Company Law

U1
Short

1) What is Chartered Company

A chartered company is an association with investors or shareholders that is incorporated
and granted rights (often exclusive rights) by royal charter (or similar instrument of
government) for the purpose of trade, exploration, and/or colonization. They are given
various privileges but have many obligations as well.

2) Who is Promoter
A promoter is a person or a group of people who come up with an idea of forming a
profitable business venture. After the idea is conceived, the promoters make initial
investigations to discover the plan's pros and cons. They also calculate working capital
needs, estimated costs and potential income.

3) What is Perpetual Succession

In company law, perpetual succession is the continuation of a corporation 's or other
organization's existence despite the death, bankruptcy, insanity, change in membership or
an exit from the business of any owner or member, or any transfer of stock, etc.
Perpetual succession means that a company's life is not determined by the longevity of
its members, shareholders, promoters, directors, employees or anyone else.

4) Company V/s partnership

BASIS FOR
PARTNERSHIP FIRM COMPANY
COMPARISON
When two or more persons agree to A company is an association of persons
carry on a business and share the profits who invests money towards a common
Meaning
& losses mutually, it is known as a stock, for carrying on a business and
Partnership firm. shares the profits & losses of the business.
Governing Act Indian Partnership Act, 1932 Indian Companies Act, 2013
Partnership firm is created by mutual The company is created by incorporation
How it is created?
agreement between the partners. under the Companies Act.
Registration Voluntary Obligatory
Minimum number of Two in case of private company and Seven
Two
persons in case of public company.
200 in case of a private company and a
Maximum number of
100 partners public company can have unlimited
persons
number of members.
Audit Not Mandatory Mandatory
Management of the
Partners itself. Directors
concern
Liability Unlimited Limited
A partnership firm cannot enter into A company can sue and be sued in its own
Contractual capacity
contracts in its own name name
Long

1) What do you mean by Company? Explain the rules related to lifting up corporate Veil.

Ans ) A company can be defined as an "artificial person", invisible, intangible, created by or

under law, with a discrete legal personality, perpetual succession, and a common seal. Except for
some senior positions, companies remain unaffected by the death, insanity, or insolvency of an
individual member.

Corporate veil is a legal term which distinguishes a company from its shareholder. According to
it the individual members shall not be personally responsible for the debts and obligations of the
company. However, they began to abuse it as a mask for fraud and unethical conduct. It is
therefore necessary for the courts to break through the corporate shell and look behind the
corporate body as if there is no independent existence of the organization from its members.
Thus where a fraudulent use is made of the business entity, the individuals concerned will not be
allowed to be protected under its corporate personality. Furthermore, if found guilty of any
wrongdoing, members can be held responsible for the acts of the company, including any unpaid
debts. This is termed as the lifting of the corporate veil.

The Rules/ Provisions / Basis On Which Corporate Veil Is Lifted

A) Under Companies Act,2013

1. Misstatement In Prospectus
In a case where the company’s prospectus is misrepresented, the company and every director,
promoter, and every other individual, who authorized such issue of prospectus shall be liable to
compensate the loss to every person who subscribed for shares on the faith of misstatement.
Also, these individuals may be punished with a jail term for a duration of not less than six
months. This duration may be extended to ten years. The concerned company and person shall
also be liable to a fine that shall not be less than the sum involved in the fraud but may extend to
three times the amount involved in the fraud.

2. Misdescription Of Name
As per the Companies Rule,2014, a company shall have its name printed on every official
document, including (hundis, promissory notes, BOE, and such other documents) as may be
mentioned.
Thus, where a company’s officer signs on behalf of the company any contract, BOE, Hundi,
promissory note or cheque or order for money, that individual shall be liable to the holder if the
name of the company is not properly mentioned.
 3. Fraudulent Conduct
In case of winding up of a company, it comes out that any business has been carried on with
intent to cheat the creditors or any other individual, or for any illicit purpose, if the Tribunal
thinks it proper so to do, be directed in person liable without limitation to obligation for all or
any debts or other obligations of the company.
Liability under the fraudulent conduct may be imposed if it is proved that the company’s
business has been carried on misguiding the creditors.

4. Ultra-Vires Acts
Directors and other officers of a company will be held liable for all those acts they have
performed on the company’s behalf if the same is ultra vires the company.

5. Failure To Return The Application Money

In case of Public Issue, if minimum subscription, as per the prospectus, has not been received
within thirty days of the issue of prospectus or such other period as may be mentioned, the
application money shall be returned within fifteen days from the closure of the issue.
However, suppose any the application money is not so repaid within such specified time. In that
case, the directors/officers of the company shall jointly and severally be liable to pay that money
with 15% per annum.
Additionally, the defaulter company and its officer shall be liable for a penalty of 1000rs/day
during which such default continues or Rs 100000, whichever is less.

B) Under other Statues-

Apart from the Companies Act,2013, the directors & other officers of the company may be held
personally accountable under the provisions of other statutes. For Instance, under the Income-tax
Act, 1962, where any private company is wound-up and if tax arrears in respect of any income of
any previous year cannot be recovered, every individual who was director of that company
during the relevant preceding year shall be jointly and severally accountable for payment of tax.

C) Under Judicial Interpretation

While initially the court, based on the principle of the separate entity as well as a district
corporate persona, refused to lift the veil of corporate governance, However, due to the rise of
corporations and the ever-growing conflict between corporations and their different stakeholders,
courts have taken a more pragmatic strategy and have lifted the veil of corporate governance.
It isn’t easy to record every court decision in which the veil was lifted. However, there are
various circumstances where the veil of corporate character can be taken off, and the people who
are behind the corporate entities could be found out and punished.

1. Improper conduct and Prevention of Fraud.

2. Formation of the Subsidiary company to act as Agent.
3. Economic offence
4. Revenue Protection
5. The company used it for illegal purposes.
6. Company ignoring welfare legislations.
7. Company acting a mere fraud.

2) Characterstics of company and classification of company

Ans ) Characteristics of a company.

1. Voluntary association.

A company is a voluntary association formed by an individual or group of individuals. Most

companies are formed with the motive of profit-making except the section 8 companies (NGO).

Profit earned is divided among the shareholders or saved for the future expansion of the

company.

2. Company is an artificial person created by law.

A company is an artificial person created by law. It is regarded as a legal person capable of

entering into contracts, owning property in its name, suing, and being sued by others.
Case Law: Union Bank of India vs Khader International Constructions and others: The

Supreme Court held that the word ‘person’ mentioned in Order 33, Rule 1 of Civil Procedure

Code, 1908, includes any company. Thus a company may also file a suit as an indigent (poor)

person.

Info: Order 33, Rule 1 of CPC permits a person to file suit under the code as an indigent person

if they cannot bear the cost of litigation.

3. Company is not a citizen.

In State Trading Corporation of India Ltd. vs CTO (Commercial Tax Officer), Supreme

Court held that the State Trade Corporation, although a legal person, is not a citizen and can act

only through a natural person.

Certain fundamental rights provided by the Indian Constitution to protect a person are also

available to a company. For example – The right to equality (Article 14).

4. Separate legal entity.

A company incorporated under the Companies Act, 2013 is treated as a separate person distinct

from its members under the law. Therefore, the company will be liable for all the acts of the

company except any illegal act done by the directors of the company.

Case Law: Salomon vs Salomon: Salomon had a business in leather and shoe manufacturing.

Due to some circumstances, he created his own company and sold his previous business of shoe

manufacturing to this company. Salomon gave one share each to his wife, daughter, sons, and the

rest of the company’s shares were held by him. After a few years, the company was wound up

and had some existing liabilities but did not have enough assets to pay off the liabilities.

Unsecured creditors sued Salomon for repayment of their money, but the court held that the
 company was not an agent or a trustee for Salomon. The company is entirely different from the

individual, and hence the contentions of the creditors could not be upheld.

5. Company has limited liability.

The liability of a company may be limited either by Shares or Guarantee.

 Company limited by Guarantee: Liability of shareholders is limited to a certain amount of

guarantee mentioned in the memorandum payable only at the time of wind up and losses

occurred by the company.

 Company limited by Shares: Liability of the members shall be limited to the extent of
unpaid money or shares held by them.

6. Company has a perpetual succession.

A company can come to an end only by the process of winding up. The death or retirement of a

person does not affect the life of a company.

7. Transferability of shares.

There are three types of companies under the Companies Act:

1. Public company.

2. Private company.

3. One Person company.

A public company is free to transfer its share from one person to another, whereas, in a private

company, the right to transfer shares is restricted. And in One Person Company (OPC), the

transferability of shares is not allowed.

8. Separate property.

As we have already studied, a company is a separate artificial person created by law, and a

company is different from its members. Therefore, a company has its separate property and can

own, enjoy, and dispose of properties in its name.

Case Law: In RF Perumal vs H. John Deavin, it was held that no member can claim

themselves to be the owner of the company’s property during its existence or its wind up. A

company cannot even have an insurable interest in the property of the company.

9. Capacity to sue and be sued.

A company can sue and be sued in its name and may even sue its members. It also has a right to

seek damages where a defamatory matter is published about the company, which affects its

business.

Case Law: Abdul Haq vs Das Mal: In this case, Das Mal was an employee in the company and

was not paid a salary for several months, and therefore he sued the directors. The court held that

the remedy lies against the company and not against the directors or members of the company.

10. Contractual rights.

A company can enter into contracts for the conduct of business in its name.

As a company is not a trustee for its shareholders, a shareholder cannot enforce a contract

established by his company because he is neither a party to the contract nor entitled to any

benefit from it.

11. Limitation of action.

A company cannot go beyond the power stated in its Memorandum of Association. The

Memorandum of Association regulates the power and fixes the objects of the company. Acts

done beyond the powers given in the Memorandum of Association are ultra-vires and hence

treated void.

12. Separate management.

Members may derive profits without being burdened with the management of the company.

13. Termination of existence.

A company is created by law; throughout its life, carries on its affairs according to the law; and

ultimately is wind up by law. A company can be terminated only by the procedure of winding

up.

B) Classification of company

1. Classification on the Basis of Incorporation.

There are three ways in which companies may be incorporated.

1. Chartered Companies: These companies can also be called sovereign companies, which

were incorporated before the Independence.

2. Statutory Companies: Statutory companies are constituted by a special Act of the Parliament

or a State Legislature. The provisions mentioned in the Companies Act, 2013 do not apply to

them. For example, the Reserve Bank of India, Institute of Company Secretaries of India.
3. Registered Companies: Companies registered and incorporated under the Companies Act,

2013 or any other previous Companies Act are called registered companies.

2. Classification Based on Liability.

There are three types of companies under this category.

1. Unlimited Liability Company: Unlimited Liability Company is defined under section 2(92)

of the Companies Act, 2013. In these types of companies, members are liable for the debts or

losses of the company, even to the extent of their personal property.

2. Companies limited by Guaranteed: It is defined under section 2(21) of the Companies Act,

2013. In this type of company, the person who has guaranteed to pay the company’s debt is

liable to pay debts only when the company is winding up and has incurred losses.

3. Companies limited by Shares: It is defined under section 2(22) of the Companies Act, 2013.

In these types of companies, members are liable to pay the amount only up to the value of unpaid

shares held by them. Limited by Shares = No. of Shares x Unpaid Value

Types of Companies Under the Companies Act, 2013

There are mainly three types of companies registered under the Companies Act, 2013, and we’ll

study each one of them one by one.

1. Public Company.

2. Private Company.

3. One Person Company.

 1. Public Company.

According to section 2(71) of the Companies Act, 2013, a company means a company which:

 is not a private company.

 has a minimum paid-up share capital, as may be prescribed.

Note: If a private company becomes a subsidiary of the public company, then it will be called a

public company for this Act and will remain to be a private company under its articles.

Requirement of the minimum number of directors and shareholders: A public company

requires a minimum of 7 shareholders and 3 Directors.

2. Private Company.

According to section 2(68) of the Companies Act, 2013, a private company is a company that has

the minimum paid-up share capital as may be prescribed, and

 Has restriction on transfer of shares.

 Invitation to the public is prohibited from subscribing to the securities of the company.

 Maximum members should be 200 in a private company.

If two or more persons jointly hold the shares of the company, then they will be treated as a

single member.

People who shall not be included in the number of members are:

 People who are in employment with the company.

 People who were previously employed or working with the company.

3. One Person Company (OPC).

This company is defined under section 2(62) of the Companies Act, 2013. This Act brought the

concept of One Person Company in which even a single person can constitute a company.

OPC was introduced to encourage corporatization for small businesses. JJ Irani Expert

Committee recommended establishing One Person Company in 2005 with a simpler legal regime

and exemptions for such a company.

3) What do you mean by Pre-Incorporation Contracts and provisional contracts? Explain the
provisions related to such contracts.

Pre Incorporation Contracts

Preliminary contracts or Pre Incorporation 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.

Contracts made before the incorporation of company is called pre-incorporation contracts.

Contracts made after incorporation, but before the company becomes entitled to commence
business are called provisional contracts. Provisional contracts are no more valid as
provisions relating to commencement of business have been omitted by Companies
(Amendment) Act, 2015. The contracts after the incorporation should be within the purview of
Memorandum of Association.

Provisions

Important clauses of a pre-incorporation contract

1. Corporate name- Name of the company which is going to be incorporated.

2. Incorporation- The state in which the company is going to be incorporated in the
future.
3. Corporate address- The official address of the business which is mentioned in the
memorandum of association and article of association is mentioned here.
 4. Directors- Names of all the proposed directors must be mentioned here.
5. Object clause – It defines all the purposes and objects of the company once it is
incorporated. It also describes the license which may be required for the
incorporation and how it will be received.
6. Due date – The targeted date on which all the procedures of the corporation are
completed and the company is finally going to be incorporated.
7. Capital contribution – This clause discusses what will be the total capital contribution
of all the subscribers and what should be the mode of subscription? should be
discussed here.
8. Bank account – It discusses the opening of a separate corporate bank account in the
name of the company and who will be the authorised signatory who will be
responsible to carry out all the transactions in the name of the company.
9. Authorized person- This clause discusses who is the authorized person to carry out all
the actions of the company, sign contracts, and borrow on the behalf of the company.
10. Reimbursement of expenses- This clause talks about the reimbursement of money of
shareholders and any other persons for handling all the incorporation matters.
11. Corporate stock – It is a very important clause that discusses all the authorised and
issued share capital of the company by the shareholders. It also discusses in detail
about what is the total authorised capital of the company, what is the issued capital,
and what is paid and unpaid capital of all the shareholders of the company is going to
be incorporated.
12. Jurisdiction of court- discusses what is the jurisdiction of court- for any matter which
arises in the company in the future.
13. Confidentiality – This clause discusses how to keep safe all the confidential
information shared amongst the promoters and others during the process of
incorporation and with whom should the liability lie in case of its breach.
14. Termination – The termination clause discusses all the circumstances in which this
agreement is terminated. For example, if any of the party declared insolvent by the
band, became insane, the death of any promoter ( in case there are only two
promoters and so on).

4) Steps involved in the formation and incorporation of a company

Steps In Incorporation of A Company

The incorporation of a company refers to the legal process that is used to form a corporate entity or
a company. An incorporated company is a separate legal entity on its own, recognized by the law.
These corporations can be identified with terms like ‘Inc’ or ‘Limited’ in their names. It becomes a
corporate legal entity completely separate from its owners.
The formation of a company goes through a number of steps, starting from idea generation to
commencing of the business. This whole process can be broken down into 4 major phases or
steps, which we will be discussing in the lines below.
The major steps in formation of a company are as follows:

1. Promotion stage
2. Registration stage
3. Incorporation stage
4. Commencement of Business stage

Promotion Stage: Promotion is the first step in the formation of a company. In this phase, the
idea of starting a business is converted into reality with the help of promoters of the business
idea.
In this stage the ideas are executed. The promotion stage consists of the following steps:

1. Identify the business opportunity and decide on the type of business that needs to be
done.
2. Perform a feasibility study and determine the economic, technical and legal aspect of
executing the business.
3. Interest shown by promoters towards the business idea and supply of capital and other
necessary procedures to start the business.

Registration stage: Registration stage is the second part of the formation process. In this stage,
the company gets registered, which brings the company into existence.
A company is said to be in existence, if it is registered as per the Companies Act, 2013. In order
to get a company registered, some documents need to be provided to the Registrar of Companies.
There are several steps involved in the registration phase, and are as follows:

1. Memorandum of Association: A memorandum of association (MoA) must be signed by

the founders of the company. A minimum of 7 members are required in case of a public
company and 2 in case of a private company. The MoA must be properly registered and
stamped.
2. Article of Association: Article of Association (AoA) is also required to be signed and
submitted. All members who previously signed MoA, should also be signing the AoA.
3. The next step is preparing a list of directors which should be filed with the Registrar of
Companies.
4. Directors of the company should provide a written consent agreeing to be directors,
should be filed with the Registrar of Companies (RoC).
5. The notice of address of the office needs to be filed.
6. A statutory declaration should be made by any advocate of either the High Court or
Supreme Court, or a person of the capacity of Director, Secretary or Managing Director.
This declaration shall be filed with the RoC.

Certificate of Incorporation: Certificate of incorporation is issued when the registrar is

satisfied with the documents provided. This certificate validates the establishment of the
company in the records.
Certificate of commencement of business: Certificate of commencement of business is
required for a public company to start doing business, while a private company can start business
once it has received the certificate of incorporation.
Public companies receiving the certificate of incorporation can issue prospectus in order to make
the public subscribe to the share for raising capital. Once all the minimum number of required
shares have been subscribed, a letter should be sent to the registrar along with a bank document
stating the receiving of the money.
The registrar will issue a certificate upon finding the provided documents satisfactory. This
certificate is known as certificate of commencement of business. The company can start business
activities from the date of issue of the certificate and the business shall be done as per rules laid
down in the MoA (Memorandum of Association).
Unit 2

Short

1) What is MOA

The Memorandum of Association or MOA of a company defines the constitution and the scope of
powers of the company. In simple words, the MOA is the foundation on which the company is built

Object of registering a Memorandum of Association or MOA

 The MOA of a company contains the object for which the company is formed. It identifies
the scope of its operations and determines the boundaries it cannot cross.

 It is a public document according to Section 399 of the Companies Act, 2013. Hence, any
person who enters into a contract with the company is expected to have knowledge of the
MOA.

 It contains details about the powers and rights of the company.

2) Types of prospectus

Red herring prospectus

Red herring prospectus is the prospectus which lacks the complete particulars about the quantum
of the price of the securities. A company may issue a red herring prospectus prior to the issue of
prospectus when it is proposing to make an offer of securities.
This type of prospectus needs to be filed with the registrar at least three days prior to the opening
of the subscription list or the offer. The obligations carried by a red herring prospectus are same
as a prospectus. If there is any variation between a red herring prospectus and a prospectus then
it should be highlighted in the prospectus as variations.

When the offer of securities closes then the prospectus has to state the total capital raised either
raised by the way of debt or share capital. It also has to state the closing price of the securities.
Any other details which have not been included in the prospectus need to be registered with the
registrar and SEBI.

The applicant or subscriber has right under Section60B(7) to withdraw the application on any
intimation of variation within 7 days of such intimation and the withdrawal should be
communicated in writing.
Abridged Prospectus

The abridged prospectus is a summary of a prospectus filed before the registrar. It contains all
the features of a prospectus. An abridged prospectus contains all the information of the
prospectus in brief so that it should be convenient and quick for an investor to know all the
useful information in short.

Section33(1) of the Companies Act, 2013 also states that when any form for the purchase of
securities of a company is issued, it must be accompanied by an abridged prospectus.

It contains all the useful and materialistic information so that the investor can take a rational
decision and it also reduces the cost of public issue of the capital as it is a short form of a
prospectus.

Deemed Prospectus

A deemed prospectus has been stated under section 25(1) of the Companies Act, 2013.

When any company to offer securities for sale to the public, allots or agrees to allot securities,
the document will be considered as a deemed prospectus through which the offer is made to the
public for sale. The document is deemed to be a prospectus of a company for all purposes and all
the provision of content and liabilities of a prospectus will be applied upon it.

In the case of SEBI v. Kunnamkulam Paper Mills Ltd., it was held by the court that where a
rights issue is made to the existing members with a right to renounce in the favour of others, it
becomes a deemed prospectus if the number of such others exceeds fifty.

3) MOA vs AOA

Articulars MOA AOA

Description Defines the company’s Defines rules and regulations of the

constitution, powers, company. It also defines the duties,

 objectives, and powers, liabilities and rights of

constraints of the individuals associated with the

organisation. organisation.

It contains the five It contains the provisions as per the

Contents
mandatory clauses. requirements of the organisation.

It is a mandatory
The drafting of AOA is mandatory.
document that must be
Filing at the time of However, the filing of AOA with the
filed with the ROC at
registration ROC is optional at the time of
the time of company
company registration.
registration.

MOA is a supreme legal

document and AOA is subordinate to the MoA and

Importance and position
subordinate to the the Companies Act.

Companies Act.

MOA is a dominant Any provision in the AOA that

The relationship between
document that helps in contradicts the MoA is considered as
the two
the drafting of the AoA. null and void.
 An alteration can be

made in the MOA only

after passing a special

An alteration in the AOA can be
resolution in the Annual
made by passing a special resolution
Alteration General Meeting
in the Annual General Meeting
(AGM) and after
(AGM).
obtaining prior approval

from the Central

Government.

The MOA cannot be

The AOA can be amended
Retrospective amendment amended with
retrospectively.
retrospective effect.

4) Doctrine of Constructive Notice and Indoor management

Doctrine of Constructive Notice

Section 399 of the Companies Act, 2013 states that any person may, after payment of the

prescribed fees inspect by electronic means any documents kept with the Registrar of

Companies. Any person can also obtain a copy of any document including the certificate of

incorporation from the Registrar.

In line with this provision, the Memorandum of Association and the Articles of Association are

public documents once they are filed with the Registrar. Any person may inspect the same after

payment of the fees prescribed. The special resolutions are also required to be registered with the

Registrar under the Companies Act, 2013.

The doctrine presumes that every person has knowledge of the contents of the Memorandum of

Association, Articles of Association and every other document such as special resolutions as it is

filed with the Registrar and available for public view.

This principle has been upheld in the landmark case of Oakbank Oil Co. V. Crum (1882) 8

A.C.65. Thus, if any person enters into a contract, which is inconsistent with the company’s
Memorandum and Article, he shall not acquire any rights against the company and shall bear the

consequences himself.

Doctrine of Constructive Notice

Section 399 of the Companies Act, 2013 states that any person may, after payment of the

prescribed fees inspect by electronic means any documents kept with the Registrar of

Companies. Any person can also obtain a copy of any document including the certificate of

incorporation from the Registrar.

In line with this provision, the Memorandum of Association and the Articles of Association are

public documents once they are filed with the Registrar. Any person may inspect the same after

payment of the fees prescribed. The special resolutions are also required to be registered with the

Registrar under the Companies Act, 2013.

The doctrine presumes that every person has knowledge of the contents of the Memorandum of

Association, Articles of Association and every other document such as special resolutions as it is

filed with the Registrar and available for public view.

This principle has been upheld in the landmark case of Oakbank Oil Co. V. Crum (1882) 8

A.C.65. Thus, if any person enters into a contract, which is inconsistent with the company’s

Memorandum and Article, he shall not acquire any rights against the company and shall bear the

consequences himself.

Long

1) “A company object clause is of fundamental importance not only to members but

also to non-members.” Comment.

What is the Object Clause

This clause sets out the purpose for which the company was formed. It is difficult to change the
object clause later. Therefore, it is necessary for the company to formulate this clause carefully.
This clause lists all types of business that a company may carry out in the future. The object
clause must contain the company’s important goals as well as other goals not listed above.

This clause must specify the following:

 The company’s main objectives are to be pursued by the company upon its
incorporation;
 Auxiliary or ancillary purposes for achieving the main objectives; and
 Other objectives of the company that are not covered by (i) and (ii) above.
For corporations other than commercial corporations whose purpose is not limited to one state, it
is necessary to specify the state in which the purpose of the corporation extends to its territory.

To that end, object clauses are often lengthy and unwieldy, as companies try to include as much
as possible to avoid classifying deals as ‘overreaching’ in later years. It usually includes a broad
‘catch-all’ clause that allows the ability to do something incidental or ancillary to the other
objects.

Purpose behind the object clause

The object clause is the most important clause in the memorandum, as it not only sets out the
objectives of the company’s formation but also defines the scope and powers that the company
can exercise in achieving those objectives. Indicating the company’s purpose in the company’s
Memorandum of Association is not only a legal technicality but also has great practical
significance. This is due to the following reasons:

1. It provides protection for shareholders and investors because they know where
their money is being used for. Also, it ensures that their investment is not being used
for any other business.
2. It protects creditors by ensuring that company funds are not used for unauthorized
activities.
3. It serves the public interest because it restricts the activity of a company within the
specified boundaries as stated in the object clause. This prevents diversification into
areas of business that are not closely related to the purpose for which the company
was founded.
A company can choose any object provided:

 It does not break the law,

 The object is moral, and it should not be contrary to public policy,
 It must not contain any content that contravenes the provisions of the Companies Act
2013,
 It must not contain any ambiguous statements,
 It must contain the main object and all other materials needed to promote the main
objects.

One of the MOA's most important clauses, the object clause, describes the company's projected
goals. This clause specifies the goal for which the company was founded and the direction in
which it will work. This sentence is split into two pieces. A sub clause follows one of the major
clauses. The main clause of the MOA will provide a concise description of the business activities
that will be carried out by the firm, which may include manufacturing, trading, or rendering any
type of services. The sub clause also included a description of the actions related to the main
clause. Additionally, it can include business-related operations that are planned with future
diversification demands and changes in mind. This is so that a company cannot deviate from its
MOA and is not allowed by law to engage in any activity not covered by the MOA. Why the
object clause is important The company describes its founding and operating objectives in detail
in the appropriate object clause. Every subscriber and shareholder has access to the MOA, and
with the object clause, they may determine how the company plans to utilise their money.
Additionally, it offers protection to those doing business with the company because they are
aware of its range of activities. Additionally, the board of directors restricts their ability to utilise
business funds for improper reasons and only permits them to do so in accordance with the
MOA.

An object clause in the MOA is important for the following reasons:

 It states the primary objects that will be pursued by the business upon its incorporation
and the objects ancillary or incidental to attainment of primary objects.
 It enumerates the objects that are not covered by the primary objects and objects
ancillary but nevertheless necessary in enabling a business in undertaking the kinds of
activities that it anticipates to pursue. A company has to state the objects in a clear,
unambiguous, and plain language for which funds of the business may be used or field of
business that cover the activities of the company need to be extended.
 It determines the powers a company will have for the mentioned objects conferred on a
company to their attainment.
 It limits the powers a company is granted. Any act that’s outside the approved areas of
objects of a company will be considered as ultra vires.

2) Who are the different categories of persons liable for mis-representations in the
prospectus

What is a prospectus?
Pursuant to section 2(70) of the Companies Act, 2013, prospectus is a document that invites
offers from the public for the subscription or purchase of the securities of a company. The term
‘prospectus’ includes not only a document described or issued as prospectus but also notices,
circulars and advertisements offering invitation to purchase or subscribe the securities. Likewise,
any document that offers sale of shares of a company by its members will also be deemed to be a
prospectus (sec. 28(2)). The prospectus must contain such information and reports on financial
information specified by the Securities and Exchange Board of India (SEBI) in consultation with
the Central Government (sec. 26(1)). The date of publication of the prospectus is deemed to be
the date indicated in the prospectus. The Central Government, the Tribunal or the Registrar can
invoke all powers in matters related to prospectus (sec. 24 Explanation).

Misstatements in the prospectus

Since prospectus is relied on by the members of the public to subscribe or purchase the
securities of a company, any misstatements on it invite penal consequences. Misstatement may
occur when a statement which is untrue or misleading in form or context is included in the
prospectus. Also, any inclusion or omission of any matter which is likely to mislead will also be
considered as a misstatement (sec. 34). For e.g., a statement on the purpose of offering shares
which is untrue, or statement on the locations of offices for a company which is misleading will
amount to misstatement in the prospectus.
Liability for misstatement in the prospectus
A person who has signed and given consent to the prospectus is liable for misstatement. Persons
who had the management of the whole, or substantially whole of the affairs of the company can
be held liable for misstatement in prospectus if they have signed the prospectus and had given
consent for the same. Managers, Company Secretaries, and Directors will come under this
category. However, the mere signing of the declarations in the prospectus will not result in
liability for misstatement if the person signing is neither a manager of the company nor draw
salary from the company. In the Matter of Sahara India Commercial Corporation Ltd., SEBI 31
Oct. 2018. Here, SEBI considered the submission of the Company Secretary that he signed the
prospectus on behalf of the directors under their power of attorney and concluded that he was not
liable for misstatement as the director of the company.

A misstatement in the prospectus can invoke criminal (sec. 34) and civil liabilities (sec.
35). Misstatements can lead to punishment for fraud under Sec. 447.

 Criminal liability
A person who authorizes the issue of a prospectus which has untrue or misleading
statements is liable for punishment under Sec. 34. Such a punishment is for fraud as set out in
Sec. 447. “Fraud” under Sec. 447 includes an act, omission, concealment of any fact with an
intent to deceive, gain undue advantage, or to injure the interests of the company or its
shareholders or its creditors or any other person. It is not necessary that such an act involve any
wrongful gain or wrongful loss. Abuse of position committed by a person is also considered
fraud under this section. Sec. 447 further sets out the punishment for fraud:

 If the fraud involves an amount of ten lakh rupees or more, or one per cent. of
the turnover of the company (whichever is lower) the person who is found guilty of
fraud shall be punishable with imprisonment for a minimum term of six months
which may extend to ten years. Such a person shall also be liable to a fine of an
amount not less than the amount involved in the fraud and the fine may extend to
three times of such amount.
 If the fraud involves an amount less than ten lakh rupees or one per cent. of the
turnover of the company (whichever is lower) and does not involve public interest,
the imprisonment may extend to five years or with fine which may extend to fifty
lakh rupees or with both.
 If the fraud in question involves public interest, the term of imprisonment shall not
be less than three years.
 Civil liability
Civil liability for misstatements in prospectus will arise when a person has sustained any loss
or damage by subscribing securities of a company based on a misleading prospectus (sec.
35). In such instances the following persons shall be liable under sec 447 and will have to pay
compensation to persons who have sustained such loss or damage:
 1. director of the company at the time of the issue of the prospectus;
2. person who has agreed to be named as a director in the prospectus and is named as a
director of the company, or has agreed to become such director;
3. is a promoter of the company;
4. has authorised the issue of the prospectus; and
5. is an expert who has been engaged or interested in the formation or promotion or
management of the company.

3) MOA importance, formant / content / clause and alteration of memorandum

Ans )

1. To declare the reason for the company’s formation: The foremost purpose of a
Memorandum of Association is to let the company’s members know why the
company has been formed.
2. To let investors understand the company’s activities: It allows any person who is
interested in investing in a company to know everything about its activities.
3. To let investors know the prospect of their investment: A Memorandum of
Association is a public document, which means it can be read by anyone. So, with the
help of the Memorandum of Association, prospective investors will know the exact
purpose for which their investments may be used.
4. To assure the investors: The Memorandum of Association helps the existing
investors in the company to stay assured that their investments are not used for any
purpose for which they weren’t foretold.

OTHER MOA IMPORTANT?

The MOA is important because it defines the scope and objectives of the company. It sets out the
rules and regulations that govern the company's operations and helps to establish the company's
legal identity. It is a public document and can be accessed by anyone who wishes to understand
the company's objectives and structure.

The MOA is also important because it protects the interests of the shareholders. It outlines the
relationship between the company and its shareholders, and ensures that the shareholders' rights
are protected. It also helps to prevent any misuse of power by the directors.

The preparation of Memorandum of Association is the first step in the formation of the company.
Memorandum means the memorandum of association of a company as originally framed or as
altered from time to time in pursuance of any previous company laws or under Companies Act
2013 (Section 2 [56]). However, the definition given under the act is not exhaustive or
explanatory.

It enables all parties to know the purpose, for which their money is going to be used by the
company and the nature and extent of risk they are undertaking in making the investment.
Memorandum Of Association enables the parties dealing with the company to know with
certainty as to whether the contractual relation to which they intend to enter with the company is
within the object of the company.

Format / content / clause

Format of Memorandum of Association (MOA)

According to Section 4 of the Companies Act, 2013, companies must draw the MOA in the form
given in Tables A-E in Schedule I of the Act. Here are the details of the forms:

 Table A: Form for the memorandum of association of a company limited by shares.

 Table B: Form for the memorandum of association of a company limited by guarantee and
not having a share capital.

 Table C: Form for the memorandum of association of a company limited by guarantee and
having a share capital.

 Table D: Form for the memorandum of association of an unlimited company.

 Table E: Form for the memorandum of association of an unlimited company and having
share capital.
Learn more about Articles of Association here

Content of the MOA

The following information is mandatory in an MOA:

Name Clause

1. For a public limited company, the name of the company must have the word ‘Limited’ as
the last word

2. For the private limited company, the name of the company must have the words ‘Private
Limited’ as the last words.
This is not applicable to companies formed under Section 8 of the Act who must include one of the
following words, as applicable:

 Foundation

 Forum

 Association

 Federation

 Chambers

 Confederation

 Council

 Electoral Trust, etc.

Registered Office Clause

It must specify the State in which the registered office of the company will be situated.

Object Clause

It must specify the objects for which the company is being incorporated. Further, if a company
changes its activities which are not reflected in its name, then it can change its name within six
months of changing its activities. The company must comply with all name-change provisions.

Liability Clause

It should specify the liability of the members of the company, whether limited or unlimited. Also,

1. For a company limited by shares – it should specify if the liability of its members is
limited to any unpaid amount on the shares that they hold.

2. For a company limited by guarantee – it should specify the amount undertaken by each
member to contribute to:
i. The assets of the company when it winds-up. This is provided that he is a member of
the company when it winds-up or the winding-up happens within one year of him
ceasing to be a member. In the latter case, the debts and liabilities considered would
be those contracted before he ceases to be a member.

ii. The costs, charges, and expenses of winding up and the adjustment of the rights of the
contributors among themselves.
Capital Clause

This is valid only for companies having share capital. These companies must specify the amount of
Authorized capital divided into shares of fixed amounts. Further, it must state the names of each
member and the number of shares against their names.

Association Clause

The MOA must clearly specify the desire of the subscriber to form a company. This is the last
clause.

alteration of a Memorandum of Association allowed

Generally, the alteration of a company’s Memorandum of Association is allowed under the
following circumstances:

 When such an alteration is needed to let the company venture into new businesses
related to the one in which it is already involved;
 When such an alteration is pertinent to enable the company to upgrade its existing
means to carry out its objects, or
 When altering the Memorandum of Association will help the company carry on its
business more economically.

Alteration of a Memorandum of Association and the doctrine of ultra vires

As discussed above, a Memorandum of Association defines the relationship between the
company and its members. The Memorandum of Association states the object of incorporating
the company. It provides an overview of the company’s operations. As per the doctrine of ultra
vires, the company is not supposed to bypass the boundary set by the Memorandum of
Association on the company’s activities. If the company does any act outside its operational
scope specified under the Memorandum of Association, such an act will be held ultra vires.

The term ‘ultra vires’ is Latin, and it means ‘beyond the powers.’ Such an ultra vires act shall be
null and void. It cannot be ratified by the company’s Board of Directors (BoD). Similarly, any
contract entered into by the company against the provisions of its Memorandum of Association
shall be ultra vires and have no binding effect on the company. Nevertheless, the doctrine
of ultra vires allows the company to do any act that may be incidental to its main object specified
in its Memorandum of Association.

The doctrine of ultra vires was essentially brought forth to safeguard the interests of the
members—that is, the shareholders and creditors of any company. The shareholders or creditors
of the company invest in it by essentially considering its main objectives. They invest in a
 particular company, considering various factors like the market trends, the reputation of the
company, etc., and expect to get a good profit out of it. They invest, thinking that their
investment will be used only for the purposes about which they were already informed. They
expect the company to be consistent with its objectives. So, the doctrine of ultra vires prevents
the company from going beyond its permitted limits of operation. That is why altering the
Memorandum of Association of any company follows a lengthy and complex process to ensure
the company expands its scope of operation without being affected by the doctrine of ultra vires.

Basic principles of the doctrine of ultra vires

The following are the basic principles of the doctrine of ultra vires as derived through the course
of various case laws.

 The defence of ultra vires is available to all parties.

 No member of the company can ratify an ultra vires act.
 A party that has fully performed its part in an ultra vires transaction cannot later avail
itself of the defence of ultra vires; it is prohibited under the doctrine of estoppel.
 Any act committed or omitted by any agent or representative of any company within
the extent of his employment cannot be repudiated availing the defence of the
doctrine of ultra vires.

4) Prospectus: Meaning, Definition and contents

A prospectus is a legal document that a company issues to the public giving details of an
offer for investment. This document is filed with the Securities and Exchange Commission
(SEC). It is usually published when the company offers bonds, stocks, mutual funds, or
other investment offers.

Contents

The document contents are as follows:

1. The types of investment options offered.

2. The issue date for the offer.
3. The maturity date.
4. It will state the method of interest payment and the denomination of the offer.
5. It details how the company will utilize the amount raised.
6. A brief company description.
7. It shows the company’s financial information and condition.
8. Its principles, mission, vision, and years in the market.
9. The management information, experience, and contribution to the business are given.
10. It gives the name of banks or financial institutions involved in the offering.

Importance

The importance of prospectus guidelines is as follows:

1. Invitation for investment – It is a document issued when the organization plans to make
investment offers to the public. Thus, it is an invitation to invest.
2. Company Information – It gives details of the company’s workings, mission, vision, financial
condition, management information, etc.
3. Authentic document – It is a genuine and legal document that investors can rely upon because it
should be filed with the SEC.
4. Identifies investment risks – This document clearly states the risks involved in the offer by
giving details related to securities offered and the company’s financial information, its debt in
the market, the repayment capacity, etc.
5. Help make decisions – The prospectus regulation helps investors make informed decisions
regarding whether it is worth investing in this company, particularly in the offer that the
company makes, based on its financial condition and the purpose for which capital is being
raised.
6. Helps company raise capital – This document is a source of information about the offer made
for fundraising. Thus, it helps increase the money intended for company use, like
expansion, capital expenditure, existing debt repayment, etc.

5) statutory requirements in relation to prospectus

1. Dating of prospectus:- As per section 5s, a prospectus issued by or on behalf of a

company or in relation to an intended company must be dated. The section further
provides that the date on the prospectus shall, unless contrary is proved, be taken as the
date if the publication of the prospectus.
2. Registration of prospectus:- section 60 of the Act deals with the registration of
prospectus with the Registrar of Companies. it requires:-

1) Delivery of a copy of the prospectus to the Registrar of Companies on or before the date of
its issue. The copy of prospectus so delivered, should be signed by all the persons named therein
as director or proposed director

2) The prospectus so delivered should be accompanied by (a) consent of every expert

referred to in section 58 of the Act; (b) prospectus, in case any of the contracts has not been
reduced to writing, a Memorandum of Association setting out full particulars of the contract and
(c) adjustment made in financial statements required to be included in the prospectus duly signed
by the person(s) making the report thereon, with reasons.
Section 60(3) provides that the Registrar of Companies will not register a prospectus if

(i) It is not dated

(ii) It does not comply with the requirements of section 56 as to the matters and reports to be
set out in it, viz, Schedule II requirements;

(iii) It contains statements or reports of experts engaged or interested in the formation or

promotion or management public the company [section 57];

(iv) It includes a statement purported to be made by an expert without a statement that he has
given and has not withdrawn his consent to the manner of its inclusion therein. [section 58];

(v) A copy delivered to the Registrar of Companies is not signed by every persons who is
named threin as a director or proposed director of the company or by his agent authorized in
writing.