COMPANY LAW (2023) Qu. “Once the company is legally incorporated, it must be treated like any other independent person with rights and led to itself.” Critically analyse the concept ‘separate legal entity of the company with the help of case with reasons the tax evasion cases where the courts COMPANY LAW Third Semester y rel together for the purpose of carrying out some busines Characteristics of a Company- 1. Separate legal entity 5. Common seal y to sue and to be sued feral y of sharesen he defined coq nP2a a ble, intangible and existing onan bears its na: eae ae its shareholders distinct from those of its members, ASsels are separate ang One-man Company- In this ty the share capital of the company, and in order to mee requirements of minimum numbi ers of members who are mostly his rel mena of its capi 0 one person only. Leading case laws: 1. Salon v. A. Salomon Co. Ltd., (1897) A wasn Salomon had for many years carried on a prosperous into a Hine Cather merchant. In 1892, he decided to convert it was forma @,Company and for that purpose, Salomon & Co. L os memben, with Salomon, his wife, his daughter, and his four sons "s, and Salomon as Managing Director. The pre SamPanY Purchased the business of Salomon for £ 32,002 over all the come d by £ 10,000 in debentures, conferring a charge and the ba omPRAY'S assets, £20,000 in fully paid up £1 shares in cash. Seven shares were subscribed in cash by the members and and the res of 20007 shares eg gplt 8 that Salomon hel held by a member of his fa ran into dit (Salomon had train’, Oty a year later the holder of debentures a Receiver and thera his shares to another person) appointed the value of assets ne pany went into liqui a assets was divided as £ 6,000 Tor iabi 1 r debentures, and £ 7,000 for unsecured debts. trading det pany, one man holds practically the whole of e statutory. tummy ; ions or friends holds of states each. A company does not lose individuality ty iaoug Bal 3 Company taro (2023) After paying off the ors nothing, would be left for the unsecured creditors. 11 was brought by the Liquidator against Salomon to indemnify the company against the company’s Issues- 1. Whether Salomon & Co. Ltd. was a legally valid company? 2. Whether Salomon was liable for the debts of the company? ‘The House of Lords unanimously held that, as the \dependent person with and that the motives of Judgment company was duly incorporated, it is an in« ies appropriate to itself, hose who took part in the promotion of the compan irrelevant in discussing what those rights and In the present case, the Company Act of 1862 provided that ‘or more persons, associated for a lawful purpose may, ‘ames to a memorandum of association and otherwise complying with the provisions of the Act in respect of registration form a company with or without limited liability. ‘The Act further provided that “no subscriber shall take less than ‘one share.” That there were seven actual living persons who held shares in the company was never doubted. Whether the capital of the company is owned by seven persons in equal shares, with the right to equal share in profits, or whether it is almost owned by one person who takes practically the whole profits, it does not concern ‘a creditor of the company. The company does not lose its identity the bulk of its capital is held by one person. The company at law is an altogether different person from its subscribers/shareholders. Since the company fulfilled all the requirements of the Act, the court held that the company had been validly formed and was a real company. any seven by subscribing their n 2. Lee v Lee's Air Farming (1960) appellant’s husband, Lee, formed the company named Lee's Air Farming Ltd. with 3000 thousand share of leuro each forming share capital of the company and out of which 2999 shares were owned by Lee . Lee was also the director of the pany. He exercised unrestricted power to control the affairs of company and ig to contracts of the company.fous contract with ; employees and few premiyit® claimed worker compensa ed during work as employee of the com the any, ict legal ground that Lee Issue ~ Whether Lee and his company were distin entities which could enter into contractual relationship and servant, or Lee and the company was one and the storey "aster - The court held that Lee's Air Farming Lye en” rent from the person Lee. The entity of i a was s independent and separate from that of its governing weeny and shareholder, ie., Lee. Being two separate entities, Lee aa company had entered into a contractual relationship a4 Lee became the chief iP under which, give himself orders in his capacity as pi effect of magic of “corporate personality’ and servant at the same time. 3. Daimler Co,, Ltd. v. C Lord Parker held that a comp: entity, a creation of law confers. It is not a nat neither be loyal nor di any incorporated in U.K. is a legal id capacity which the law ind or conscience. It can can be neither friend nor enemy. Corporate Veil- The theory of the corporate vi a company has a legal personality separate the identity of its shareholders. Hence, liabilities mpany are discrete fron where the latter are res contributions, known as This comport tion to pursue an econom 10 sks oF company can ovo investments, and asin ee of its members More in ther own name, rights, obligations, or from those of its shareholders, ly to the extent of their capital {as devised to enable ic purpose as a single uni ups of individuals without exposure rights and obligations, independent survives the death of i ies in one’s personal capacity. Accordingly, a "execute contracts, raise debt, make as companies can then sue and be sued tes legal courses too. Lastly, the most striking consequence of separate legal entity is that a company les, the overarching rule of th exceptions, where the courts may look through the veil to reach out to the inside members through a mechanism called as the “lifting or piercing of the corporate veil” The concept of lifting the corporate ve been done by Mr. Salomon and that he was legally the creditor of the company and had a right to be paid at the winding up of the company before the unsecured creditors as his debt was secured by a charge against the assets of the company. ‘A company has a separate legal personality distinct from ‘members but the blanket legal personality may be used as a shield for fraudulent consumers in particular and public in general. In such cases the corporate veil may be lifted by the Court in order to identify the responsible person and affix proportionate liabilities. However, it must be noted that lifting of the corporate veil is the exception and not the rule.The theory of lifting the corporate veil became imperative when unscrupulous people started using the corporate veil as an instrument to conceal fraud in company’s affairs. Thus, it become necessary for the legislature and the judiciary to lift the corporate veil and find out the person behind the company who are the actual beneficiaries of the corporate body. al grounds of 1. Tax Evasion- The Courts have the power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation. In certain exceptional cases the court has to pay regard to the economic realities behind the legal facade. It may be noted that a company cannot be imprisoned for evasion of taxes or any other crime, but penalties can be imposed. (a) Apthorpe v Peter Schoenhofen Bre In this case, an English company acquired business and assets of ‘a New York company in contravention of the statutory law which ting of vei; ding land in New Y ow «from holding land in New York, Hi hibited aliens from r oe proieyreained the ovenership of the premise he York SQmercan company and claimed that there oF the restriction placed t court lited the corporate ¥ financed and run by the English company. As that the said American company Was operating as an English company , fompany was fxable as the income of the English compa ican () In Re, Sir Dinshazo Maneckjee (1927) Dinshaw formed four private companies in wi all the shares except a few which were owned by on ns ove Subordinate to him. The companies were doing no busine’? Wee receiving dividends and handing them back to him in the ee? Joans to reduce tax liabilities. Buise of The court held that it did not necessarily follow tha alleged transaction between individual and company would and genuine. The court is empowered to go into the questi whether the so called one-man company is reall on by the assessee himself for the purpose of a tax t eve be valid ion as to ly a business carried, voiding payment of In this case, the company was formed by the assessee purely and simply as a means to avoiding tax and he had thus disguised higneclt with the intention to deceive. Hence, : corporate veil was allowed corporat in order to hold the assessee liable for (©) CIT v Sri Meenakshi Mills (1967) In this case the court held that the Income Tax Authorities are entitled to pierce the veil of corporate entity and look at the reality of the transactions. It was observed as under: “It is true from the juristic poi istic point of view that company is a legal personality entirely distinct from its members and the company & capable of enjoying rights and being subjected to duties which Fr et the same as those enjoyed or borne by its members. But vena exceptional cases the court is entitled to lift the veil of Tegel facade 2 2 PAY Fegard tothe economic realities behind the ‘The courts reiterate reiterated Hingorani v. State 1970), the principle laid down above in Kapil i wn we i ipila of Bihar (2003) and RC Cooper v. Union of India J transferred the court allowed lifting of wy Law (2023) 7 2. Avoiding welfare legislation- In Workmen v Associated Rubber Industry Ltd (1985), a company created a subsidiary and t holdings to it in order to reduce its bility to pay bonus to its workmen. The subsidiary company had no assets of its own except those transferred by the parent company, and no business or income except receiving dividends from shares so transferred to it. The corporate veil was lifted by the Supreme Court to set aside the separate existence of the subsidiary company for the purpose of calculating bonus payable to the workmen. It observed as under: “It is the duty of the court in every case where ingenuity is nxpended to avoid taxing and welfate legislation, to get behind the ‘smoke-screens and discover the true state of affairs” 3. Prevention of fraud or improper conduct- In Gilford Motor Company Ltd v Horne (1933), it was held that when the corporate personality of a company is being used as a cloaking device to commit an unlawful act, the courts would be justified in lifting the corporate veil to discover the real nature of the transactions. Q.2. A Public Ltd. Company is engaged in manufacturing stainless steel products. The Company also has a 160 MW captive power plant within its premises. Board of Directors proposes to sell power plant to another steel company and thereby intend to raise money for funding the installation of a new furnace. A shareholder of the company challenged the decision on the ground that it was ultra-vires the company. Would he succeed? Would your answer differ if the company makes investment in new furnace after passing the special resolution? Ans. 2 This question deals with the doctrine of ultra vires as laid down in Ashbury Railway Carriage and Iron Co. Ltd. vs Riche 1875). “Ultra” means beyond and “vires” means power. “Ultra Vires” is a Latin phrase meaning “beyond the powers.” If an act requires legal authority and it is done with such authority, it is characterised in law as intra vires (within the power). If it is done without such authority, it is ultra vires. Acts that are intra vires are equivalent to be ‘valid’ and those that are ultra vires are ‘invalid’. Lord Cranworth explained this doctrine in Eastern Counties Railways v Hawk (1885) as follows:sity Hed doctrine nt for a Doctrine of ultra-vires in the Companies Act, 2013- t0 be incorporated hereof Section 245 (1)(b) of the Act provides to the members and depositors 2 right to file an application before the tribunal if they have reason to believe that the conduct of the affairs of the company is conducted in a manner which is prejudicial to the interest of the company or its members or depositors, to restrain the company from committing anything which can be considered Be 5 brea fa erovatns ol Ua compan) alieanarancim es. Basic principles- ~ Shareholders cannot ratify an ultra-vire : fy vires tran: even if they wish to do so. | - Whe y ‘ere one party has entirely performed his part contract, relance on the defence of the ultrevites veo precluded in the doctrine of estoppel - Where both the parties have enti ‘es have entirely performe: then it cannot be atlacked on the Bass of ths decteen oe ine. parties can raise the defence 2 contract has been partially performed was insufficient to bring the doctrin ee eitiartes can be brought for the re ee tra-vires was - Any of of ultra-vires. action, a su conferred covery of the benefits = If an agent of the corporation co defend itself from its consequences by gqce™Pany i was ultra-vires. Company Lie (2023) 9 Advantages of the Doctrine- = Protection of shareholders: The doctrine of ultra vires assures shareholders that their investments will not be used for any activities other than the ones that were mutually agreed upon. = Protection of creditors: The doctrine of ultra vires also protects the interests of creditors by ensuring that the Company's capital is not spent on any project or business that is beyond the scope of the objects clause. Disadvantages- es makes it impossible for a company in a direction that is agreeable to all = The doctrine of ultra to alter its activ members = It is possible to alter the object clause of the Memorandum via a special resolution, thus defeating the main purpose of the doctrine. ifference between ultra vires and an illegal act- ‘An ultra vires act is completely different from an illegal act. People often mistakenly use them as synonyms. An act which is beyond the objectives of the company and not mentioned in the memorandum of the company is termed as an ultra vires act, Whereas an act which is an offence in itself and draws civil liabilities or is prohibited by law is termed as an illegal act. Anything which is ultra-vires may or may not be illegal, but both of such acts are void ab initio. Leading Case Laws- Ashbury Railway Carriage and Iron Co. Ltd. v- ‘The object clause of the defendant company provided that it was formed to “make, sell, or lend on hire the railway carriages, wad all Kinds of railway plant, fitting machinery of rolling stock. The company entered into a contract for financing the construction of railway. Riche (1875) Issues- 1, Whether financing of construction of railways comes in the term General contractors?n of other companies and der:= Property o act ” performed do The company underwrot lerwrote and to company the business of which was ney CP, Shes in company or with the objects set out incl senneced with the ee the liquidation of the other com D- Ona sumentte E transaction was ultra vires the E. company. contended mors ; at this ny Law (2023) i It was held that as the registrar had accepted the memorandum any, and granted a certificate of incorporation, the the memorandum could not be challenged, and stood, and so the transaction y memorandum must be construed as was ultra vires. Lord Wrenbury held that before registering a memorandum of ‘ought to consider whether the requirements ® Companies Acts have been complied with, and to refuse in if he conceives that they have not. The memorandum ind identify the field of industry within which the ies are to be confined. corpo Lord Atkinson and Lord Parker observed as under- of association, company and the In re (Jon) Beuforte (London) Ltd. (1953) “The company was authorised by its Memorandum of Association to carry out business of costumes and other activities of allied ature Later the directors decided to carry out the business of ing veneer panels which was ultra vires the main objective of the company. ‘The court held that the memorandum of association a company is a constructive notice to the public. Everyone dealing with the Company is supposed to know its powers. If an act is beyond the not liable to pay for that. An Ultra Vires cont red, even though the person dealing with the company was working under an impression that it is intra vires. Bell Houses, Ltd. vs City Wall Properties, Ltd. (1966) ‘The object clause of the plaintiff company included power Yo carry any business which in the opinion of Board of Direcct® be gdvantageously carried out by the company in connection with o y to any of the above business.” ff company acquitde cee oN Mnibersty property development and introduced the financier to the def Company. The company claimed the agreed commission of aM pounds for its services but the defendant company contest 0.000 the ground that the contract was ultra vires the plaintiff cout © and thus void. Mpar ny, The court held that the clause empowered the c 0 undertake any business which the directors honestly thought i Qu be advantageously carried on as ancillary to the compan objective. Since it was so in the present case, not ultra vires. As such, the defend pay the claimed amount. ‘ompany’s main the act in question was lant company was held liable tg Dr. A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, (1963) A company cannot travel beyond obj y jects of MOA unless it incidental to the main object. The donation for charitable purposes is not incidental to or natural busine: fe rally inclusive to the usiness of Ii ‘ Justice Shah: An ultra vires contract remains ultra vires even if j be shareholders agree, The power to do a thing and object are wo different things. The articles may explait ees ‘ay explain memorandum but Main Objective Rule was ado; excluded in Cotman’s case. The mai the evasion of ultra vires. pted in Ashbury case but was in object rule has failed to prevent Death of Ultra Vires- The doctrine of ultra vires, however, is not always an unmi blessing. It can cause hardships as great pi eaaoe as those which it prevents, The English Company Law Revisi Committee 1945 recommended its abolition due to fellowes roa ion due to following reasons: Restriction on the scope of activities of the company Trap for the unwary creditors (eg. Re Beauforte case) Methods of bypassing ultra vires (eg. Cotman » Brougham) Conclusion The directors of the c company can act only wit of the authority provided to them under these borrowing is made beyond the authority objectives mentioned in the memorandum. ip Law (2023) 7 a-vires. Any borrowing which is made through an ultra-vires void ab and hence, directors are personally responsible for ese acts. However, if such borrowings are ultra-vires only to the articles of ry or ultra-vires directors, then they can be ratified by the iareholders. Then after such ratification, they will be considered valid. In light of the above discussion, we can conclude that the decision of the company is ultra vires. ‘The case would not have differed in the latter scenario. Q.3.(i) “Men who assume complete control of a company’s business must remember that they are not at liberty to sacrifice the interest which they are bound to protect and while ostensibly acting for the company, direct in their own favour business which should properly belong to the company they represent.” Comment. (i) Discuss the requirements as prescribed under the Companies Act 2013 for the appointment of an Independent Director. ‘Ans, 3ti) This question deals with the General Duties of Directors. Introduction- Directors are key decision makers of a company and as such, they are entrusted with various responsibilities and duties under the company law. These duties are of utmost importance for the proper functioning of a company and to ensure that the interests of all shareholders are protected. General Duties ‘The general duties of directors are as follows: Duty of good faith- Section 166(2)- The directors must act in the best interest of the company. A director should not make any secret profits. He should also not exploit of his own use the corporate opportunities. Duty of care- A director must display work assigned to him. Amount of care w man would take in his own case. Duty to avoid conflicts of interest- Company directors must avoid of manage all situations in which they have or may have, conflicts of interest that could affect their objectivity and loyalty to the company. Examples of such conflicts of interest include: wre in performance of the an ordinary prudentin ie . " awbersity + Holding an advisory position (eg. consultant oF accounta ina firm that is a competitor of the company ani) + Acting as a director and/or holding majority share, company that is, or could be, affected by the activinan & Activities of the company (e.g, a supplier, client or competitor of th company) ‘ or personal relationships with individuals of s that are, or could be, affected by the activitic of the company a Taking advantage, for theit own personal gain, of propery, information, or opportunities belonging to the company, even if the company does not take advantage of these opportunities. Business Opportunities (Diversion of business)- A director should not feat to his use corporate opportunities. The doctrine of corporate opportunities has been described as an act of a director or controlling shareholder in diverting from the benefit of the corporation any enterprise or transaction in which sensible persons would agree that the corporation had some expectancy or interest. Sing omPttition by directors- There is no breach of duty if a rector competes with his company or holds some interests in a rival company or is a competing company, but a director will be held accountable if he uses the company’s assets for the benefit of a rival. This includes its business connecti Will, trade assets, ion, goodwil one goodwill, a rigs May Be restrained from using such skills for the benefits of fe wat concem. & director can also be restrained by the terms of is SPpeintment from rivals with the company or from joining any dinetos ate, 8 Citector whatever i’s business. A. whole-time i ss by the very nature of employment to confink from joining any other company. ne Nima Leading case laws- 1. Cook v Deeks (1916) The directors had breached their fiducia a contract from the company ‘The transaction was ratified by a resolution which was carrie ‘wrongdoing directors held the majority of the vo te ry duties by di into their oven names, The ta 1% spony Law (2023) 15 It was observed by Lord Buckmaster as follows: 1 who assume complete control of a company’s business her that they a ty to sacrifice the interest y are bound to protect and while ostensibly acting for , direct in their own favour business which should y belong to the company they represent.” 2. Regal (Hastings) Limited v Gulliver (1942) ‘The appellant company was the owner of a cinema in Hastings. ‘was to acquire two more cinema halls. A subsidiary company was formed to do so. They did not have enough paid-up capital. For raising the extra capital, the directors took 500 shares of 1 pound iach in the subsidiary company, 500 by the solicitor and 500 by nother person. This was done through a board meeting. The sale of all three properties were affected by shares held in two companies. The shares were sold by the director at a profit. Issue- Whether the directors and others were liable to account for the profit made by them? Observation -The House of Lords observed that all the directors were in a fiduciary position, and they acted on their exclusive knowledge as directors. They framed resolution by which they made profits for themselves. They sought no authority from the company to do so by reason of their authority. Decision- Lord Russell of Killowen held as under:~ he rule of equity which insists on those sho by use of @ fiduciary position make a profit, being liable to account for that no way depends on fraud, or absence of bona fides; or ‘upon questions or considerations as whether the property would oF should otherwise have gone to the plaintiff, or whether he took a ‘or acted as he did for the benefit ofthe plaintify, or whether the iff has in fact been damaged or benefited by his action. The it having, in the stated been made that director who acquires property while in office, to account for his profit upon resale even if he acts in good h. This case illustrated the standard of honesty required in a director. board of directors is the company’s heart and we key to its success. Since greater power comes ., the company management should bein the hands of responsible people who can use right way and the organisation is governed by who make all of the company’s deci a any’s decisions together i mating and even though a substantial number ye e°sAting company mismanagement have been experiential and Cees of are the first to be held respor And the directo their powe @ board of di ‘ible in this case. Ans 3(ii) This question deals with A) oe PPointment of Independent Independent Director- An Independent Director is anon. is executive company aeho helps the company in improv ; and governance standards. He does not have ant and gover es not have any kind of relationsh ‘th the company that may affect the independence of nee cone em “Independent Directors has been defined in the panies Act, 2013. The relevant provisions are reproduced director of a 8 Corporate credibility hereunder Eligibility criteria to appoint an Independent Director- pac! Per Section 149(6) of the Companies Act, 2013, “Independent means a director, who does not have any of the following ion with the company: who is not or was not a pror any promoter; Ee relationship or transacti 1 group or related to who has or never had any the 2 immediately preceding current financial year; Pecuniary relationship during financial years or during the cox a his relative is holding any security or interest — eI 50,00,000 or 2% of the paid-up capital of the : ae 'y during the 2 immediately preceding financial year; Patter ‘e holds or has ever held the ase '¥ managerial personnel in any 3 preceding of ear. Manner of appointment of Independent Director- Appointment o Sect 18 eat Of independent director shall be made as_per ieee te Companies Act, 2013 read with rule Rule 5 : ointment and Qualification i Rules, 2014 and Keulaion 16 of Securities Exchange Board ot ‘8 and Obligations Disclosure) Regulations 2015, > —~— 7 ed skill set_and qualifying all have his/her name added in the data bank of an ependent director. The company may select qualified persons be appointed as independent directors from data banks based n their areas of expertise and expertise. Once the right person is jund, the Company shall follow the following procedure: 1. Ascerta her the selected person is qualified in terms of Section 149(6) of the Companies Act read with Rules 5 and 6 of The Companies (Appointment and Qualification of Directors) Rules, 2014. 2, Obtain DIN Director Identification Number (DIN). The Company shall obtain a DIN if the selected person is not having it, 3. Obtain intimation that he is not disqualified to appoint as director in Form DIR-8. 4. Consent to act as a Director in Form-DIR-2 5, The Company shall hold a Board Meeting to approve the appointment of an Independent Director wherein the following matters shall be decided: ~ Resolution of appointment to hold office up to 5 years shall be passed subject to the approval of shareholders in the General Meeting. ~ Decide terms of appointment and remuneration ~ Decide the Directors’ authorisation for filing documents with respect to such an appointment ~ Decide upon the Date and agenda of the General Meeting, 6. The Company shall convey the General Meeting to confirm the appointment of the Independent Director through ordinary Resolution. 7. The Company shall issue the appointment letter to the Director. 8. ‘The Director shall disclose his interest in other entities in Form MBP-1 within 30 days of his appointment. 9. The Company shall file Form DIR-12 with RoC within 30 days of his appointme: n addition to the above, the listed companies also have to disclose the appointment of an independent director to stockexchanges within 24 hours of the conclusion of the board and post the appointment on the website within 2 work; ly Meeting NG days, Period of Appointment of Independent Director- As per Section 149(10) of the Companies Act, an In Director shall hold the office for a period of 3 consecurinn ePetent . cutive yez shall be eligible for reappointment for another 5 consecutive yar as, Number of Independent Director- A. Listed Company - minimum 1/3 of the directors as an independent director. B. Unlisted Public Company - Must have directors on its board. Q.4.(i) John is a banker who bought the lease of Phi for mining for 30,000. He then set os the “New Coal Cor attr its incorporation and sold the lease of the Phine Island to the company for 60,000 through directors who were virtually his Tominees, Later, the public investors who originally sanctioned the transaction became aware that John had earned a huge profit in this entire transaction. The ‘New Coal Co.” sued John and claimed rescission due to non-disclosure and an account of profits. Decide the case highlighting the relationship of a promoter to the company and with the suj ea ‘PPort of relevant case laws and total number of at least 2 independent Gi) Define prospectus and discuss its various kinds. Ans.4(i) This tion deals wi ionshi the Company» Weston deals with relationship of a Promoter to Introduction- F Promoters play a crucial role in establishi rom its inception stage. An individual or a gre ax of a company. They carryout the required process ye, Promotes firm. Much before the legal birth of a company it er yes aelish the minds of promoter (s) who take the idea a step aca eee to give it a shape and form. However, oter sat andeavour ra promo *s are the actual owners ing a company right of a company, but the company sharcholte of the company. Section 2(68) of the Companies Act, 2013 states “Promoter means a person- Company Lav (2023) 19 has been named as such in a prospectus or is identified by the company in the annual return referred to in Section 92; 2. who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise; 3. in accordance with whose advice, directions or instructions the Board of directors of the company is accustomed to act. The proviso excludes persons acting in a professional capacity.” In simple words, promoters perform the preliminary steps, like floating the securities in the market, making the prospectus of the company, etc., for establishing the company’s business. However, the person is doing these things professionally, they will not be considered a promoter. Types of Promoters A promoter is a person/entity who conceives the idea of ‘company formation. An individual, firm, association of persons or company can be a promoter. A promoter of a company can be any of the following types: a. Professional promoter — an expert in promoting business during its inception. b. Financial promoter ~ who invests capital and has a sizeable company share. c. Managing promoter - helps in company formation and also gets the managing rights in the company after it is formed. d. Occasional promoter — his main job is to float the company; they get involved only in the crucial matters of the business. Functions of a Promoter- r s tion of a A promoter performs several functions in the formation o} company, from conceiving the business idea to taking all the required steps to make the ideal a reality. Some of the functions are: 1. Comprehend or conceive the idea of company formation. ake aad 2. Look into the feasibility and viability of the business idea an whether the company formation will be practicable or profitabl Organise and collect the available resources to convert the business idea into a reality.A QE ALLE. 4. Decide the company the company’s Memorandum of As n ation and Articles of Assoc Decide th ate people for bankers and comy Wn of the company’s head office. comp first directors. y posts, such as auditors, company’s funding sources and capital The role of the promoter ceases when the company is establishe and is handled by the board of directors and. the ore management. i Duties of a Promoter (Fiduciary position)- a. Disclose hidden profits- The first duty of the promoter is to be loyal to the business and not involve in malpractice. They should not earn secret or hidden profits. They are not barred from making profits, but the only condi 7 jon they must disclose it a a b. Disclose all material facts and all private arrangements- | A promoter has a relationship of trust and confidence with the company, ie. fiduciary relationship. I the duty of prom Il material facts relating to the as disclose all private transactions earned from the stakeholders. in the best interest of cor I . mpany- promoters should Prioritise the company’s interest over their personal interests. Rights of a Promoter- a Bah te Heder Promoter are jointly and severally for any hidden pro r Thus, one greeaty hidden profits made by any of them. e b. ight to preliminay reimbursement for company’s e ry expenses- A Promoter is entitled to preliminary exper iaheeliminary expenditure incurred for the © Right to 7 Fenumeration- Ap; e rename at A, Promoter has. the right to tthe contary. The company's apa unless a contact ipany’s Article of Associ ® Provide that the directors can pay iation can an amount to the ne and prepares the contents of 21 promoters for their services. However, the promoters cannot he company for renumeration unless there is a contract Liability of a Promoter- + They cannot make secret profits out of company deals, they are liable to pay such profits to the company. + They can be held liable for damages or losses suffered by a person who subscribes for debentures or shares due to the false statements made in the company prospectus. The are y liable for making false statements. + They are also liable to the company where there is a breach of duty on their part, misappropriated company property or xy of breach of trust. Leading Case Law- Erlanger v. New Sombrero Phosphate Co. (1878) Erlanger a Patsi banker, along with another person bought an island containing phosphate mines for 55000 Euros. For a resale they formed a company. The object of the company as purchaser was the lease of the island and work the mines. He named 5 directors, out of these 2 were abroad and 3 were under complete control of Erlanger. These three directors purchased the island for 110000 Euros. A prospectus was then issued which disclosed nothing. Issue- 1. What is the position and duty of a promoter whole promoting a company? 2. Whether Erlanger is liable to refund the profits made by him? Observation- The House of Lords observed that a Promoter of a company stands in a fiduciary position. A Promoter is bound to take care that when he sells his own property to the company through the medium of board of directors, who can pass an independent judgement on the transaction and who are not left under the believe that the property belongs not to the promoter but some other party. Decision- The company was held authorised to rescind the contract and to recover the balance from the vendors of the island, who were promoters of the company. Conclusion- In light of the above discussion, it can be held that John has acted in breach of his fiduciary relationship with he company as a promoter. Therefore, the contract shall be held ded in the present case.Qeaul 1s of Delhi University rospectus and Kinds of panies Act, 2013, ‘Ans. 4Gi) This question dea Prospectus as envisaged in the Co Prospectus : Iris a legal document which outlines the company’s financial es for sale to the investors. The prospectus is a legal pursue, detailing product socuriti document for market participants and investors the features, prospects, and promise of a finan tis mandated by the law For insurance and inv ‘e customers, For example-In an IPO, the prospectus tells ps about the company’s plans and business mod Importance of Prospectus- The company provides a prospectus with the intention to raise their capital. Prospectus helps the investors in making a welhinformed decision by providing the entire information of the securities which are offered to the public for sale. Whenever the company issues the prospectus, the company rust file it with the regulator. The prospectus includes the deta of the company’s business, financial statements. 1. To notify the public of the issue ut the company on record with regards to the terms of issue and allotment process on the part of the directors and Types of Prospectus- According, to Companies on panies Act 2013, ther A. Deemed Prospectus — are four types of states that when the compen, at® OF aBrees to allot any securities of prospectus via eqZocement is considered as a. deemed pron i ia offer is made to investors 75°, document that is assumed to Y'S Prospectus, d_ prospectus at contains an ory oF issu made by the B such as a merchant bank, another business, or an issuing house. A company usually opts for a deemed prospectus to avoid complying with regulations issued by the ‘A deemed prospectus is considered a document of offer for sale if it meets any of the following criterias: 1. The intermediary made an offer to sell shares to the public within six months of the allotment of shares; or 2. The company which allotted its shares to the intermediary has not received payment in exchange for the shares the offer for sale was made by the intermediary. B. Red Herring Prospectus ~ A red herring prospectus is defined under Section 32 of the CA, 2013. A red herring prospectus does not provide detailed information about the quantum, or quantity, and price of the securities offered. It is used for the book-building process. The process through which an issuer seeks to identify the price at which an initial public offering (IPO) will be offered is known as book building. An issuer often creates a book for institutional investors to make offers for the quantity of shares and the estimated amount of money they will pay. The issuer examines the data and estimates the final price for the security using an average value. A company that intends to offer securities to the public can issue a red herring prospectus before issuing the original prospectus. It must be filed with the Registrar at least three days prior to the ‘opening of the subscription list and offers. A red herring prospectus s subject to the same obligations as a prospectus, and any difference between the red herring prospectus and the prospectus must be identified as ‘deviations in the prospectus’. Following the close of the offer of securities, the prospectus must state the total capital wr by debt or share capital, and the closing price of the a8 well as any other details not included in the red herring prospectus, and must be filed with the Registrar and the SEBI. C. Shelf prospectus The shelf prospectus is outlined under Section 31 of the CA, 2013. A shelf prospectus offers securities for subscription in one or more isstes over a specific period of time without the need for a fresh prospectus to be issued. This is done es in projects where the issue si ge sums of money are required is substantial, andQsAl pers GF LU niversity, a to be raised in order to save on the expense of filing a neyy prospectus every time. Any company may file a shelf prospectus with the Registra at the stage of the first offer of securities, and the validity periog af such prospectus shall not exceed one year, which shall begin from the date of opening of the first offer of securities under the prospectus and in respect to subsequent offers of securities issued {turing the period of validity of that prospectus in accordance with the guidelines issued by SEBI. A fresh prospectus is not required to be issued for the offer of securities. ‘A company filing a shelf prospectus must file an information ‘memorandum with the Registrar within one month under Rule 10 of the Companies (Prospectus and Allotment of Securities) Ru 2014, prior to the issue of a second or subsequent offer of securities, containing all updated charges in the facts, the company’s financial position that changed between the previous offer of securities and the succeeding offer of securities, or any other changes. Prior to applying, any changes, a company or any other person shall inform applicants of the changes, and if they express willingness to withdraw their application, the company or other person shall reimburse money received as a subscription within fifteen days. When an information memorandum is submitted with the shelf prospectus at the time of the offer for securities, it is considered a prospectus. D. Abridged Prospectus ~ Section 2(1) of the CA, 2013 outlines an abridged prospectus. It means a memorandum containing the salient features of a prospectus as per the regulations specified by the Securities and Exchange Board. Section 33 mandates the issuance of application forms for securities along with an abridged prospectus. Section 33 shall not be applicable to the application form issued for: 1 A valid invitation to a person to engage in an underwriting agreement with regard to such securities; or 2. Securities that were not offered to the public. A copy of the prospectus shall b A shall be sent to any indi requests it prior to the close of the subs. I If a corporation fails to comply velth ih it would be liabl default. to any individual who rule ery decision-making method favours : ye ae Not every deci ttle is applicable only in case of infringement rule an Foss v, Hates sear a member and is not applicable oa Ee personal Finds gM ty the removal of the Chairman In light of the above discussion, the ieee from the company in the present case will not amount 10 OPPrNision, Ne case of Needle Industries Ltd. v Needle Newey an is contrary to the law, may and by itself support the inference that the law was peated with a mala fide intention. But a series of acts following, tp one another can in the context lead justifiably to the conclusion that they are part of same transaction of which the object is to cause or commit oppression. Qs. 6. Evaluate the case of Aluminum Corporation of India Ltd. Mis. Lakshmi Rattan Cotton Mills Co. Ltd, (1970). Analyse the legal provisions and case laws on the criteria laid by courts to decide when it is “just and equitable” to wind up the company. ‘Ans 6. This question deals with the Just and Equitable Windup of a Company by the court. jot necessa Introduction- “Winding Up of a Company” means to bring an end to the life of the company. A distinct feature of a company is “Perpetual Succession” which means that the longevity of the company does not depend on its members or their financial status. Even if all the members of the company go bankrupt or all of them die, the company will not dissolve on its own unless it is dissolved on the grounds which are laid out in the Companies Act, 2013. ‘Types of Winding Up- According to Section 425 of the Companies Act, 201 two kinds of Winding Up:- pans A 2013, ther ae 1. Compulsory Winding Up under the order of the Court 2. Voluntary Winding Up 1. Winding Up by Court - Section 271 of the Ci i i [Ac 1956) slates 4 COMAPI Act, 2013(-S.433 of the Companies Company Law (2023) 31 “Cire ances in which company may be wound up by Tribunal.— (1) A company may, on 4 petition under section 272, be wound up by the Tribunal, (a) if the company is unable to pay its debts; (6) if the company has, by special resolution, resolved that the company be wound up by the Tribunal; (c) ifthe company has acted against the interests ofthe sovereignty ‘and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality; (a) if the Tribunal has ordered the winding up of the company under Chapter XIX; (e) if on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the iy have been conducted in a fraudulent manner or the any twas formed for fraudulent and unlawful purpose or persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up; company as made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years; or (g) if the Tri of the opinion that it is just and equitable that the company should be wound Just and equitable - Section 271(1)(g)- Section 271(1)(g) gives the court a very wide discretionary power to order winding up whenever it appears to be desirable. However, the exercise of such wide discretionary power by the court must necessarily be governed by justice and equity. The court may give due weight to the enthusiasm of the organisation, its representatives, creditors and investors and overall population ought to likewise be considered. Thus, there must be a really strong ground for iquidating a company. ‘The conditions wherein the courts have in the past broken down organi ground can be settled into general classiQ& ALLB. Solved P ey 2 Law (2023) 1. Deadlock in Management- _ » 6. Bubble Company- ritly, when there is a deadlock in the management of the Lees Firtly, when there 4 jeto order windingup: Meredifference When the company is merely a bubble {sjustand eq) sotctorate and those representing on any business or does not have any propery, the minority does not amount to deadlock. Winding up cannot be oun a Mored on the grounds of friction and disputes between directors. ‘The expression “just and equitable” as used in $.271(1)(g) of the When A Sak of probity and good faith, the company may Act has been examined in the following case law:- Aluminium Corporation of India Ltd. v. Mls. Lakshmi Rattan Cotton Mills Co. Ltd., (1970)- 2. Loss of Substratum- When the substratum of the company is gon 3B it does not carry may be ordered be wound up. ie. when the he appellant company and the respondent company were jointly seen ee cetisas incorporated has substantially failed, it ig Owned BY two Broups, Differences arose between them and their oe eee eed interests were separated under an award. The company was directed just and equitable to order winding up. to pay a sum to the corporation under restitution. The company ‘A temporary difficulty which does not knock out the company’s failed to pay the corporation, a petition was filed under Section 433 jpottom should not be permitted to become a ground for liquidation, | of the Companies Act, 1956 for winding up then filed a winding up petition on a number of grounds including the company’s inability 3. Losses- to pay its debts. It is considered just and fair to wrap up an organisation when Issues- 1.Whether the company is liable to be wound up if it it cannot carry on business with the exception of at misfortunes. js insolvent? It will be unnecessary, in reality, for an organisation to carry on i i - > business when there is no deste for accomplishing the object of ea acy ear ero ene a exchanging at a benefit. Yet, simple anxiety with respect to certain 3. Whether the petition is mala fide and liable to be dismissed? investors that the benefits of the organisation will be squandered Observation- The court observed that its power to pass a and that misfortune rather than increase will result has been held winding up order in case of the inability of a company to pay its to be no ground. debts is discretionary. The discretion has to be exercised judicially. "This means that it is only where the balance of equities is shown | by the petitioner to tilt appreciably in favour of a winding up order It is simple and even-handed to wrap up an organisation where _| that it will be made “ex debito justitiae.” A petitioner relying on the the vital investors have embraced a forceful or pressing approach | Sounds of Section 433 can get a winding up order as a matter of towards the minority. However, a mere ‘mere mismanagement TE or misconduct or misappropriation on the part of directors is no ground for winding up’ 4. Oppression of Minority- ‘The provision of Section 434(1) determines when the requirements | of Section 433 will be deemed to be fulfilled, but they do not lay 5. Fraudulent Purpose- | down when a winding up order must necessarily be passed. Itis simple and fair to wr . | Thecourt further observed that for determining ‘total insolvency’, that it has Been imagines ae aan Ofganisation on the off chance | total liabilities including contingent and prospective liabilities, are for an illicit reason (hen and Gelivered in misrepresentation or | to be weighed against total realisable assets. However, for a case of fraudulent 6 aie When the company was formed to carry out | ‘ insolvency’, only current liabilities of which payment the business Bees (viz. lottery, gambling etc.) or when | is actually due, have to be examined. However, the mere ae it may be ordered to be wound up. ‘The petitioner in this case could not prove that the current fraudulent misee Of having been fraud in promotion or ests of the company were less than current liabilities and that the resentation in the to wind up a company. ‘ation in the prospectus, will not be sufficientof Delhi University 7 from the profit ee % company would not be abl could not be made under not to make them trap for unwary people. They should be is said to be making, 2 We UP gid not fall under Section 433(1) of in consonance with the main object.” Section 433(e) because the Decision- It was held that substratum of the company had the 1956 Act. The court further refused under Section of winding up may be [and it was impossible to carry out the object for which i is formed ord mone oe remedy is arpilabie te Pand therefore it was just and equitable to wind up the company. the petitioners and they unzeasonably seek to Have the company Seth Mok Chambers Ltd, (1968) ‘ound up instead of pursuing that remedy. The court then laid ‘The company was formed to carry on business of trading of Gur, pone he following circumstances which can be considered as just cotton, sugar and grains etc, It was basically carrying on the business and equitable of trading in futures fication, the government prohibited the futures trade in Gur. The member of the company 1. Substratum gone led a petition for winding up of the company on just and equitable Deadlock in management Fraud or irregularities Observation- The court held that the substratum of a company Mismanagement of company’s funds could be said to have disappeared only when the object for which in was incorporated had substantially failed or it was impo: carry on the business of the company except a a substantial loss or Insolvency g assets were insufficient to meet the existing liabilities. Business carried on for the benefit of debenture holders jon- The Supreme Court held that since the substratum Right given by provision of article. of the company was not destroyed in this case, te company could : not be wound up. Bubble company Decision- The court held that the allegations of mala fide against the petitioner for winding up can generally be substantiated by circumstantial evidence. The fact that the company was unable pay its debts does no to wind up the company. It futher cautioned that though the discretion secretary, it may be considered tribunal/court, the same has to be exercised judiciously. as a complete deadlock between the two member-directors. In the co eS present case, the directors had forfeited mutual confidence beyond oe e a Co., In Re (1882) repair and consequently the company was ordered to be wound ny was : oe - German co as formed to make cofee from dates under 2 business was flourishing. It was just and equitable nnded German patent was never granted, bi igs should not be allowed to continue and court — patent and make and sold coffee fervene and wind up the company. t oe rd ares . des ‘was presented by two hails n to wind up the company Conch This doctrine, which is eae consideration s not turning a pro t was created. The court/tribunal will i air ‘company. Ar for winding up based on the shareholders’ just dee, ee only to the extent permitted by the Justice Lindley observed as under Ww, a8 discussed above, In construing the MOA j care mist beg he MOA in which there are al ds, taken to construe those ponent rene co ords so a8 zz.