to be held as soon as peace was restored on the very
day and upheld the election. – Against the judgment of the High Court, the petitioner has filed
the present special leave petition. – The Respondents contended that the meeting had not been
adjourned sine die but the proceedings had merely been suspended at 2.45 p.m. and the
adjourned meeting held at 4.30 p.m. was a continuation of the original meeting and no new
notice of an adjourned meeting had to be given.
Held: A properly convened meeting cannot be postponed. The proper course to adopt is to hold
the meeting as originally intended, and then and there adjourn it to a more suitable date. If this
course be not adopted, members will be entitled to ignore the notice of postponement, and, if
sufficient to form a quorum, hold the meeting as originally convened and validly transact the
business thereat. Even if the relevant rules do not give the chairman power to adjourn the
meeting, he may do so in the event of disorder. Such an adjournment must be for no longer than
the chairman considers necessary and the chairman must, so far as possible, communicate his
decision to those present. – The HC was right in holding that the first meeting of the Municipal
Corporation fixed by the Municipal Commissioner for May 6, 1988 was not 'adjourned for the
day' but had only been put off to a later hour i.e. the proceedings had only been suspended, to
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re-commence when peace and order were restored. – There is nothing on record to substantiate
the petitioner's submission that the first meeting scheduled to be held on May 6, 1988 at 2 P.M.
was 'adjourned for the day' without transacting any business i.e. without consideration of the
agenda for the day. On the contrary, it is not in dispute that the business for the day was partly
transacted when the Councilors met at 2 p.m. as scheduled and the Municipal Commissioner
declared that the polling would commence from 2.30 p.m. onwards. – The trouble started at
2.30 p.m. when the Councilors belonging to the petitioner's party prevented the casting of votes
by snatching away the ballot boxes from the polling booths and sat upon them. There was a
pre-determined plan on their part not to allow the first meeting to be held on that day. But the
Municipal Commissioner did not give way to the commotion and pandemonium and he did not
put off the meeting to another day. In the prevailing situation, the Municipal Commissioner had
no other alternative but to adjourn the meeting. Under the scheme of the Act, when the term of
the elected Councilors is a period of five years which in terms of S. 6(2) of the Act is deemed to
commence on the date of the first meeting, the Municipal Commissioner obviously could not
adjourn the meeting for another day. If the contention that the meeting having been adjourned
without specifying a definite point of time were to prevail, it would give rise to a serious
anomaly. The effect of adjourning the first meeting to another day would imply the coming into
existence of another deemed date under s. 6(2) of the Act for commencement of the term of the
Councilors. The fact that the Municipal Commissioner did not leave the House or vacate the
seat lends support to the version that he had merely suspended the proceedings till order was
restored.
Case: M.S. Madhusoodan v. Kerela Kaumudi (P.) Ltd. (2003) 46 SCL 695 (SC)
Facts: 4 brothers owned the family business - The main subject matter of litigation is ‘Kerala
Kaumudi’ which is into publishing newspaper. 3 brothers - Srinivasan, Ravi and Mani – re
against the 4th - M.S. Madhusoodan. The Company had a total share capital of Rs. 20 lakhs
divided into 2,000 shares of Rs. 1,000/- each. – Shareholding: Mani = 222 shares, Valsa Mani
(Mani’s Daughter) = 84 shares, Sukumaran Mani (Mani’s Son) = 84 shares,
Madhusoodhan [MD] = 390 shares, Srinivasan [GM] = 390 shares, Ravi [Director] = 390
shares, Madhavi [Chairman] = 3 shares, Sukumaran (MD + Chairman) = 9 shares,
Kaumudi Investments Pvt. Ltd. = 3 shares [Total =1575 shares] – Sukumaran was
succeeded by his wife after his death - Madhavi as chairman. Madhusoodhan was appointed as
MD and editor of the Company for life. Srinivasan and Ravi were appointed GM and Director
respectively for life. AOA were amended to reflect the changes.– Various disputes b/w the
brothers – so two agreements were entered into to divide the business amongst the four brothers.
– One of the two agreements - Kerala Kaumudi’s control was given to M.S. Mahusoodhanan.
– Later a third agreement (16.1.1986) was entered into between Madhavi (the widow) and the
4 brothers, according to which, Mani and his children transferred all their shares to
Madhusoodhan and his children. – This meant that out of the 1575 shares - Mashusoodhan’s
two children now held – 84 shares each and Madhusoodhan held 612 shares with the other two
brothers – Srinivas and Ravi – 222 shares each and Madhavi still continued to hold 3 shares –
rest shares held by other parties. – Later, two Board resolutions were passed, as per which,
Maadhusoodhan was ousted as MD and in the second, issuance of further 425 shares of Rs.
1,000 each was passed. These shares were issued to Ravi and Srinivasan and later Ravi
transferred one share to Mani.
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Issue: Doubts were raised towards the transfer of 320 shares of Mani and his children to
Madhusoodhan as void + Madhusoodhan disputed his removal and contested that he continued
to be the MD and that the resolutions and the EOGM, where the decision of removing him was
taken was ultra vires the AOA. He demanded cancellation of 425 new shares allotted to Ravi
and Srinivasan.
Held: Mani and his children argued that the transfer of shares that had taken place were invalid
because there was no adequate consideration paid, no proper documents were executed and the
minor children had no knowledge about the transfer of shares. – Madhusoodhan stated that the
decisions taken in the meetings ousting him and issue of additional shares were invalid because
when these resolutions were passed he was not present at these meetings because no notice for
such meeting was served to him and according to the charter documents 75% votes were
required to amend the AOA and Madhusoodhan along with his family and KIPL held 50%
shares of the Company. – There should have been atleast 21 days prior notice for holding the
meeting and stating the intention of the resolution and 75% vote was required for passing the
resolution. There was no proper delivery of the notice informing Madhusoodhan of the meeting
for issuance of additional shares. The records kept are also unclear as to whether the sealed
envelope delivered to the assistant of Madhusoodhan did in actuality have the notice for the
meetings. – The share transfer of Mani’s children was valid because the minutes of the meeting
in which the shares were transferred by Mani and his children to Madhusoodhan were signed
by Mani. There were resolutions showing that Mani had resigned from the Directorship
position. The court held that even though the agreement allowed for the determination of
consideration at a later stage, the intention to transfer can be clearly seen from the minutes of
the meeting. The court also held that S. 9 of the Sale of Goods Act allows for such a transaction.
– The transfer of the shares of Mani and family to Madhusoodhan was also recorded in the
Company ledger. There was a notice publication in the newspaper stating the transfer of shares
to Madhusoodhan. There should be proper documents in place for transfer of the shares and
that fixation of a price was not a condition precedent. – For the meeting: The notice for the
meeting did not have the fact that the deletion of article 74 would be considered. According to
Section 189(2)(a) of the Act, the notice should be sufficiently specific so to inform each member
of the actual resolution to be passed. The notice is to be frank and clear. If not then the notice
is bad and the special resolution is vitiated and cannot be acted upon. Hence, deletion of article
74 was wrong and Madhusoodhan continues to be the MD of the Company. Also according to
S. 53 of the Act here are only two methods envisaged of serving the notice which are personal
service or service by post. But neither method was used for informing Madhusoodhan and KIPL
of the meeting. The notice for the holding of the meeting has not been produced and there is a
presumption against Srinivasan and others. Although the Act does provide that if a document
is sent by post in the manner specified "service thereof shall be deemed to be effected". The
word "deemed" literally means "thought of“ or, in legal parlance "presumed”. This is a
rebuttable presumption even though the words used are ‘shall presume”. There are letters by
Madhusoodhanan to Madhavi which prove that he was not aware of the meeting in which the
resolution to issue additional shares were taken. Thus, the additional issuance and allotment
of shares are invalid.
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CORPORATE GOVERNANCE
Section 149 – Board of Directors + Independent Director, Section 151 – Small Shareholder
Director, Section 152 – Appointment of Director, Section 161 – Additional, alternate and
nominee Director, Section 162 and Section 163 – Voting for appointment, Section 164 –
Disqualifications for appointment, Section 165 – Number of Directorships, Section 166 –
Duties of Directors, Section 169 – Removal of Directors, Section 170 – Shareholding of
Directors and KMPs, Section 173- Meetings of Board, Section 174 – Quorum for meetings of
Board, Section 176 – Defect in appointment, Section 177 – Audit Committee, Section 178 –
Nom. and remuneration comm. + Stakeholders R. Comm, Section 179 – Powers of Board,
Section 184 – Disclosure of interest by Director, Section 188 – Related party transactions,
Section 189 – Register of contracts with interested Directors, Section 194 –Prohibition on
forward dealings, Section 195 – Insider trading, Section 197 – Overall max. remuneration,
Section 199 – recovery of remuneration in cases, Section 129 – Financial statements, Section
138 – Internal audit, Section 135 – Corporate Social Responsibility
Case: Eclairs Group Ltd (Appellant) v JKX Oil & Gas plc (Respondent)
JKX Oil [“JKX”] is a Company listed on the London Stock Exchange. Eclairs and Glengary,
both incorporated in the British Virgin Islands, owned substantial minority shareholdings in
JKX, sufficient to block special resolutions: 27.55% and 11.45% respectively. Eclairs was
owned beneficially by Ukrainian politician-businessmen, Mr. Kolomoisky and Mr.
Bogulyubov, both having acquired the reputation of ‘raiders’. Glengary was owned by a Mr.
Zhukov. – Relations between JKX and Eclairs/Glengary do not appear to have been particularly
cosy: by 2013, the Directors of JKX perceived that they were the target of a raid by the two
minority shareholders. From 2010 to 2012, JKX (which was going through a financially
challenging time) attempted to raise capital, but these attempts fell through in view of the
blocking minority with the raider group. In March 2013, Eclairs and Gregory wrote to JKX,
calling for an extraordinary general meeting to consider resolutions for removal of the existing
CEO of JKX, Mr. Dixon, from the Board. An AGM was convened for June 2013. The agenda
included the re-election of Dr Davies, the approval of the Directors’ remuneration report and
resolutions empowering the Board to allot shares for cash. – JKX issued disclosure notices to
Eclairs and Glengary (as permissible under UK law), calling upon Glengary to provide
information about their shareholding, their beneficial ownership and any agreements or
arrangements between the various persons interested in them. Prompt responses gave
information about the shareholding, but denied that the addressees were party to any agreement
or arrangement among themselves. – Article 42 of the Articles of JKX empowered the Board
to issue restriction notices (restricting the exercise of voting rights) in respect of specified
shares, in case the Board had reasonable cause to believe that information in response to
disclosure notices was incomplete. Believing Eclairs and Glengary to have provided incomplete
information, the Board issued restriction notices in respect of the shareholding of Eclairs and
Gregory. The effect was that Eclairs and Gregory could no longer use their blocking minority
at the AGM. – Proper purpose rule under Eclairs: “14. Part 10, Chapter 2 of the Companies Act
2006 codified for the first time the general duties of Directors. The proper purpose rule is stated
in Section 171(b) of the 2006 Act, which provides that a Director of a Company must “only
exercise powers for the purposes for which they are conferred”. – Compare with Section 166
of the Companies Act, 2013.
Page 34 of 61
Case: Aberdeen Rly Co. v. Blaikie Brothers (1854) 1 Macq 461
Facts: Blaikie was Director of Aberdeen Rly Co. and partner at Blaikie Brothers. Aberdeen Rly
Co. entered into a contract with BB to deliver large quantities of rail sockets over a period of
18 months. After performance of 2/3rd of the contract, Aberdeen Company refused to take
delivery of the remaining claiming that the contract was voidable from its side due to the self-
dealing of their Director Blaikie.
Held: Voidable at the behest of the Rly. Co. – “The equitable rule as to the accountability of
Directors is not limited to cases in which there is a maturing business opportunity but extends
to cases in which the Director either has or can have a personal interest conflicting, or which
possibly may conflict, with the interests of whose whom he is bound to protect.”
Case: North-West Transportation Co. Ltd. v. Beatty 12 S.C.R. 598

Facts: James H. Beatty, one of the Directors of the North-West Transportation Company, had
a boat called the “United Empire,” which he was desirous of selling to the Company. In order
to effect such sale he became the owner of more than half the shares of the Company, a few of
which he transferred to the defendants, Rose and Laird, and at the first annual meeting thereafter
the said James H. Beatty, and the defendants Rose and Laird, were elected Directors and
constituted a majority of the Board, which was composed of five. – The Board passed a by-law
authorizing the purchase by the Company of the said boat, and a meeting of the shareholders
was subsequently called at which such by-law was confirmed, the said James H. Beatty being
present and voting for such confirmation. Without his vote the resolution could not have been
passed as he himself voted on nearly half the stock of the Company, the capital stock being 600
shares, and there was only a majority of seventeen in favour of the resolution. – Matter taken
to court by one of the shareholders dissenting to this sale of boat.
Held (Chief Justice Ritchie): If he had done his duty and refrained from acting in the transaction
as a Director the by-law might never have been passed, and the contract of sale never entered
into; and having acted contrary to his duty to his co-shareholders he disqualified himself from
taking part in the proceedings to confirm his own illegal act; and then to say that he was a
legitimate party to confirm his own illegal act seems to me simply absurd, for nobody could
doubt what the result in such a case would be, as the futileness of the interested, but discontented
shareholders attempting to frustrate the designs of the interested Director with his majority is
too manifest; but he, if he had done his duty towards them and refrained from entering into the
transaction, would never have been in the position of going through this farce of submitting this
matter to the shareholders, and when so submitted of himself voting that he, though he had
acted entirely illegally, had done right, and thereby binding all the other shareholders who
thought the purchase undesirable; or in other words, by his vote carrying a resolution that the
bargain he himself had made for the Company as buyer, from himself as seller, was a desirable
operation and should be confirmed.
Case: Dale and Carrington v. Prathapam (2005) 1 SCC 212

Facts: Prathapam works in Muscat and wants to incorporate a business in his native state of
Kerala for his sons. Contacts his relation Ramanujam in Kerala. – R informs P that there is a
hotel for sale – 6 Lakh consideration + liability of 18 lakh. P sends in Rs. 5 lakh in name of his
mother who then transfers it to R. R is to get a salary for his services rendered as well. Dale and
Page 35 of 61
Carrington Co. is incorporate for the purposes. No capital contribution by R. – Promoters as

provided – Ramanujam and his wife. – Original Directors: R and his wife. However, later the
wife was removed. P’s brother and brother in law were made Directors. – Both Prathapan and
his wife were allocated 2500 shares each in the Company against the 5 lakh initial capital
contribution. – Over the course of the business, Prathapan made other remittances for the
business in the name of Ramanujam and not the business. Prathapam argues that he was
expecting shares to be issued in his name against this remittances. – When he returns in 1998,
P discovers: The Company's authorised capital was increased from Rs. 15 lakhs to Rs. 25 lakhs
and thereafter to Rs. 35 lakhs without the knowledge of Prathapan, a principal shareholder of
the Company. Further in an alleged meeting of the Board of Directors of the Company said to
have been held on 24th October, 1994, chaired by Ramanujam, the Board of Directors of the
Company is said to have been informed about a sum of Rs. 6,86,500 (Rupees six lakhs eighty
six thousand five hundred only) standing standing to the credit of Ramanuajum in the books of
the Company. He made a proposal for allotment of shares in lieu of that amount in his favour.
As per the case of Ramanujam the Board allotted 6,865 equity shares of Rs. 100 each in the
said meeting in his favour.
Held: The Directors of companies have been variously described as agents, trustees or
representatives, but one thing is certain that the Directors. act on behalf of a Company in a
fiduciary capacity and their acts and deeds have to be exercised for the benefit of the Company
– HELD - The fiduciary capacity within which the Directors have to act enjoins upon them a
duty to act on behalf of a Company with utmost good faith, utmost care and skill and due
diligence and in the interest of the Company they represent. They have a duty to make full and
honest disclosure to the shareholders regarding all important matters relating to the Company.
It follows that in the matter of issue of additional shares, the Directors owe a fiduciary duty to
issue shares for a proper purpose. This duty is owed by them to the shareholders of the
Company. Therefore, even though Section 81 of the Companies Act which contains certain
requirements in the matter of issue of further share capital by a Company does not apply to
private limited companies, the Directors in a private limited Company are expected to make a
disclosure to the shareholders of such a Company when further shares are being issued.
Page 36 of 61
CORPORATE FUNDRAISING
Section 25 –Deemed Prospectus, Section 31 – Shelf Prospectus, Section 32 – Red Herring

Prospectus, Section 26 – Information to be contained in the prospectus, Section 27 – Variation
in prospectus, Section 28 – Offer of sale by certain members, Section 30 – Advertisement,
Sections 34, 35, 36 and 447 – Punishment for misrepresentation, Section 42 – Private
Placement, Section 62 – Rights Issue, Section 43 – Equity Shares, Section 55 – Preference
Shares, Section 52 – Shares Issued at premium, Sections 53 and 54 – Issued at discount +
Sweat equity shares, Sections 68 and 70 – Buyback of shares by Company
Introductory Concepts:
Important Provisions: One of the most important characteristics of a Company is that its shares
are transferable. – Section 44 of the Companies Act, 2013 states that the shares or debentures
or other interest of any member in a Company shall be movable property, transferable in the
manner provided by the Articles of the Company. – As per Section 58(2), the securities or other
interest of any member n a public Company shall be freely transferable. – Proviso to Section
58(2) provides that any contract or arrangement between two or more persons in respect of
transfer of securities shall be enforceable as a contract. – In terms of Section 2(68), a private
Company is required to restrict the right to transfer its shares by its Articles.
Instruments of Transfer to be Presented: As per Section 56(1) of the Companies Act, 2013, a
Company, shall not register a transfer of securities of, the Company, unless a proper instrument
of transfer (in Form No.SH.4) duly stamped, dated and executed by or on behalf of the
transferor and the transferee has been delivered to the Company by the transferor or transferee
within a period of sixty days from the date of execution along with the certificate relating to the
securities, or if no such certificate is in existence, then along with the related letter of allotment
of securities. – However, nothing in Section 56(1) shall prejudice any power of the Company
to register, on receipt of an intimation of transmission of any right to securities by operation of
law from any person to whom such right has been transmitted. (Section 56(2).
Transmission of Securities: According to Section 56(2) A Company shall have power to register
on receipt of an intimation of transmission of any right to securities by operation of law from
any person to whom such right has been transmitted.
Issue of Securities: “Allotment” of shares means the act of appropriation by the Board of
Directors of the Company out of the previously un-appropriated capital of a Company of a
certain number of shares to persons who have made applications for shares (In Re Calcutta
Stock Exchange Association, AIR 1957 Cal. 438). – Prospectus is an invitation to offer to
subscribe for shares in the Company. The applicant for shares is the offeror. The acceptance by
the Company is called allotment. – The Certificate conveys the title to the security and is issued
subsequent to allotment. – According to 2(81) of Companies Act, 2013 “securities” means the
securities as defined in clause (h) of Section 2 of the Securities Contracts (Regulation) Act,
1956. – As per Section 2(h) of the Securities Contracts (Regulation) Act, 1956 “securities”
inter alia include shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated Company or other body corporate; –
According to 2(84) of the Act, “share” means a share in the share capital of a Company and
includes stock.
Page 37 of 61
General Principles for Allotment of Securities: a) The allotment should be made by proper
authority, i.e. the Board Directors of the Company, or a authorized committee. – b) Allotment
of securities must be made within a reasonable time An applicant may refuse to take
securities if the allotment is made after a long time. – c) The allotment should be absolute
and unconditional. Securities must be allotted on same terms on which they were applied for
and as they are stated in the application for securities. Allotment of securities subject to certain
conditions is also not valid. – d) The allotment must be communicated. – e) Allotment
against application only. Section 2(55) of the Act requires that a person should agree in writing
to become a member. – f) Allotment should not be in contravention of any other law.
Provisions Relating to Allotment of Securities: Allotment of Securities – Conditions: Section
39(1) states that no allotment of any securities of a Company offered to the public for
subscription shall be made unless the amount stated in the prospectus as the minimum amount
has been subscribed and the sums payable on application for the amount so stated have been
paid to and received by the Company by cheque or other instrument. – Minimum Application
Money [Section 39(2)]: The amount payable on application on every security shall not be less
than five per cent. of the nominal amount of the security or such other percentage or amount,
as may be specified by the Securities and Exchange Board by making regulations in this behalf.
– Money to be returned if minimum application money is not received: If the stated minimum
amount has not been subscribed and the sum payable on application is not received within a
period of thirty days from the date of issue of the prospectus, or such other period as may be
specified by the Securities and Exchange Board, the amount so received shall be returned within
15 days from the closure of the issue. If any such money is not so repaid within such period the
Directors of the Company who are officers in default shall jointly and severally be liable to
repay that money with interest at 15% P.A. – Company to file Return of allotment: Whenever
a Company having a share capital makes any allotment of securities, it shall file with the
Registrar a return of allotment in Form PAS-3.
Issue of Certificates: A share certificate is a certificate issued to the members by the Company
under its common seal specifying the number of shares held by him and the amount paid on
each share. – According to Section 45 of the Companies Act, 2013 each share of the share
capital of the Company shall be distinguished with a distinct number for its individual
identification. – In terms of Section 46(1) of the Act, a certificate under the common seal of the
Company is prima facie evidence of the title of the person to the shares specified therein. The
certificate is the only documentary evidence of title in the possession of the shareholder. But it
is not a warranty of title by the Company issuing it.
According to Section 23(1), a public Company may issue securities—(i) to public through
prospectus ("public offer"); or (ii) through private placement; or (iii) through a rights issue
or a bonus issue.
Prospectus: A prospectus is an invitation to an offer to subscribe for shares or debentures. – A
document should have following ingredients to constitute a prospectus: a) There must be an
invitation to the public; b) The invitation must be made “by or on behalf of the Company or in
relation to an intended Company”; c) The invitation must be “to subscribe or purchase”; d) The
invitation must relate to any securities of the Company. – An issue will not be “public” if: (i) It
is directed to a specified person or a group of persons, and (ii) It is not calculated to result in
the securities becoming available to other persons.
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Case: Peek v Gurney (1873) LR 6 HL 377
Facts: A Company issued a prospectus in July 1865 to the general public inviting them to
subscribe for shares in the Company. The prospectus contained material misrepresentations.
Peek, who was not an original allottee, bought his shares in the Company on the stock market
in October and December 1865. The Company having gone into liquidation Peek became liable
as a contributory and paid £100,000 on his shares in the winding up. Peek sought an indemnity
from the Directors of the Company on the ground that their misrepresentations in the prospectus
had caused him to buy the shares.
Issue: Was the prospectus issued and intended for only the original allotees and not subsequent
shareholders?
Held: It appears to me that there must be something to connect the Directors making the
representation with the party complaining that he has been deceived and injured by it; as in
Scott v Dixon, by selling a report containing the misrepresentations complained of to a person
who afterwards purchases shares upon the faith of it, or as suggested in Gerhard v Bates, by
delivering the fraudulent prospectus to a person who thereupon becomes a purchaser of shares,
or by making an allotment of shares to a person who has been induced by the prospectus to
apply for such allotment. In all these cases the parties in one way or other are brought into direct
communication; and in an action the misrepresentation would be properly alleged to have been
made by the Defendant to the Plaintiff; but the purchaser of shares in the market upon the
faith of a prospectus which he has not received from those who are answerable for it,
cannot by action upon it so connect himself with them as to render them liable to him for
the misrepresentations contained in it, as if it had been addressed personally to himself. I
therefore think that the Appellant cannot make the Respondents responsible to him for
the loss he has sustained by trusting to the prospectus issued by them inviting the public
to apply for allotments of shares.
Case: Derry v. Peek (1889) LR 14 AC 337

By a special Act the Plymouth, Devonport and District Tramways Company was authorized to
make certain tramways. The carriages used on the tramways might be moved by animal power
and, with the consent of the Board of Trade, by steam or any mechanical power for fixed periods
and subject to the regulations of the Board. By sect. 34 of the Tramways Act 1870, which
Section was incorporated in the special Act, "all carriages used on any tramway shall be moved
by the power prescribed by the special Act, and where no such power is prescribed, by animal
power only." – In February 1883 the appellants as Directors of the Company issued a prospectus
containing the following paragraph:-- "One great feature of this undertaking, to which
considerable importance should be attached, is, that by the special Act of Parliament obtained,
the Company has the right to use steam or mechanical motive power, instead of horses, and it
is fully expected that by means of this a considerable saving will result in the working expenses
of the line as compared with other tramways worked by horses." – Soon after the issue of the
prospectus the respondent, relying, as he alleged, upon the representations in this paragraph and
believing that the Company had an absolute right to use steam and other mechanical power,
applied for and obtained shares in the Company. – The Company proceeded to make tramways,
but the Board of Trade refused to consent to the use of steam or mechanical power except on
certain portions of the tramways. – In the result the Company was wound up, and the respondent
in 1885 brought an action of deceit against the appellants claiming damages for the fraudulent
Page 39 of 61
misrepresentations of the defendants whereby the plaintiff was induced to take shares in the
Company.
Held: In an action of deceit the plaintiff must prove actual fraud. Fraud is proved when it is
shewn that a false representation has been made knowingly, or without belief in its truth, or
recklessly, without caring whether it be true or false. – A false statement, made through
carelessness and without reasonable ground for believing it to be true, may be evidence of fraud
but does not necessarily amount to fraud. Such a statement, if made in the honest belief that it
is true, is not fraudulent and does not render the person making it liable to an action of deceit.
Case: Shiromani Sugar Mills Ltd v. Debi Prasad, AIR 1950 All 508
Facts: The Company which was a public limited Company was formed with a large number of
objects, the first and most important object being : "to manufacture in India or abroad all kinds
of sugar by up-to-date and latest scientific method and machinery, and for this purpose to erect
and construct a factory or factories at one or several places in or outside India." – It was
incorporated on 7th November 1933 on which date the Memorandum of Association and the
Articles of Association were registered with the Registrar, Joint Stock Companies. The
prospectus was published on 16th October 1933 and was registerd with the Registrar on 26th
February 1934. On 24th November 1933, a meeting of the promoters of the Company
unanimously elected the following persons as first Directors: (1) Pandit D. P. Pandey, (2) Pandit
P. P. Pandey, (3) Pandit S. K. Pandey, (4) Chaudhri Bhagwati Prasad, (6) Mahant Vishwanath
Bharthi, (6) Pandit Ganga Narain Tewari, (7) Thakur Saran Singh, (8) Dr. P. C. Bhattacharjee,
(9) Mukut Behari Lal, (10) Pandit Tirath Raj Pandey, (11) Sahu Baldeo Prasad, (12) Abdul
Qadir Khan, (13) R. D. Sharma, ex officio and (14 N. K. Varma. – The authorised capital of
the Company was fixed at RS. 20,00,000 divided into Rs. 15,000 preferred shares of Rs. 100
each and RS. 50,000 ordinary shares of Rs. 10 each. Out of Rs. 100, the price of a preference
share, Rs. 20 were payable on application for the share, Rs. 30 were payable on the share being
allotted and the balance of Rs. 60 was payable in such call or calls as might be decided by the
Directors from time to time. – Prospectus provided on its cover in red that "the Managing
Agents with their friends, promoters and Directors have already promised to subscribe share
worth Rs. 6,00,000," printed in red on the cover of the prospectus.” This was later found to be
not true. – The defendants-opposite parties were all share-holders of the Company. Some of
them did not pay even the allotment money and others did not pay the first and second call
moneys. Consequently their shares were forfeited through resolutions passed by the Directors
in three meetings held on 14th June 1939, 23rd July 1939 and 16th October 1939. An order for
the winding up of the Company was passed on 7th December 1941. The official liquidator then
instituted the suits to recover the balance of the allotment and first and second-call moneys. –
Relevant clauses from AOA – a) Under Article 32 of the Articles of Association a share became
liable to forfeiture if the call or instalment or allotment money was not paid by the share-holder
within the fixed time. – b) The qualification of a Director as fixed under Article 156 was "the
holding of shares of Rs. 5,000 at least In the capital of the Company in his own name and right.“
– c) Article 157 provided that: "A Director may act as Director before acquiring his qualification
but shall in any case acquire the game within two months from his appointment and unless he
shall do so he shall be deemed to have agreed to take the said share from the Company and the
same shall be forthwith allotted to him accordingly.” – d) Article 131 laid down that: "All acts
done by any committee of Directors or by any person acting as a Diretor shall, notwithstanding
that it be afterwards discovered that there are some defects in appointments of any such
Directors or persons acting as aforesaid or that they or any of them are disqualified, be as valid
as if every such period have been duly appointed and was qualified to be a Director."
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Held: “What is left out does not make what is stated false.” In absence of proof indicating the
promise was never made, the non-execution of the said promise is not misstatement in
prospectus. – A share-holder's contract to purchase shares is only voidable, and not void on
account of misrepresentation in the prospectus. This means that the contract is valid till
rescinded. But a share-holder has not unlimited time within which to rescind the contract; he
must rescind it promptly, that is within reasonable time of his becoming aware of the fraud
giving him the right to rescind. – Active steps need to be taken to establish intention to rescind
share contract. – Remedy of recession cannot be instituted after a petition of winding up has
been filed.
Private Placement: As per Explanation II (ii) to Section 42(2), "private placement" means
any offer of securities or invitation to subscribe securities to a select group of persons by a
Company (other than by way of public offer) through issue of a private placement offer letter
and which satisfies the conditions specified in s. 42.
--
The Takeover Code (2011), in Regulation 6, specifically prescribes conditions upon which an
acquirer can make a “voluntary offer” to acquire shares of an Indian listed company. Regulation
6 sets out the conditions, which can be summarized as follows: 1. A voluntary offer can be
made only by a person who holds at least 25% shares in a company, but not more than 75%
(taking account of the maximum permissible public shareholding). Hence, a person who does
not hold any shares, or holds less than 25% shares, in a company cannot make a voluntary offer
without first triggering the mandatory public offer requirement by crossing the 25% threshold.
2. A voluntary offer can be made only by a person who has not acquired any shares in the target
company in the preceding 52 weeks prior to the offer. In other words, there is a 52-week
moratorium on acquisitions before the acquirer can make a voluntary offer. 3. During the offer
period, the acquirer cannot acquire shares other than through the voluntary offer. 4. Once the
voluntary offer is completed, the acquirer shall not acquire further shares in the target company
for 6 months after completion of the offer. However, this excludes acquisitions by making a
competing offer.
The Parties would be required to make the following disclosures under Chapter V of the
Takeover Code to the stock exchanges where the shares of the Target Company are listed and
to the Securities and Exchange Board of India (“SEBI”): (a) Disclosure of every acquisition of
shares in excess of 2% of the shares of the Target Company where the acquirer holds more than
5% of the shares; and (b) Annual disclosure of the aggregate shareholding of the promoters of
the Target Company and of shareholders holding more than 25% of the shares of the Target
Company.
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CORPORATE BORROWING, LENDING AND INVESTMENTS
Section 179 – Powers of the Board, Section 180 – Restrictions on powers of Board, Section
2(30) – “debentures”, Section 71 – Debentures, Section 88(1)(b) – Register of debenture-
holders, Section 186 – Loan and Investment by Company, Section 77 – Duty to register
charges.
Borrowing: In order to run a business effectively/successfully, adequate amount of capital is

necessary. – In some cases capital arranged through internal resources i.e. by way of issuing
equity share capital or using accumulated profit is not adequate and the organization resorts to
external resources of arranging capital i.e. External Commercial borrowing (ECB), Debentures,
Bank Loan, Public Fixed Deposits etc. – Thus, borrowing is a mechanism used whereby the
money is arranged through external resources with an implied or expressed intention of
returning money.
Power of the Company to borrow: The power of the Company to borrow is exercised by its
Directors, who cannot borrow more than the sum authorized. – The powers to borrow money
and to issue debentures whether in or outside India can only be exercised by the Directors at a
duly convened meeting. Pursuant to Section 179(3) (c) & (d), Directors must pass a resolution
at a duly convened Board Meeting to borrow money. – The power to issue debentures cannot
be delegated by the Board of Directors. However, the power to borrow monies can, however,
be delegated by a resolution passed at a duly convened meeting of the Directors to a committee
of Directors, managing Director, manager or any other principal officer of the Company. – The
resolution must specify the total amount up to which the moneys may be borrowed by the
delegates. – Often the power of the Company to borrow is unrestricted, but the authority of the
Directors acting as its agents is limited to a certain extent. – For example, Section 180(1)(c) of
the Act prohibits the Board of Directors of a Company from borrowing a sum which together
with the monies already borrowed exceeds the aggregate of the paid-up share capital of the
Company and its free reserves apart from temporary loans obtained from the Company’s
bankers in the ordinary course of business unless they have received the prior sanction of the
Company by a special resolution in general meeting.
Unauthorised or Ultra Vires borrowings: Where a Company borrows without the authority
conferred on it by the Articles or beyond the amount set out in the Articles, it is an ultra vires
borrowing. Any act which is ultra vires the Company is void. – In such a case the contract is
void and the lender cannot sue the Company for the return of the loan. The securities given for
such ultra-vires borrowing are also void and inoperative. – Ultra vires borrowings cannot even
be ratified by a resolution passed by the Company in general meeting. – However, equity assists
the lender where the common law fails to do so. In equity, there are following remedies:
a) Injunction and Recovery: Under the equitable doctrine of restitution he can obtain an
injunction provided he can trace and identify the money lent, and any property which the
Company has bought with it. Even if the monies advanced by the lender cannot be traced, the
lender can claim repayment if it can be proved that the Company has been benefited thereby;
b) Subrogation: Where the money of an ultra vires borrowing has been used to pay off lawful
debts of the Company, he would be subrogated to the position of the creditor paid off;
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c) Suit against Directors: In case of ultra vires borrowing, the lender may be able to sue the
Directors for breach of warranty of authority, especially if the Directors deliberately
misrepresented their authority [Executors v. Himphreys (1866) QBD 64].
Intra Vires borrowing, but outside agent’s authority: Where the borrowing is intra vires the
Company but outside the authority of the Directors e.g. where the Articles provide that the
Directors shall have the power only up to ` 100 lacs and prior approval of the shareholders
would be required to borrow beyond ` 100 lacs; any borrowing beyond `100 lacs without
shareholders approval i.e. ultra vires the Directors can be ratified by the Company and become
binding on the Company. – The Company would be liable, particularly if the money has been
used for the benefit of the Company. Here the legal position is quite clear. The Company has
power or capacity to borrow, but the authority of the Directors is restricted either by the Articles
of the Company or by the statute, and they have exceeded it. The Company may, if it wishes,
ratify the agent’s act in which case the loan binds the Company and the lender as if it had been
made with Company’s authority in the first place. – Where the borrowing is intra vires the
Company but outside the authority of the Directors e.g. where the Articles provide that the
Directors shall have the power only up to ` 100 lacs and prior approval of the shareholders
would be required to borrow beyond ` 100 lacs; any borrowing beyond `100 lacs without
shareholders approval i.e. ultra vires the Directors can be ratified by the Company and become
binding on the Company. – The Company would be liable, particularly if the money has been
used for the benefit of the Company. Here the legal position is quite clear. The Company has
power or capacity to borrow, but the authority of the Directors is restricted either by the Articles
of the Company or by the statute, and they have exceeded it. The Company may, if it wishes,
ratify the agent’s act in which case the loan binds the Company and the lender as if it had been
made with Company’s authority in the first place. – On the other hand, the Company may refuse
to ratify the agent’s act. Here the normal principles of agency apply. The doctrine of Indoor
Management (also known as rule in Royal British Bank v. Turquand (1856) CI & B 327) shall
protect the lender, provided he can establish that he advanced the money in good faith. – A
third-party who deals with an agent knowing that the agent is exceeding his authority has no
right of action against the principal. – Bearing in mind that the Memorandum and Articles are
public documents, the contents of which the third-party is deemed to know, he will obviously
have no right of action against the Company if the agent’s lack of authority is obvious from
reading them. But a third-party is not effected by secret restrictions on the agent’s authority, as
the lack of authority is not clear from the public documents and the lender can not be aware of
it from some other source. Therefore, the Company will be liable.
Types of borrowings: A Company uses various kinds of borrowing to finance its operations.
The various types of borrowings can generally be categorized into: 1A. Long Terms
Borrowings: Funds borrowed for a period ranging for five years or more are termed as long-
term borrowings. A long term borrowing is made for getting a new project financed or for
making big capital investment etc. Generally Long term borrowing is made against charge on
fixed Assets of the Company; 1B. Short Term Borrowings: Funds needed to be borrowed for
a short period say for a period up to one year or so are termed as short term borrowings. This is
made to meet the working capital need of the Company. Short term borrowing is generally
made on hypothecation of stock and debtors; 1C. Medium Term Borrowings: Where the
funds to be borrowed are for a period ranging from two to five years, such borrowings are
termed as medium term borrowings. The commercial banks normally finance purchase of land,
machinery, vehicles etc; 2A Secured/unsecured borrowing: A debt obligation is considered
secured, if creditors have recourse to the assets of the Company on a proprietary basis or
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otherwise ahead of general claims against the Company; 2B Unsecured debts comprise
financial obligations, where creditors do not have recourse to the assets of the Company to
satisfy their claims; 3A Syndicated borrowing:if a borrower requires a large or sophisticated
borrowing facility this is commonly provided by a group of lenders known as a syndicate under
a syndicated loan agreement. The borrower uses one agreement covering the whole group of
banks and different types of facility rather than entering into a series of separate loans, each
with different terms and conditions; 3B Bilateral borrowing refers to a borrowing made by a
Company from a particular bank/financial institution. In this type of borrowing, there is a single
contract between the Company and the borrower; 4A Private borrowing comprises bank-loan
type obligations whereby the Company takes loan from a bank/financial Institution; 4B Public
borrowing is a general definition covering all financial instruments that are freely tradable on
a public exchange or over the counter, with few restrictions i.e. Debentures, Bonds etc.
Borrowing on security of property: The power to borrow includes the power to give security,
which may take the form of a mortgage, a charge, hypothecation, lien, guarantee, pledge etc.
The creditor’s position becomes safer when security is given, for he will not only be able to sue
the Company for the amount of money which he has lent to it, but he will also be able to enforce
his security, i.e., claim that the property charged belongs to him to the extent of the total amount
due to him.
Debentures: According to Section 2(30) of Companies Act 2013 “debenture” includes

debenture stock, bonds or any other instrument of a Company evidencing a debt, whether
constituting a charge on the assets of the Company or not; – It is evident from the definition
that the term debentures covers both secured and unsecured debentures. – Classification of
Debentures: (1) convertibility of the instrument, (2) Security of the Instrument, (3) Redemption
ability, (4) Registration of Instrument.
On the basis of convertibility: a) Non Convertible Debentures (NCD): These instruments
retain the debt character and can not be converted into equity shares; b) Partly Convertible
Debentures (PCD): A part of these instruments are converted into Equity shares in the future
at notice of the issuer. The issuer decides the ratio for conversion. This is normally decided at
the time of subscription; c) Fully convertible Debentures (FCD): These are fully convertible
into Equity shares at the issuer's notice. The ratio of conversion is decided by the issuer. Upon
conversion the investors enjoy the same status as ordinary shareholders of the Company; d)
Optionally Convertible Debentures (OCD): The investor has the option to either convert
these debentures into shares at price decided by the issuer/agreed upon at the time of issue.
On the basis of security: a) Secured Debentures: These instruments are secured by a charge
on the fixed assets of the issuer Company. So if the issuer fails on payment of either the
principal or interest amount, his assets can be sold to repay the liability to the investors. Section
71(3) of the Companies Act, 2013 provides that secured debentures may be issued by a
Company subject to such terms and conditions as may be prescribed by the Central Government
through rules; b) Unsecured Debentures: These instrument are unsecured in the sense that if
the issuer defaults on payment of the interest or principal amount, the investor has to be along
with other unsecured creditors of the Company, they are also said to be naked debentures.
On the basis of redeemability: a) Redeemable Debentures: It refers to the debentures which
are issued with a condition that the debentures will be redeemed at a fixed date or upon demand,
or after notice, or under a system of periodical drawings. Debentures are generally redeemable
and on redemption these can be reissued or cancelled. The person who has been re-issued the
debentures shall have the same rights and priorities as if the debentures had never been
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redeemed; b) Perpetual or Irredeemable Debentures: A Debenture, in which no time is fixed

for the Company to pay back the money, is an irredeemable debenture. The debenture holder
cannot demand payment as long as the Company is a going concern and does not make default
in making payment of the interest. – But all debentures, whether redeemable or irredeemable
become payable on the Company going into liquidation. However, after the commencement of
the Companies Act, 2013, now a Company cannot issue perpetual or irredeemable debentures.
On the basis of charge: a) Registered Debentures: Registered debentures are made out in the
name of a particular person, whose name appears on the debenture certificate and who is
registered by the Company as holder on the Register of debenture holders. Such debentures are
transferable in the same manner as shares by means of a proper instrument of transfer duly
stamped and executed and satisfying the other requirements specified in Section 56 of the
Companies Act, 2013; b) Bearer debentures: Bearer debentures on the other hand, are made
out to bearer, and are negotiable instruments, and so transferable by mere delivery like share
warrants. The person to whom a bearer debenture is transferred become a “holder in due course”
and unless contrary is shown, is entitled to receive and recover the principal and the interest
accrued thereon. [Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat (1971) 41 Com
Cases 1063].
Charge: A charge is a security given for securing loans or debentures by way of a mortgage on
the assets of the Company. Normally, the debentures and other borrowings of the Company are
secured by a charge on the assets of the Company. – Where property, both existing and future,
is agreed to be made available as a security for the repayment of debt and creditors have a
present right to have it made available, there is a charge created. The legal right of the creditor
can only be enforced at some future date if certain conditions governing the loan are not met.
The creditor gets no legal right either absolute or special to the property charged. He only gets
the right to have the security made available / enforced by an order of the Court.
Kinds of charge:
a) fixed or specific charge: A charge is called fixed or specific when it is created to cover assets
which are ascertained and definite or are capable of being ascertained and defined, at the time
of creating the charge e.g., land, building, or plant and machinery. A fixed charge, therefore, is
a security in terms of certain specific property, and the Company gives up its right to dispose
off that property until the charge is satisfied. – In other words, the Company can deal with such
property, subject to the charge so that the charge holder’s interest in the property is not affected
and the charge holder gets priority over all subsequent transferees except a bona fide transferee
for consideration without notice of the earlier charge. – In the winding-up of the Company, a
debenture holder secured by a specific charge will be placed in the highest ranking class of
creditors.
b) floating charge: A floating charge, as a type of security, is peculiar to companies as
borrowers. A floating charge is not attached to any definite property but covers property of a
fluctuating type e.g., stock-in-trade and is thus necessarily equitable. – A floating charge is a
charge on a class of assets present and future which in the ordinary course of business is
changing from time to time and leaves the Company free to deal with the property as it sees fit
until the holders of charge take steps to enforce their security. “The essence of a floating charge
is that the security remains dormant until it is fixed or crystallized”. – But a floating security is
not a future security. It is a present security, which presently affects all the assets of the
Company expressed to be included in it. – On the other hand, it is not a specific security; the
holder of such charge cannot affirm that the assets are specifically mortgaged to him. The assets
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are mortgaged in such a way that the mortgagor i.e. the Company can deal with them without
the concurrence of the mortgagee. – The advantage of a floating charge is that the Company
may continue to deal in any way with the property which has been charged. – The Company
may sell, mortgage or lease such property in the ordinary course of its business if it is authorized
by its Memorandum of Association.
Crystallization of floating charge: A floating charge attaches to the Company’s property
generally and remains dormant till it crystallizes or becomes fixed. The Company has a right
to carry on its business with the help of assets over which a floating charge has been created till
the happening of some event which determines this right. – A floating charge crystallizes and
the security becomes fixed in the following cases: (a) when the Company goes into liquidation;
(b) when the Company ceases to carry on its business; (c) when the creditors or the debenture
holders take steps to enforce their security e.g. by appointing receiver to take possession of the
property charged; (d) on the happening of the event specified in the deed. Effect of
Crystallization of a floating charge: On crystallization, the floating charge converts itself into a
fixed charge on the property of the Company. It has priority over any subsequent equitable
charge and other unsecured creditors. – But preferential creditors who have priority for payment
over secured creditors in the winding-up get priority over the claims of the debenture holders
having floating charge. – Although a floating charge is a present security, yet it leaves the
Company free to create a specific mortgage on its property having priority over the floating
charge. – In Government Stock Investment Co. Ltd. v. Manila Railway Co. Ltd., (1897) A.C.
81, the debentures were secured by a floating charge. Three months’ interest became due but
the debenture holders took no steps and so the charge did not crystallize but remained floating.
The Company then made a mortgage of a specific part of its property. Held, the mortgagee had
priority. The security for the debentures remained merely a floating security as the debenture
holders had taken no steps to enforce their security.
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MAJORITY RULE AND MINORTY RIGHTS
Section 241 – Application to Tribunal for relief in cases of oppression, etc., Section 242 –
Powers of Tribunal, Section 243 – Consequences of termination or modification of certain
agreements, Section 244 – Right to apply under S.241, Section 245 – Class action, Section 246
– Application of certain provisions to proceedings under S.241 or S.245
Shareholders' democracy: The concept of shareholders’ democracy in the present day corporate
world denotes the shareholders’ supremacy in the governance of the business and affairs of
corporate sector either directly or through their elected representatives. – Under the Companies
Act the powers have been divided between two segments: one is the Board of Directors and the
other is of shareholders. – The Directors exercise their powers through meetings of Board of
Directors and shareholders exercise their powers through General Meetings. – Although
constitutionally all the acts relating to the Company can be performed in General Meetings but
most of the powers in regard thereto are delegated to the Board of Directors by virtue of the
constitutional documents of the Company viz. the Memorandum of Association and Articles of
Association. – Apart from the rights which are vested in the shareholders to be exercised in
relation to the conduct of the business of the Company, the Directors of the Company have
certain obligations towards the shareholders. – The courts have determined two broad duties to
be performed by a Director: 1) Duty of utmost care and skill in managing the affairs of the
Company or else be liable for damages; and 2) Fiduciary duty to act bona fide in the interest of
the Company, not to exercise powers for collateral benefit and not to earn profit from the
position as a Director.
Powers of Majority: Voting Rights: Subject to the provisions of Act, every member of a
Company limited by shares and holding equity share capital therein, shall have a right to vote
on every resolution placed before the Company; and his voting right on a poll shall be in
proportion to his share in the paid-up equity share capital of the Company. – Member’s right to
vote is recognized as right of property and the shareholder may exercise it as he thinks fit
according to his choice and interest. – The resolution of a majority of shareholders, passed at a
duly convened and held general meeting, upon any question with which the Company is legally
competent to deal, is binding upon the minority and consequently upon the Company [North-
West Transportation Co. v. Beatty (1887) L.R. 12 A.C. 589]. Exceptions/Limitations to
Majority Rule: Firstly, the powers of the majority of members is subject to the provisions of
the Company’s Memorandum and Articles of Association – A Company cannot legally
authorize or ratify any act which being outside the ambit of the Memorandum, is ultra vires of
the Company [Ashbury Rly. Carriage and Iron Co. v. Riche, (1875) L.R. 7 H.L. 653]. Also,
where the Articles authorize the Directors to deal with any matters except those which are
outside the scope of the authority of the Directors; or with which the Directors, having power,
are unable or unwilling to deal. Secondly, the resolution of a majority must not be inconsistent
with the provisions of the Act or any other statute, or constitute a fraud on minority depriving
it of its legitimate rights.
The Principle of Non-interference (Rule in Foss v. Harbottle): The general principle of
Company law is that every member holds equal rights with other members of the Company
in the same class. The scale of rights of members of the same class must be held evenly for
smooth functioning of the Company. In case of difference(s) amongst the members the issue is
decided by a vote of the majority. – Since the majority of the members are in an advantageous
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position to run the Company according to their command, the minorities of shareholders are
often oppressed. – The Company law provides for adequate protection for the minority
shareholders when their rights are trampled by the majority. – But the protection of the
minority is not generally available when the majority does anything in the exercise of the
powers for internal administration of a Company. – The court will not usually intervene at
the instance of shareholders in matters of internal administration, and will not interfere with
the management of a Company by its Directors so long they are acting within the powers
conferred on them under the Articles of the Company. – In other words, the Articles are the
protective shield for the majority of shareholders who compose the Board of Directors for
carrying out their object at the cost of minority of shareholders. – The basic principle of non-
interference with the internal management of Company by the court is laid down in a celebrated
case of Foss v. Harbottle 67 E.R. 189; (1843) 2 Hare 461 that no action can be brought by a
member against the Directors in respect of a wrong alleged to be committed to a Company. The
Company itself is the proper party of such an action.
Case: Foss v. Harbottle

In Foss v. Harbottle, two shareholders, Foss and Turton brought an action on behalf of
themselves and all other shareholders against the Directors and solicitor of the Company
alleging that by their concerted and illegal transactions they had caused the loss of Company’s
property. It was also alleged that there was no qualified Board. – Foss and Turton claimed
damages to be paid by the defendants to the Company. – It was held by the court that the
action could not be brought by the minority shareholders although there was nothing to prevent
the Company itself, acting through the majority of its shareholders, bringing action. The wrong
done to the Company was not which could be ratified by the majority of members. The
Company (i.e. the majority) is the proper plaintiff for wrong done to the Company, so the
majority of members are competent to decide whether to commence proceedings against the
Directors. – The reasons for rule were nicely stated by Melish L.J. n MacDougall v. Gardiner,
(1875) 1 Ch. D. 13 (C.A.) at p. 25 in the following words: – “If the thing complained of is a
thing which in substance the majority of Company are entitled to do, or if something has
been done irregularly which the majority of the Company are entitled to do regularly, or if
something has been done illegally which the majority of the Company are entitled to do legally,
there can be no use in having litigation about it, the ultimate end of which is only that a meeting
has to be called, and then ultimately the majority gets its wishes.” – In Rajahmundry Electric
Supply Co. v. Nageshwara Rao AIR 1956 SC 213, the Supreme Court observed that: “The
courts will not, in general, intervene at the instance of shareholders in matters of internal
administration, and will not interfere with the management of the Company by its Directors so
long as they are acting within the powers conferred on them under Articles of the
Company. Moreover, if the Directors are supported by the majority shareholders in what they
do, the minority shareholders can, in general do nothing about it.” – From the above it follows
then that a Company being a separate legal person from the members who compose it, it is the
Company that is the proper person to bring an action.
Justification & Advantages of the Rule in Foss v. Harbottle: On becoming a member of a
Company, a shareholder agrees to submit to the will of the majority. The rule really
preserves the right of the majority to decide how the Company’s affairs shall be conducted. If
any wrong is done to the Company, it is only the Company itself, acting, as it must always
act, through its majority, that can seek to redress and not an individual shareholder. –
Moreover, a Company is a person at law, the action is vested in it and cannot be brought by a
single shareholder. Where there is a corporate body capable of filing a suit for itself to recover
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property either from its Directors or officers or from any other person then that corporate body
is the proper plaintiff and the only proper plaintiff [Gray v. Lewis, (1873) 8 Ch. Appl. 1035]. –
Main advantages: 1. Recognition of the separate legal personality of Company; 2. Need to
preserve right of majority to decide; 3. Multiplicity of futile suits avoided; 4. Litigation at
suit of a minority futile if majority does not wish it: If the irregularity complained of is one
which can be subsequently ratified by the majority it is futile to have litigation about it except
with the consent of the majority in a general meeting.
The Delhi High Court in ICICI v. Parasrampuria Synthetic Ltd. SSL, July 5, 1998 has held that
an automatic application of Foss v. Harbottle Rule to the Indian corporate realities would be
improper. – Here the Indian corporate sector does not involve a large number of small
individual investors but predominantly financial institutions funding atleast 80% of the finance.
It is these financial institutions which provide entire funds for the continuous existence and
corporate activities. – Though they hold only a small percentage of shares, it is these financial
institutions which have really provided the finance for the Company’s existence and, therefore,
to exclude them or to render them voiceless on an application of the principles of Foss v.
Harbottle Rule would be unjust and unfair.
Exceptions to the Rule in Foss v. Harbottle — Protection of Minority Rights and

shareholders’ remedies: The rule in Foss v. Harbottle is not absolute but is subject to certain
exceptions. In other words, the rule of supremacy of the majority is subject to certain exceptions
and thus, minority shareholders are not left helpless, but they are protected by: (a) the common
law; and (b) the provisions of the Companies Act, 2013.
Actions by Shareholders in Common Law: The cases in which the majority rule does not
prevail are commonly known as exceptions to the rule in Foss v. Harbottle and are available to
the minority. – In all these cases an individual member may sue for declaration that the
resolution complained of is void, or for an injunction to restrain the Company from passing it.
a) Ultra Vires acts: In Bharat Insurance Ltd. v. Kanhya Lal, A.I.R. 1935 Lah. 792, the plaintiff
was a shareholder of the Bharat Insurance Company. One of the objects of the Company was :
“To advance money at interest on the security of land, houses, machinery and other property
situated in India...” The plaintiff complained that “several investments had been made by the
Company without adequate security and contrary to the provisions of the Memorandum
and therefore, prayed for perpetual injunction to restrain it from making such investments”. –
The Court observed: “In all matters of internal management, the Company itself is the best
judge of its affairs and the Court should not interfere. But application of assets of a Company
is not a matter of internal management. As Directors are acting ultra vires in the application of
the funds of the Company, a single member can maintain a suit”.
b) Fraud on minority: Where an act done by the majority amounts to a fraud on the minority;
an action can be brought by an individual shareholder. This principle was laid down as an
exception to the rule in Foss v. Harbottle in a number of cases. – In Menier v. Hooper’s
Telegraph Works, (1874) L.R. 9 Ch. App. 350, it was observed that it would be a shocking
thing if the majority of shareholders are allowed to put something into their pockets at the
expenses of the minority. – In this case, the majority of members of Company 'A' were also
members of Company 'B', and at a meeting of Company 'A' they passed a resolution to
compromise an action against Company 'B', in a manner alleged to be favourable to Company
'B', but unfavourable to Company 'A'. Held, the minority shareholders of Company 'A' could
bring an action to have the compromise set aside.
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c) Wrongdoers in control: If the wrongdoers are in control of the Company, the minority
shareholders’ representative action for fraud on the minority will be entertained by the court
[Cf. Birch v. Sullivan, (1957) 1 W.L.R. 1274]. – The reason for it is that if the minority
shareholders are denied the right of action, their grievances in such case would never reach the
court, for the wrongdoers themselves, being in control, will never allow the Company to sue
[Par Jenkins L.J. in Edwards v. Halliwell, (1950) 2 All E.R. 1064, 1067].
d) Resolution requiring Special Majority but is passed by a simple majority: A shareholder
can sue if an act requires a special majority but is passed by a simple majority. Simple or rigid,
formalities are to be observed if the majority wants to give validity to an act which purports to
impede the interest of minority. – An individual shareholder has the right of action to restrain
the Company from acting on a special resolution to which the insufficient notice is served
[Baillie v. Oriental Telephone and Electric Co. Ltd., (1915) 1 Ch. 503 (C.A.); refer also
Nagappa Chettiar v. Madras Race Club, 1 M.L.J. 662].
e) Personal Actions: Individual membership rights cannot be invaded by the majority of
shareholders. He is entitled to all the rights and privileges appertaining to his status as a
member. An individual shareholder can insist on the strict compliance with the legal rules,
statutory provisions. Provisions in the Memorandum and the Articles are mandatory in nature
and cannot be waived by a bare majority of shareholders [Salmon v. Quin and Aztens, (1909)
A.C. 442]. – In Nagappa Chettiar v. Madras Race Club, (1949) 1 M.L.J. 662 at 667, it was
observed by the Court that “An individual shareholder is entitled to enforce his individual
rights against the Company, such as, his right to vote, the right to have his vote recorded,
or his right to stand as a Director of a Company at an election.
f) Breach of Duty: The minority shareholder may bring an action against the Company, where
although there is no fraud, there is a breach of duty by Directors and majority shareholders
to the detriment of the Company. – In Daniels v. Daniels, (1978) 2 W.L.R. 73, the plaintiff,
who were minority shareholders of a Company, brought an action against the two Directors of
the Company and the Company itself. In their statement of the claim they alleged that the
Company, on the instruction of the two Directors who were majority shareholders, sold the
Company’s land to one of the Directors (who was the wife of the other) for £ 4,250 and
the Directors knew or ought to have known that the sale was at an under value. Four years
after the sale, she sold the same land for £ 1,20,000. The Directors applied for the statement
of claim to be disclosed on reasonable cause of action or otherwise as an abuse of the process
of the Court.
g) Prevention of Oppression and Mismanagement: The minority shareholders are
empowered to bring action with a view to preventing the majority from oppression and
mismanagement. These are the statutory rights of the minority shareholders. – In Bennet
Coleman & Co. and Ors. v. Union of India & Ors., (1977) 47 Com Cases 92 (Bom), the
Division Bench of the Bombay High Court held that Sections 397 and 398 of the Companies
Act, 1956 are intended to avoid winding up of the Company if possible and keep it going
while at the same time relieving the minority shareholders from acts of oppression and
mismanagement or preventing its affairs from being conducted in a manner prejudicial to public
interest. – Thus, the Court has wide powers to supplant the entire corporate management by
resorting to non-corporate management which may take the form of appointing an
administrator or a special officer or a committee of advisers etc., who will be in charge of the
affairs of the Company.
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Statutory Remedies (under the Companies Act, 2013): Under Companies Act 2013 various
powers are given to the shareholders. Further, under Section 163 a Company may adopt
principle of proportional representation. Under Section 151 small shareholders of a listed
Company may appointment their Director on the Board. – Central Government may direct the
Company to amend its Articles providing for appointment of Directors according to the
principle of proportional representation under Section 163 and make fresh appointment in
pursuance of the Articles so amended within such time as may be specified. – The Companies
Act, 2013, extends protection to minority by granting various rights to minority shareholders
which are as follows: (a) The variation of class rights: The rights attached to the shares of any
class can be varied under Section 48 of the Act with the consent in writing of the holder of not
less than three-fourths of the issued shares of that class or with the sanction of a special
resolution passed at a separate meeting of the holders of the issued shares of that class. But the
holders of not less than 10% of the shares of that class who had not assented to the variation
may apply to the Tribunal for the cancellation of the variation; (b) Schemes of reconstruction
and amalgamation: The minority is accorded protection in cases where they dissent to the
scheme of reconstruction or amalgamation; (c) Oppression and mismanagement: The
principle of majority rule does not apply to cases where Sections 241 and 242 are applicable
for prevention of oppression and mismanagement; – A member, who complains that the affairs
of the Company are being conducted, in a manner oppressive to some of the members including
himself, or against public interest, he may apply to the Tribunal by petition under Section 241
of the Act. – (d) Alternative remedy to winding up: Any member or members, who complain
that the affairs of the Company are being conducted in a manner oppressive to some of the
members including themselves, may apply to the Tribunal for redressal (Section 241); (e)
Investigation by the Government: Under Section 210 of the Act the Central Government may
appoint one or more competent persons as inspectors to investigate the affairs of any Company
and to report thereon in such manner as the Central Government may direct.
Prevention of Oppression and Mismanagement: This statutory protection for prevention of
oppression and mismanagement is an alternative remedy to winding up of the affairs of the
Company. The reason is that the oppressed minority may file petition with the Tribunal to wind
up the Company. However, the Company may be a sound and profitable concern. In that case,
the petitioners will not only be deprived of whatever dividends they might have been getting
but also the value of the assets of the Company might be substantially reduced. – The oppressed
minority, therefore, are willing in such cases not to end the Company but to mend it. Section
241 of the Companies Act, 2013, is intended to give a remedy alternative to compulsory
winding up in such cases.
Oppression: The words “oppression” and “mismanagement” are not defined in the Act. – An
attempt to force new and more risky objects upon an unwilling minority may in
circumstances amount to oppression. – This was held in Re. Hindustan Co-operative Insurance
Society Ltd., AIR. 1961 Cal. 443 wherein the life insurance business of a Company was
acquired in 1956 by the Life Insurance Corporation of India on payment of compensation. The
Directors, who had the majority voting power, refused to distribute this amount among
shareholders, rather they passed a special resolution changing the objects of the Company to
utilize the compensation money for the new objects. This was held to be an “Oppression”. The
court observed: “The majority exercised their authority wrongfully, in a manner burdensome,
harsh and wrongful. – They attempted to force the minority shareholders to invest their money
in different kind of business against their will. – Minor acts of mismanagement, however,
are not to be regarded as oppression. As far as possible, shareholders should try to resolve
their differences by mutual readjustment. Moreover, the courts will not allow these special
remedies to become a vexatious source of litigation. – For example, in Lalita Rajya Lakshmi v.
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Indian Motor Co. A.I.R. 1962 Cal 127, the petitioner alleged that the income of the Company
was deliberately shown less by excessive expenditure; that passengers travelling without ticket
on the Company’s buses were not checked; that petrol consumption was not properly checked;
that second hand buses of the Company had been disposed of at low price, that dividends were
being declared at too low a figure. It was held that even if each of these allegations were proved
to the satisfaction of the court, there would have been no oppression.
Oppression must be of a continuous nature: “Oppression must be a continuous process. This is
suggested by the words, 'are being conducted in a manner...’ used in Section 241. Hence isolated
acts of oppression or mismanagement will not give rise to an action under Section 241 of the
Act. In Shanti Pd. Jain’s Case, the court said:... "events have to be considered not in isolation
but as a part of a consecutive story. There must be continuous acts on the part of the majority
shareholders, continuing up-to-date of petition.” – However in Tea Brokers P. Ltd. v. Hemendra
Prosad Barooah (1998) 5 Comp LJ 963 (Cal.) the Division Bench of Calcutta High Court
observed that: ‘This is undoubtedly, a right and privilege which a member enjoys in his capacity
as a member of the Company… such an act may be even a single act done on one particular
occasion if the effect of such an act will be of a continuing nature and the member concerned
is deprived of his rights and privilege for all time to come in future’.
Prejudicial to public interest: Relief under Section 241 will also be available if the affairs of the
Company are being conducted in a way prejudicial to public interest. – ‘Public interest’ is a
very broad term involving the welfare not only of the individual shareholders but also of the
country according to the economic and social policies of the State. – The concept of ‘Social
profitability’ is very much akin to public interest.
Winding-up order under just and equitable clause: The other requirement is that the facts justify
the making of a winding up order under just and equitable clause. – The principle is that if there
is persistent violation of the regulations and statutes and an appeal to general body is not likely
to put an end to the matters complained of by reason of the fact that those responsible for the
violations control the affairs of the Company, then it will be just and equitable to wind up the
Company, [Ramjilal Baisiwala v. Baiton Cables Ltd.].
Winding-up order would unfairly prejudice petitioners: Though it is necessary that facts should
justify winding up, instead of winding up an alternative relief is provided if the facts are such
that the winding up would unfairly prejudice the interest of the complaining members.
Case: Rajahmundry Electric Supply Corporation v. A. Nageswara Rao, AIR 1956 SC 213.,
A very clear illustration of mismanagement contemplated by the Section is Rajahmundry
Electric Supply Corporation v. A. Nageswara Rao, AIR 1956 SC 213., – In this case, a petition
was brought against a Company by certain shareholders on the ground of mismanagement by
Directors. The court found that the vice-chairman grossly mismanaged the affairs of the
Company and had drawn considerable amounts for his personal purpose, that large amounts
were owing to the Government for charges for supply of electricity, that machinery was in a
state of disrepair, that the Directorate had become greatly attenuated and “a powerful local junta
was ruling the roost”, and that the shareholders outside the group of the chairman were
powerless to set matters right. This was held to be sufficient evidence of mismanagement. –
The Court accordingly appointed two administrators for the management of the Company for
a period of six months vesting in them all the powers of the Directorate.
Persons Entitled to Apply: The number of members required to make application under Sections
241 and 242 (i.e., who must sign the application) is given in Section 244. It provides that where
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the Company has a share capital, the application must be signed by at least 100 members of
the Company or by one-tenth of the total number of the members, whichever is less; or by any
member or members holding not less than one-tenth of the issued share capital of the
Company. – If the Company has no share capital, the application has to be signed by at least
one-fifth of the total number of its members. – The Central Government may, however, allow
any member or members to apply, if in its opinion, circumstances exist which make it just and
equitable to do so. – Once the consent has been given by the requisite number of members
by signing the application, the application may be made by one or more of them on behalf
and for the benefit of all of them. It has been held by the Supreme Court in Rajahmundry
Electric Supply Co. v. Nageshwara Rao, AIR 1956 SC 213, that if some of the consenting
members have, subsequent to the presentation of the application, withdrawn their consent, it
would not affect the right of the applicant to proceed with the application. – Obtaining of
consent is a condition precedent to the making of the application and hence a consent obtained
subsequent to the application is ineffective. Makhan Lal Jain v. The Amrit Banaspati Co. Ltd.,
I.L.R. (1954) I All. 131.
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CORPORATE RESTRUCTURING
Section 230 – Power to compromise or make arrangements with creditors and members,
Section 232 – Merger and Amalgamation of Companies.
Arrangement and reconstruction are not defined in the Act and they have no precise legal
meaning. They describe any form of internal re-organisation and scheme for the amalgamation
of two or more companies. Arrangement may be for re-organisation of capital structure, or it
may be with the creditors of a Company. Compromise may be effected by negotiation and
agreement. Where it cannot be achieved in this way, the Company can resort to amalgamation
through the Tribunal. – The process for amalgamation and reconstruction is the same. However,
the purposes are different. Amalgamation is reconstruction of two or more companies. In a
reconstruction, the same Company emerges in a new form with the same members and
debenture-holders. The purpose of amalgamation may be to take over a competing business or
a complementary business.
Compromise or Arrangement – Section 230(1) states that when a compromise or

arrangement is proposed— (a) between a Company and its creditors or any class of them; or
(b) between a Company and its members or any class of them, – the Tribunal may, on the
application of the (i) Company or (ii) of any creditor or (iii) member of the Company, or (iv)
in the case of a Company which is being wound up, of the liquidator, – order a meeting of the
creditors or class of creditors, or of the members or class of members, as the case may be, to be
called, held and conducted in such manner as the Tribunal directs.
Affidavit by the applicant to disclose certain material facts – Section 230 (2) states that the
Company or any other person, by whom an application is made under sub- Section (1), shall
disclose to the Tribunal by affidavit— (a) all material facts relating to the Company; (b)
reduction of share capital of the Company, if any, included in the compromise or arrangement;
(c) any scheme of corporate debt restructuring consented to by not less than seventy-five per
cent. of the secured creditors in value.
Notice of the meeting: Section 230(3) states that when a meeting is proposed to be called in
pursuance of an order of the Tribunal under sub-Section (1), a notice of such meeting shall be
sent to all the creditors or class of creditors and to all the members or class of members and the
debenture-holders of the Company, individually at the address registered with the Company
which shall be accompanied by • a statement disclosing the details of the compromise or
arrangement, • a copy of the valuation report, if any, and • explaining their effect on creditors,
key managerial personnel, promoters and non-promoter members, and the debenture-holders
and • the effect of the compromise or arrangement on any material interests of the Directors of
the Company or the debenture trustees, and • such other matters as may be prescribed – Notice
to provide for voting by themselves or through proxy or through postal ballot. – Who can
Object to the scheme?: Any objection to the compromise or arrangement shall be made only
by persons holding not less than ten per cent. of the shareholding or having outstanding debt
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amounting to not less than five per cent of the total outstanding debt as per the latest audited
financial statement.
Notice to be sent to the regulators seeking their representations: Section 230(5) states that
a notice under sub-Section (3) along with all the documents in such form as may be prescribed
shall also be sent to the Central Government, the income-tax authorities, the Reserve Bank of
India, the Securities and Exchange Board, the Registrar, the respective stock exchanges, the
Official Liquidator, the Competition Commission of India established under sub-Section (1) of
Section 7 of the Competition Act, 2002, if necessary, and such other sectoral regulators or
authorities which are likely to be affected by the compromise or arrangement and shall require
that representations, if any, to be made by them shall be made within a period of thirty days
from the date of receipt of such notice, failing which, it shall be presumed that they have no
representations to make on the proposals.
Approval and sanction of the scheme: Section 230(6) states that when at a meeting held in
pursuance of sub-Section (1), majority of persons representing three-fourths in value of the
creditors, or class of creditors or members or class of members, as the case may be, voting in
person or by proxy or by postal ballot, agree to any compromise or arrangement; and – if such
compromise or arrangement is sanctioned by the Tribunal by an order, the same shall be
binding on the Company, all the creditors, or class of creditors or members or class of members,
as the case may be, or, in case of a Company being wound up, on the liquidator and the
contributories of the Company.
Order of tribunal to be filed with the Registrar: Section 230(8) states that the order of the
Tribunal shall be filed with the Registrar by the Company within a period of thirty days of the
receipt of the order. – Tribunal may dispense with calling of meeting of creditors: Section
230(9) states that the Tribunal may dispense with calling of a meeting of creditor or class of
creditors where such creditors or class of creditors, having at least ninety per cent value, agree
and confirm, by way of affidavit, to the scheme of compromise or arrangement.
Compromise in respect of buy back is to be in compliance with Section 68 of the Act: As

per Section 230(10), no compromise or arrangement in respect of any buy-back of securities
under this Section shall be sanctioned by the Tribunal unless such buy-back is in accordance
with the provisions of Section 68. – Compromise includes takeover: Section 230(11) states that
any compromise or arrangement may include takeover offer made in such manner as may be
prescribed. In case of listed companies, takeover offer shall be as per the regulations framed by
the Securities and Exchange Board.
Power of tribunal to enforce compromise or arrangement: As per Section 231(1) when the
Tribunal makes an order under Section 230 sanctioning a compromise or an arrangement in
respect of a Company, it— (a) shall have power to supervise the implementation of the
compromise or arrangement; and (b) may, at the time of making such order or at any time
thereafter, give such directions in regard to any matter or make such modifications in the
compromise or arrangement as it may consider necessary for the proper implementation of the
compromise or arrangement. – Sub-Section (2) states that if the Tribunal is satisfied that the
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compromise or arrangement sanctioned under Section 230 cannot be implemented satisfactorily

with or without modifications, and the Company is unable to pay its debts as per the scheme, it
may make an order for winding up the Company and such an order shall be deemed to be an
order made under Section 273.
Tribunal’s power to call meeting of creditors or members, with respect to merger or

amalgamation: Section 232(1) states that when an application is made to the Tribunal under
Section 230 for the sanctioning of a compromise or an arrangement proposed between a
Company and any such persons as are mentioned in that Section, and it is shown to the
Tribunal— (a) that the compromise or arrangement has been proposed for the purposes of, or
in connection with, a scheme for the reconstruction of the Company or companies involving
merger or the amalgamation of any two or more companies; and (b) that under the scheme, the
whole or any part of the undertaking, property or liabilities of any Company (hereinafter
referred to as the transferor Company) is required to be transferred to another Company
(hereinafter referred to as the transferee Company), or is proposed to be divided among and
transferred to two or more companies, the Tribunal may on such application, order a meeting
of the creditors or class of creditors or the members or class of members, as the case may be,
to be called, held and conducted in such manner as the Tribunal may direct and the provisions
of sub-Sections (3) to (6) of Section 230 shall apply mutatis mutandis.
Circulation of documents for members/creditors meeting: Section 232(2) states that when
an order has been made by the Tribunal under sub-Section (1), merging companies or the
companies in respect of which a division is proposed, shall also be required to circulate the
following for the meeting so ordered by the Tribunal, namely:— (a) the draft of the proposed
terms of the scheme drawn up and adopted by the Directors of the merging Company; (b)
confirmation that a copy of the draft scheme has been filed with the Registrar; (c) a report
adopted by the Directors of the merging companies explaining effect of compromise on each
class of shareholders, key managerial personnel, promotors and non-promoter shareholders
laying out in particular the share exchange ratio, specifying any special valuation difficulties;
(d) the report of the expert with regard to valuation, if any; (e) a supplementary accounting
statement if the last annual accounts of any of the merging Company relate to a financial year
ending more than six months before the first meeting of the Company summoned for the
purposes of approving the scheme.
Sanctioning of scheme by Tribunal: Section 232(3) states that the Tribunal, after satisfying
itself that the procedure specified in sub-Sections (1) and (2) has been complied with, may, by
order, sanction the compromise or arrangement or by a subsequent order, make provision for
the following matters, namely:— (a) the transfer to the transferee Company of the whole or any
part of the undertaking, property or liabilities of the transferor Company from a date to be
determined by the parties unless the Tribunal, for reasons to be recorded by it in writing, decides
otherwise; (b) the allotment or appropriation by the transferee Company of any shares,
debentures, policies or other like instruments in the Company which, under the compromise or
arrangement, are to be allotted or appropriated by that Company to or for any person: – No
transferee Company can hold shares in its own name or under any trust ; (c) the continuation
by or against the transferee Company of any legal proceedings pending by or against any
transferor Company on the date of transfer; (d) dissolution, without winding-up, of any
transferor Company; (e) the provision to be made for any persons who, within such time and in
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such manner as the Tribunal directs, dissent from the compromise or arrangement; (f) where
share capital is held by any non-resident shareholder under the foreign direct investment norms
or guidelines specified by the Central Government or in accordance with any law for the time
being in force, the allotment of shares of the transferee Company to such shareholder shall be
in the manner specified in the order; (g) the transfer of the employees of the transferor Company
to the transferee Company; (i) where the transferor Company is dissolved, the fee, if any, paid
by the transferor Company on its authorized capital shall be set-off against any fees payable by
the transferee Company on its authorized capital subsequent to the amalgamation; and (j) such
incidental, consequential and supplemental matters as are deemed necessary to secure that the
merger or amalgamation is fully and effectively carried out:
Transfer of property or liabilities: Sub-Section (4) stares that an order under this Section
provides for the transfer of any property or liabilities, then, by virtue of the order, that property
shall be transferred to the transferee Company and the liabilities shall be transferred to and
become the liabilities of the transferee Company and any property may, if the order so directs,
be freed from any charge which shall by virtue of the compromise or arrangement, cease to
have effect. – Certified copy of the order to be filed with the registrar: Section 232(5) states
that every Company in relation to which the order is made shall cause a certified copy of the
order to be filed with the Registrar for registration within thirty days of the receipt of certified
copy of the order.
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WINDING-UP
Section 270 – Modes of winding-up, Section 271 – Compulsory winding-up, Section 272 –
Petition for winding-up, Sections 324 to 326 – Ranking of Debts
The entire procedure for bringing a lawful end to life of Company is divided into two stages.
These two stages are winding up and dissolution. Winding up of Company is defined as a
process by which the life of a Company is brought to an end and its property administered for
benefit of its members and creditors. It is the last stage, putting an end to life of a Company.
The main purpose of winding up is to realize the assets and make the payments of Company’s
debts fairly. Thus, winding up is the process by which management of a Company’s affairs is
taken out of its Directors, its assets are realized by a liquidator and its debts are discharged out
of proceeds of realization.
Difference between Winding-up and Dissolution: 1. Winding up is a proceeding by means

of which Company is dissolved and in course of dissolution, assets are realized, liabilities are
paid off and surplus is distributed among members. v. The legal existence of Company is
brought to an end by dissolution. – 2. Winding up precedes the dissolution. v. It is the final
stage where the existence of Company is withdrawn by law. – 3. The liquidator can present the
Company in winding up proceeding. v. Once the order of dissolution is made by the Court,
liquidator cannot represent the Company. – 4. Winding up proceeding can be started without
the intervention of the court. v. For the dissolution of the Company, order of the court is
essential. – 5. Any person can proceed against the Company which is being wound up. v. No
proceedings can be started against the Company which has been dissolved.
Difference between Winding-up and Insolvency: 1. It is a process by which Company is

dissolved. The assets are collected, liabilities are paid off out of assets or from contributions by
members and if surplus left, it is distributed among members. v. It is inability of a debtor to pay
debts as they fall due. A person is said to be insolvent when his liabilities exceeds his assets
and against whom Court makes order of adjudication. – 2. A Company cannot be adjudged as
insolvent v. An individual can be adjudged as insolvent. – 3. A Company can be wound up even
if it financially sound. v. A person can be adjudged as insolvent when he is unable to pay his
liabilities. – 4. During winding up proceeding, the property is vested in the Company. v. In
insolvency proceedings, the assets of person are vested in Official Receiver. – 5. After
completion of proceedings, the Company is dissolved. v. After completion of proceedings, the
insolvent person is discharged from liabilities.
On winding up, the Company does not cease to exist as such except when it is dissolved. The
administrative machinery of the Company gets changed as the administration is transferred in
the hands of liquidator. Even after commencement of winding-up, the assets of the Company
belong to the Company until dissolution takes place. The Company ceases to exist as a separate
entity on dissolution and becomes incapable of keeping its own property, suing and being sued.
Thus, the legal status of the Company continues to exist between the period of winding-up and
dissolution.
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In Pierce Leslie & Co. Ltd. V. Violet Ouchterlony, the Supreme Court held that winding-up
precedes the dissolution. There is no statutory provision vesting the properties of dissolved
Company in a trustee or having the effect of abrogating. The shareholders or creditors of a
dissolved Company cannot be regarded as its heirs and successors. On dissolution, its
properties, if any, vest in the government.
Petition by the Company for winding-up: The Company may make a petition through its
Directors with the authority of a special resolution passed at a general meeting. A petition by
the Company for winding up before the tribunal will be admitted only it is accompanied by the
statement of affairs, prescribed in form 4 and shall state the facts the date which shall not be
a date more than fifteen days prior to the date of making the statement. This statement shall be
certified by a chartered accountant. (Section 272(5) read with Rule 5 made under Chapter XX
of the Companies Act 2013) – Every contributory or creditor of the Company shall be entitled
to be furnished, by the petitioner or his authorized representative, with a copy of a petition. The
contributory may seek an electronic copy from the registry of tribunal on payment of prescribed
fee. (Rule 5(4) of the rules made under Chapter XX of the Companies Act 2013.
Petition by Creditor: A creditor or creditors (including any contingent or prospective creditor)

may make petition before the tribunal would make a winding up order on such petition if the
creditor proves that the claims are undisputed debt. – Contingent or prospective Creditor:
Section 272(6) states that before a petition for winding up of a Company presented by a
contingent or prospective creditor is admitted, the leave of the Tribunal shall be obtained for
the admission of the petition and such leave shall not be granted, unless in the opinion of the
Tribunal there is a prima facie case for the winding up of the Company and until such security
for costs has been given as the Tribunal thinks reasonable. – Rule 5(3) of Chapter XX states
that a contingent or prospective creditor is one who is able to prove that he has a bonafide and
prima facie case to establish his claim to the satisfaction of the Tribunal. – And his application
shall be in accordance with sub-Section (6) of Section 272 to seek the leave of the Tribunal for
the admission of the petition in Form No. 5. along with the fees as prescribed.
Creditor: The expression “creditors” includes the assignee of debt, a decree holder, a secured
creditor, a debenture holder or the trustee for debenture holders. – But a creditor whose debt is
unliquidated cannot apply for winding up order. – A contingent or prospective creditor can
present petition on giving security for costs and showing that a prima facie case has arisen. – A
petition by a secured creditor for winding up may not be allowed by the Court where the security
is ample and the petition is not supported by the other creditors.
Unliquidated: A claim is said to be unliquidated if there is “a genuine dispute regarding either

the amount due or the debtor’s liability.” – Thus, when the debtor tenders part payment of an
unliquidated debt in full satisfaction of the debt and the creditor accepts the same, it will be
deemed to be an accord and satisfaction of the existing debt. – On the other hand, in a liquidated
claim, the subject matter, whether it is monetary consideration or otherwise, is definite and
fixed and therefore is clearly ascertainable. For instance, if there was no dispute as to prices of
material or hours of labor in a service agreement, and the basis of computation is provided in
the agreement, the claim is deemed to be a liquidated one.
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Petition by Contributory: Section 2(26) defines “contributory” means a person liable to

contribute towards the assets of the Company in the event of its being wound up. – For the
purposes of this clause, it is hereby clarified that a person holding fully paid-up shares in a
Company shall be considered as a contributory but shall have no liabilities of a contributory
under the Act whilst retaining rights of such a contributory; – Section 273(2) states that a
contributory shall be entitled to present a petition for the winding up of a Company,
notwithstanding that he may be the holder of fully paid-up shares, or that the Company may
have no assets at all or may have no surplus assets left for distribution among the shareholders
after the satisfaction of its liabilities, and shares in respect of which he is a contributory or some
of them were either originally allotted to him or have been held by him, and registered in his
name, for at least six months during the eighteen months immediately before the
commencement of the winding up or have devolved on him through the death of a former
holder.
Petition by Registrar: The Registrar shall be entitled to present a petition for winding up under
sub- Section (1) on any of the grounds specified in sub-Section (1) of Section 271, except on
the grounds specified in clause (b), clause (d) or clause (g) of that sub-Section. – The Registrar
shall not present a petition on the ground that the Company is unable to pay its debts unless it
appears to him either from the financial condition of the Company as disclosed in its balance
sheet or from the report of an inspector appointed under Section 210 that the Company is unable
to pay its debts. – The Registrar shall obtain the previous sanction of the Central Government
to the presentation of a petition.
Voluntary Winding-up Under INSOLVENCY AND BANKRUPTCY CODE, 2016: As per

Section 59 of the Code, the voluntary liquidation process can only be initiated by a corporate
person, which has not committed any default. Default here includes those debts that are not
repaid and has become due and payable. The compliances of some requirements are necessary.
Procedure:
STEP 1: One has to submit a declaration to Registrar of Companies, stating that Company will
pay its dues and liquidation is not to defraud any person;
STEP 2: Within 4 weeks of such declaration, special resolution (in General Meeting with
creditors and members) has to be passed for approval of proposal of voluntary liquidation and
appointment of liquidator;
STEP 3: Within 5 days of such approval, public announcement in newspaper and website of
Company has to be made for inviting claims of stakeholders;
STEP 4: Within 7 days of such approval, intimation should be given to ROC and Board;
STEP 5: Submission of preliminary report containing capital structure, estimates of assets and
liabilities, proposed plan of action within 45 days to a corporate person;
STEP 6: Verification of claims within 30 days and preparation of list of stakeholders within 45
days from the last date of receipt of claims;
STEP 7: For receipt of money due to corporate person, bank account needs to be open in name
of corporate person having words ‘in voluntary liquidation’ after its name;
STEP 8: Sale of assets and recovery of due money, uncalled capital is realised;
Page 60 of 61
STEP 9: The proceeds from realization to be distributed within 6 months from receipt of
amount to the stakeholders;
STEP 10: The final report by the liquidator has to be submitted to corporate person, ROC, the
Board and application to NCLT;
STEP 11: The order of NCLT regarding dissolution to be submitted within 14 days of receipt
of order;
STEP 12: Records to be maintained for 8 years.
Page 61 of 61

Company Law Notes - Anirudh Belle

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Company Law (Notes) / Jindal Global Law School / 2017

Case: Salomon v. Salomon and Co. Ltd., (1897) A.C.

Exceptions to the Principle of Limited Liability: 1. A Company has been incorporated by

DOCTRINE OF LIFTING OF OR PIERCING THE CORPORATE

Case: Daimler Co. Ltd. v. Continental Tyre and Rubber Co.

Case: Macaura v. Northern Assurance Company (1925) AC 619

Case: Prest V Petrodel Resources Ltd & Others [2013] UKSC 34

Facts: M/s Hindustan Aluminium Corporation Ltd., (HINDALCO) established an aluminum

Case: Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613

1. Public Company [S.2(71) r/w S.3(1)(a)]

Classification Based on Liability

FUNDAMENTAL RIGHTS OF A COMPANY

Case: R.C. Cooper v. Union of India 1970 AIR SC 564

Organisation Sole Partnership LLP One person Private Public

Ownership Individual Partners Partners Individual 2 to 7 Shareholders

Liability Unlimited Unlimited- Limited to Limited to Limited to Limited to

Management Owner Partners Partners Board of Board of Board of

Formation Minimal Optional Compulsory Considerable Considerable Considerable

Profits Individual Partners Partners Individual Shareholders Shareholders

INCORPORATION, MoA & AoA

Section 3 – Formation of a Company, Section 4 – MoA, Section 5 – AoA, Section 6 – Act to

Memorandum of Association: Memorandum and Articles of Association are the most

Case: Lakshmanaswami Mudaliar v. L.I.C. AIR 1963 SC 1185

Effect of Ultra Vires transaction:

Doctrine of Indoor Management: It operates to protect outsiders against the Company. It

Case: Royal British Bank v. Turquand (1856) 6 E&B 327

Exceptions to the doctrine of Indoor Management— Relief on the ground of ‘indoor

2) No knowledge of Memorandum and Articles — In Rama Corporation v. Proved Tin &

Conflict between a shareholders’ agreement and AoA:

SHARE CAPITAL, SHAREHOLDERS AND SHAREHOLDER

Case: Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218

Case: Kelner v. Baxter, (1866) LR 2 CP 174

1. Subscribers to the MoA: In the case of a subscriber, no application or allotment is necessary

3. By transfer of shares: Shares in a Company are movable property as provided in Section 44

4. By transmission of shares: A person may become a member of a Company by operation of

5. By acquiescence or estoppel: A person is deemed to be a member of a Company if he allows

f) To share the surplus assets on winding up (Section 320);

Meeting: A meeting may be generally defined as a gathering or assembly or getting together

Case: LIC of India v. Escorts Ltd. [1986] 59 Comp Cas 548

Case: Chandrakant Khare v. Shantaram Kale, (1989) 65 Comp Cas 121 SC

Case: Aberdeen Rly Co. v. Blaikie Brothers (1854) 1 Macq 461

Case: North-West Transportation Co. Ltd. v. Beatty 12 S.C.R. 598

Case: Dale and Carrington v. Prathapam (2005) 1 SCC 212

Carrington Co. is incorporate for the purposes. No capital contribution by R. – Promoters as

Section 25 –Deemed Prospectus, Section 31 – Shelf Prospectus, Section 32 – Red Herring

Case: Peek v Gurney (1873) LR 6 HL 377

Case: Derry v. Peek (1889) LR 14 AC 337

CORPORATE BORROWING, LENDING AND INVESTMENTS

Borrowing: In order to run a business effectively/successfully, adequate amount of capital is

Debentures: According to Section 2(30) of Companies Act 2013 “debenture” includes

redeemed; b) Perpetual or Irredeemable Debentures: A Debenture, in which no time is fixed

MAJORITY RULE AND MINORTY RIGHTS

Case: Foss v. Harbottle

Exceptions to the Rule in Foss v. Harbottle — Protection of Minority Rights and

Compromise or Arrangement – Section 230(1) states that when a compromise or

Compromise in respect of buy back is to be in compliance with Section 68 of the Act: As

compromise or arrangement sanctioned under Section 230 cannot be implemented satisfactorily

Tribunal’s power to call meeting of creditors or members, with respect to merger or

Difference between Winding-up and Dissolution: 1. Winding up is a proceeding by means

Difference between Winding-up and Insolvency: 1. It is a process by which Company is

Petition by Creditor: A creditor or creditors (including any contingent or prospective creditor)

Unliquidated: A claim is said to be unliquidated if there is “a genuine dispute regarding either