Company Law

COMPANY LAW
Dr. Sushila
Assistant-Professor (Law)
&
Director
Centre for Study of Consumer Law and Policy
National Law University Delhi

New Delhi
NATIONAL LAW UNIVERSITY DELHI 1

OUTLINE
 Modes of Doing Business
 Meaning of “Company”
 Definition of Company
 Advantages of Incorporation
 Disadvantages of Incorporation
 Company v. Partnership Firm v. LLP
 Classifications/ Kinds of Companies
 Memorandum of Association
 Articles of Association

MODES OF DOING BUSINESS
Sole Proprietorship Concern Business Associations
Company Partnership Firm LLP

MEANING OF COMPANY
 A “Company”, in common parlance, means a group of persons associated together for
attainment of a common end, social and economic, and to a large extent publicly and
socially responsible. It is, therefore, a combined political, social, economic, and legal
institution. It is the most dominant form of business organisation.
 It is called a “body corporate” because the persons composing it are made into one
body by incorporating it according to the law and clothing it with legal personality.
 In the legal sense, a company is an association of both natural and artificial persons
and is incorporated under the existing law of a country. In terms of the Companies
Act, 2013 a “company” means a company incorporated under this Act or under any
previous company law.
 A company, though a legal person, is not a citizen under the Constitution of India, as it
is not a natural person.

Important Feature
 Voluntary Association of persons formed for some purpose
 Creation of law- i.e., legal person
 Artificial person-no body or soul exists only in eyes of law. Law alone can dissolve it.
May purchase/sell property, enter into contract through natural persons. Can sue and
be sued
 Comes into existence after incorporation, on issue of certificate of incorporation by
Registrar.
 On incorporation, a company becomes a body corporate or corporation and acquires a
personality distinct from its members.

ADVANTAGE OF INCORPORATION
(i) Independent corporate existence
A Co. has an independent corporate existence separate from its members. This is unlike a partnership which is nothing but a
collection of the partners. Business belongs to Co. even when members keep changing. Incorporation confers a number of benefits.
Owner of the business ceases to trade in his own person. Liabilities are Co.’s liabilities and former owner is under no liability for
anything the Co. does although as principal shareholder, he is able to take full advantage of the profits which the Co. makes. Noone
can say he is owner of the Co. Creditors of members have no rights over assets of the Co.
Cases:
• Salmon v. Salmon & Co. Ltd. (1897)
• Lee v. Lee’s Air Farming Ltd. (1961)
(ii) Limited liability of Members

The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of
organisation. Liability of the shareholders is limited to the capital invested by them
Exceptions:
• Incorporation by furnishing false information
• Fraudulent conduct of business
• Unlimited company etc.

Independent Corporate Existence
• 1. Salmon v. Salmon & Co. Ltd. (1897) : There was a sale by 'S" of a shoe business to a newly formed Company.
The consideration was 38, 782 pounds of which 'S' took 20,000.shares of 1 pound each. His wife, daughter and 4
sons took up one share each. Subsequently, the Company was wound up on which date the assets were worth 6,000
pounds and liabilities were 17,000 pound (including 10.000 pounds secured debentures held by ‘S). Payment was
first made to 'S' as he was a secured' creditor.
• Contention: The unsecured creditors contended that S' could not be treated as a secured creditor as he was the
Managing Director of a one man Company which was no different from 'S' and the Cloak of the Company was a
mere sham and fraud.
• Decision- It was held that a Company is distinct from the members who from it and their liability are restricted to the
extent of unpaid value of shares, if any.
• 2. Lee v. Lee's Air Farming Ltd. Facts : 'L' held 2,999 shares out of 3,000 shares in a Company. He was the
Managing Director and chief pilot on a salary. He was killed in an air crash while working for the Company. His wife
claimed compensation under Workman Compensation Act since her husband died during the course of employment.
• Contention : The Insurers challenged that 'L' and the Company was the same person.
• Decision: It was held that ‘L’ was a separate person distinct -from the Company he formed and hence, compensation
was due to the widow.

ADVANTAGE OF INCORPORATION CONTD.
(iii) Perpetual Succession and Common Seal

An incorporated company never dies. The membership of a company may keep changing
from time to time, but that does not affect the company’s continuity.
Upon incorporation, a company becomes a legal entity with perpetual succession and a
common seal.
(iv) Separate Property

A company, being a legal person, is capable of owning, enjoying and disposing of
property in its own name. no shareholder has any right to any item of property owned by
the company. The property of a company can clearly be distinguished from that of its
members.
ADVANTAGE OF INCORPORATION CONTD.
(v) Transferable shares

Shares or other interests of any member in a company are transferrable in a manner
provided by the articles of the company.
(vi) Capacity to sue and be sued

A company, being a body corporate, can sue and be sued in its own name. it can take
actions to enforce its legal rights or be sued for breach of its legal duties in its own name.
(vii) Management divorced from ownership

Management being divorced from ownership, the company is professionally managed.

DISADVANTAGE OF INCORPORATION
(i) Formality and Expense
Incorporation is expensive affair and requires number of formalities to be complied with. The administration of a
company has to be carried on strictly in accordance with the provisions of the Act.
(ii) Corporate Governance

In a public limited company, there are large number of shareholders who cannot take part in the management of
company and therefore, the powers of management are exercised by the directors. It has been found on actual
practice in many cases that the management has a poor track record of corporate governance.
(iii) Lifting the Corporate Veil

Generally, the principle in Salomon’s case recognising the separate existence of a company from its members, is
recognised and the company and its members are separated by a corporate veil. That is, the company as a
corporate personality which is distinct from its members. This theory of corporate entity is indeed the basic
principle on which the whole law of corporation is based. In reality, however, the business of the company is
always carried on by, and for the benefit, of some individuals. As such, there are situations where the courts will
lift the veil of incorporation in order to examine the “realities” which lay behind.

LIFTING THE VEIL OF CORPORATE PERSONALITY
 A company has a separate legal personality distinct from it members.
 The Salomon case well established the existence of the veil of corporate personality.
 Circumstances may occur which compel the courts to identify a company with its
members. The corporate veil is said to be lifted when the court ignores the company
and concerns itself directly with the members or managers.
 In other words, the courts look at the things as if the company did not have a separate
existence. Thus, the “lifting of the corporate veil” means disregarding the corporate
entity and paying regard instead to the individual members behind the legal façade.

LIFTING THE VEIL OF CORPORATE PERSONALITY CONTD.
Adherence to Salomon principle will not be rigidly followed where this would cause an
unjust result.
Grounds for lifting of corporate veil
[A] Judicial grounds of lifting of veil
(a) Prevention of fraud or improper conduct
(b) Tax evasion
(c) Avoidance of welfare legislation
(d) Determination of character of a company
[B] Statutory Grounds of Lifting of Veil

[C] For imposing punishment, penalties and compensation under the Companies Act,
2013

Prevention of fraud or improper conduct :
Gilford Motor Co. v. Home, (1993) Ch. 935:
B was in the employment of A. During, employment, B covenanted that he shall not at
any time wile in office of MD or afterwards, solicit, entice away the company’s
customers’. In order to escape the legal obligation B formed a nominal company. The
company carried on the rival trade and solicit the customers of A.
Can B contend that he was the party to the agreement and not the company? In such cases,
the courts will look into the reality of the situation. For what purpose B formed the
Company? Solely for the purpose of defeating a pre-existing legal obligation.
So, the Court passes an order of injunction not only against B, but also against the
nominal company restraining them both from practicing the rival trade. "The corporate
device cannot be used as a mask to escape a legal obligation".

Tax Evasion :
In Re Sir Dinshaw Manekjee Pettit, AI.R. (1927)
A is an income tax assessee. His income consisted of dividends and interests. He formed
four private companies. The investments were put in the name of the companies but held
by him as an agent. Incomes were credited into the accounts of the company. A received
them as pretended Loans. The court held that the companies and the assessee were not
two different persons. The companies did not do any business. They were created solely
for the purpose of enabling the assessee to avoid super tax.

Tax Evasion :
Bacha F. Guzdar v CIT Bombay
At that time agricultural income was exempt from tax. However in the case of Tea Estates,
60% was treated as agricultural income, 40% was liable for tax as income. A lady was a
member in a Tea Company. She claimed that 60% of her income from dividend shall be
treated as agricultural income. The Court negatived her contention and held that income in
her hands, which she received as dividend, cannot be treated as agricultural income.
Company and the assessee were two different persons

Avoidance of welfare legislation:
Workman Employed in Associated Rubber Industries Ltd., Bhavnagar v. Associated

Rubber Industries Ltd., Bhavnagar & Anr.:
A new Company was formed by the Principal Company with no assets of its own except
those transferred to it by the principal company with any business or income of its own
excepts receiving dividends from shares transferred to it by the principal Company. The
Supreme Court held that the new Company was formed as a device to reduce the gross
profits of the principal company' and thereby reduce the amount to be paid by way of
bonus to the workmen. The amount of dividends received by the new Company should
therefore be taken into account while assessing the gross profit of the principal company.

Determination of Character of a Company
Daimler Co. Ltd v. Continental Tyre & Rubber Co. (1916) 2 AC 307
The Corporate veil was pierced to identity the men in de facto control of its affairs, who
were residents of Germany, which was at war with England. The alien Company was not
allowed to proceed with the action as that would meant giving money to the enemy, which
was considered monstrous and against public policy.

COMPANY V. PARTNERSHIP v. LLP
COMPANY PARTNERSHIP LLP
Formation/ Companies Act, 2013 Indian Partnership Act, 1932 LLP Act, 2008
Applicability
Registration/ Nature of A company must be Registration is optional. An LLP must be

Document registered registered.
Name of the Entity Must be approved by No approval is necessary . Must be approved by

Registrar of companies. Registrar of companies.
Legal Status Artificial person having Not a distinct entity. Partners Separate legal entity.
separate legal entity. are collectively called
partnership.
Agreement Memorandum of Association May or may not be in writing. Agreement must be in

– has to be in writing. writing.

Number of Pvt. Ltd. Co. (Min.- 2, Max. – 200) Min. - 2 Min. – 2

Members
Public Ltd. Co. (Min.- 7, Max. – No Max. - 100 Max. – No Limit.
Limit)
Now a “One-Person Company” is

also allowed under the Companies
Act, 2013
Liability of Limited Unlimited – partners are Limited to the amount of

Members jointly and severally liable. capital agreed to be
contributed.
Object of As per the objects clause of the Any lawful business. It has to state name of
Business Memorandum proposed lawful business in
the incorporated document.

Capital/ Capital of a company cannot be The capital contributed by The quantum of

Finance/ altered except by complying with partners can be altered contribution of each
Minimum the legal provisions. Finance comes freely by the partner. No partner is left to be
Capital from shareholders, borrowings and legal requirement as decided by them inter se,
retained profits. regards minimum capital. the contribution can be
altered according to the
Public limited companies can raise A partner may not agreement. The capital
money by selling shares on the contribute as capital. contribution of a partner
stock market, but private limited cannot be nil but may be
companies cannot. nominal.
Both a private company and a

public company must have a
minimum paid capital of 1 Lakh
Rupees and 5 Lakh Rupees
respectively.
Investment into With a limited company, outside Outside investors may Outside investors may
the Business investor may contribute loans or only contribute loan only contribute loan
share capital and take an equity capital and cannot take capital, not equity stake.
stake. equity stake.

Property Property belongs to the company, Property belongs to all the The property belongs to
and not the members/ shareholders. partners. the LLP and its partners.
Agency No member in a company is an Every partner is an agent A partner is an agent of the

agent of the company or other of the firm and of every LLP, but not of other
members/ shareholders. other partner of the firm. partners.
Management Board of Directors, elected by All the partners of a firm Ever partner is entitled to
shareholders, controls and manages are entitled to take part in take part in the
the business. the management. management of LLP.
Freedom of A company, particularly public A partnership firm has full Full freedom in
Operations/ limited company, is subject to strict freedom in conducting its conducting its business.
Annual regulatory framework. Board and business. No requirements
Statutory general meetings must be to conduct annual statutory
Meetings conducted periodically. meetings.
Share of Profit Profits are usually distributed to Every partner takes a share Main purpose of LLP is to
shareholders in the form of of the profits. share the profits of a
dividends. business which is a basic
element of partnership
firm.

Transfer of Share of public limited company are A partner cannot transfer A partner in LLP may
Shares freely transferable, shares of private his interest to any other transfer his share either
limited company can be transferred person without consent of wholly or in part.
subject to restrictions. other partners so as to
make him the partner.
Holding Out A company is not liable for Partnership is liable for the LLP is liable to the extent
misrepresentation of third party or credit given by an outsider of credit received by
its members. who gave the same on person who was
misrepresentation of a misrepresented by holding
person by holding out. out partner.
Investigation Central Government may order No provision for Central Government may
investigation into the affairs of a investigation into the order investigation into the
company. affairs of a company. affairs of LLP.
Accounts and Accounts must be audited. Need not be audited until Need to be audited.
Audit/ Annual the annual turnover does
Filings not cross 1 Crore.

Arbitration Companies Act, 2013 has not The disputes are to be Disputes are to be
made any provision for arbitration. resolved as per resolved according to
partnership deed or by LLP Agreement. In the
Courts. absence of any agreement
on any matter, dispute
shall be submitted/
referred to arbitration.
Existence of A company is not liquidated in Existence of a partnership Existence of LLP is not
Survivability/ case of death or insolvency of a business is dependent on dependent on partners.
Dissolution member. the partners. There is no
perpetual succession as
partners leaving (e.g.
death, insolvency etc.) a
partnership can result in
dissolution.
Winding Up Winding up a company is a long Partnership firm is Winding up of an LLP
and painful legal process. dissolved as per the may be either voluntary
agreement, or by consent or by Tribunal.
of the partners.

KINDS OF COMPANIES
Classification/ Kinds of Companies
I. Classification on the basis of incorporation

(a) Statutory Companies e.g. LIC
(b) Registered Companies – Companies incorporated under the Companies Act, 2013
II. Classification on the basis of Liability

(c) Unlimited liability companies
(d) Companies limited by guarantee
(e) Companies limited by shares
III. Classification on the basis of Registration and number of Members

(f) Private Companies
(g) Public Companies
(h) One Person Company
KINDS OF COMPANIES contd.
 Private Company
 Public Company
 One Person Company
 Small Company
 Limited Company (Guarantee Company)
 Unlimited Company
 Holding Company and Subsidiary Company
 Producer Companies
 Foreign Companies
 Government Companies
 Other Companies

 Statutory companies. They are Companies created by a special statute of the

Legislature/ Parliament, e.g. Reserve Bank of India, LIC, UTI etc., the provisions of
the Companies Act, 1956 apply to them if they are not inconsistent with the provisions
of the special Act under which they are formed.
 Registered companies : They are Companies registered under the Companies Act,
2013 or 1956

 a. Companies Limited by Shares: a Company where the liability of its members is
limited by its MoA to the amount unpaid on the shares. This liability could be
enforced during the life time of the company or in the event of Winding up.
 b. Companies Limited by Guarantee: a Company where the liability of the
members is limited by MoA to such an amount which the members undertake to
contribute to the assets of the Company, in the event of its being wound up. The
features of such a Company are legal personality and limited liability. Members of a
guarantee Co are placed in position of guarantor’s of the Co.’s debts upto the agreed
amount. For the purpose of profit but for the promotion of art science culture and
other charitable purposes. Such Company may or may not have share capital.

 Companies on basis of Numbers of members and Registrations:
 Private Companies (2 - 200)

 Public Companies(7 -unlimited)
 One man Companies (to be formed as Private Co.):
One person by subscribing his name to a Memorandum and complying with
requirements of the Act in respect of Registration

KINDS OF COMPANIES : Private Company
A Private Company is normally what Americans call a ‘closed corporation’
Means a Co. having minimum paid up share capital of 1 Lakh or such higher as may be
prescribed and which by its articles:
a) Restriction on the right to transfer it shares.

b) Except in one person Co., limits the number of members to 200 (earlier 50)
(a) Prohibits invitation to public to subscribe to any securities of the company.
(b) minimum number of two directors
(c) Cannot issue prospectus

KINDS OF COMPANIES : Private Company
 Advantages:
 Private Company enjoys a lot of exemptions from operation of Act commonly known as privileges due
to which are prescribed as ‘incorporated partnerships’. They can keep their affairs to themselves.
1. formation requires only 2 persons. This facilitates functioning and makes the choice of a private
company most suitable for friendly and family concerns.
2. Public participation by issuing prospectus is prohibited, therefore, it has not to file a statement in lieu
of prospectus, and can commence business immediately
3. As private Co. is prohibited from inviting public for subscription, it can allot shares without waiting
for minimum subscription
4. Need two directors. All directors can be given permanent appointment and be appointed by a single
resolution. 14 days’ notice for appointment of new director in place of retiring director not applicable.
5. Not to hold statutory meeting or file statutory report.

KINDS OF COMPANIES : Public company
 A company which is:
i) not a private company, will be a public company. A private company, which is a

subsidiary of a public company is also covered the definition of a public company.
ii) Has a paid up capital of at least Rs.5 Lakhs or such higher as may be prescribed.

KINDS OF COMPANIES : Public company
 Shares can be listed and publicly traded: Share of public limited company are freely
transferable.
 Liquidity of shares & easily transferable
 Minimum seven shareholders, no maximum: it helps in raising funds from the public at
large
 Financial affairs are public : it gives confidence to the authorities and the public for
funding & carrying out business.

PUBLIC COMPANY V. PRIVATE COMPANY
PUBLIC COMPANY PRIVATE COMPANY
Minimum o. of 7 2
members
Maximum no. of
members Unlimited 200
Minimum No. of 3 2
Directors
Restriction on No restriction Prohibited
Invitation to
subscribe to shares.
Minimum Paid Up 5 Lakh 1 Lakh
Capital No requirement as to minimum paid up No requirement as to minimum
capital after 2015 Amendment paid up capital after 2015
Amendment

Transferability to Freely transferable Restricted

shares
Quorum Five members. Two members.

Personally present personally present
Managerial Applicable Not applicable

Remuneration-
Ceiling
Commencement of After obtaining of certificate After obtaining of certificate of
Business commencement of Business incorporation
Independent Need to appoint independent directors- Need not appoint independent

director/retirement retirement of a certain proportion of directors
of director by directors every year by rotation directors are not required to
rotation retire by rotation

Approval of Central Where the no. of Directors exceed 12 Not Necessary

Government for
appointment of
Directors
Retirement of Two thirds Not applicable
Directors by rotation
Minimum paid-up Applicable Not applicable

Capital
Commencement of Rs. 5 Lakhs Rs. 1 Lakhs

Business

STEPS IN FORMATION OF A COMPANY
Promotion
Preparation of Memorandum of Association
Preparation of Articles of Association
Preliminary Contracts, if any
Incorporation or Registration of the Company
Issue of Prospectus

STEPS IN FORMATION OF A COMPANY contd.
 Any seven or more persons (two or more in case of a private company, and, one person in case
of a one-person company) associated for any lawful purpose may form an incorporated
company with or without limited liability. They shall subscribe their names to a Memorandum
of Association and also comply with other formalities in respect of registration.
 Before registration, it is desirable to ascertain from Registrar of Companies (RoC) about

availability and approval of the name of the company.
 Various documents (including MoA, Affidavit, Declaration, Address etc.) duly stamped
together with the necessary fees are to be filed with RoC for registration of a company.
 on satisfaction about the compliance with the requirements, RoC shall register the documents
submitted and enter the company’s name in the Register of Companies, and then issue
Certificate of Incorporation and will also allot the company a Corporate Identity Number.
MEMORANDUM OF ASSOCIATION
 The Memorandum of Association (MoA) of a company is a fundamental document of
the company. It contains “the fundamental conditions upon which alone the company
is allowed to be incorporated”.
 It is the most important document as it sets out the Constitution of the company. It is
the Charter of the company and defines its raison d’etre (i.e. reason for existence).
 It lays down the area of operation of the company. It also regulates the external affairs
of the company in relation to outsiders. It is the “Lakshman Rekha” for a company.

MEMORANDUM OF ASSOCIATION contd.
Purpose of Memorandum
 The prospective shareholders know the field in, or the purpose for, which their money is
going to be used by the company and what risk they are undertaking in making
investment.
 The outsiders dealing with the company know with certainty as to what the objects of
the company are and as to whether the contractual relation into which they contemplate
to enter with the company is within the objects of the company.
Thus, MoA is, as it were, the area beyond which the actions of the company cannot go;
inside that area the shareholders may make such regulations for their own governance as
they think fit (Articles of Association).

MoA of every company shall contain the following clauses (“conditions of the company’s
incorporation”):
• The Name Clause

• The Registered Office Clause
• The Objects Clause
• The Liability Clause
• The Capital Clause
• In the case of One Person Company, the name of the person who, in the event of death
of the subscriber, shall become the member of the company.

Name Clause
A company may, subject to the following rules, select any suitable name:
• The name shall not be identical with or resemble too nearly to the name of an existing company or be
such that its use by the company will constitute an offence or is undesirable in the opinion of the
Central Government.
• It is necessary that the word “Limited” must be mentioned as the last word of the name in the case of
a public limited company, and the word “Private Limited” must be the last word of the name in the
case of a private limited company.
• The name must not suggest connection with an unlawful activity or be offensive in form.
• Name must not be prohibited under Emblems and Names (prevention of Improper use) Act 1950.
• The name should not be misleading.
• Abbreviated names are not allowed at the first instance.
• Name now to be Published on documents of Co.

Registered Office Clause
• The second clause of the memorandum must specify the State in which the registered office of the company
is to be situated.
• A company must have from the date of commencement of business or within 15 days of incorporation
whichever is earlier, a registered office to which all communications and notices may be addressed.
• This determines the domicile of a company.
Change of registered office (detailed procedure)

• Within the same State
• From one State to another State: special resolution- application to Central govt. creditors may raise concern
• State cannot object on ground of revenue loss unless it stands in capacity of a creditor (arrears of sales tax):
In Re Mechinnon Machenzie & Co. (1967)

The Objects Clause (most Important clause in MOA)
• Indicates the purpose for which the company has been setup and its actual capability,
besides its sphere of activities.
• To inform the members in what kind of business their capital may be used as also to
inform the persons dealing with the company what its powers are.
• Thus, it protects both the investors and the creditors by ensuring that the company’s
funds are not dissipated in unauthorised activities.
• Serves public interest by preventing diversification of a company’s activities in

direction not closely connected with the business for which the company may have been
initially established.
Old Act: The objects clause must be divided in to three sub-clauses, namely:
• Main objects - The main objects to be pursued by the company and objects incidental
or ancillary to the attainment of main object.
• Other objects - Other objects not included in the above clause. If a company wants to
start a business including in ‘other objects’, it shall have to either pass a special
resolution to that effect or pass an ordinary resolution and obtain consent of the
Central Government.

2013 Act:
• Main objects - The main objects to be pursued by the company and objects incidental
or ancillary to the attainment of main object.
• Matters considered necessary in furtherance of main objects
Choice of objects lies with the subscribers to the memorandum and their freedom in this
respect is almost unrestricted (i.e. they should not be illegal or immoral).

 Alteration in object clause: 1956: procedural and substantive restrictions
(Resolution and Approval of Central Govt., really close connection with main
objects)
 2013 Act –restrictions under 1956 Act have been removed.
 Only special resolution needs to be passed and to be submitted to the ROC(3

months) and publicity in newspapers needed

Liability Clause
• The fourth clause has to state the nature of liability that the members incur. If the company is to be incorporated with
limited liability, the clause must state that the liability of the members shall be limited by shares/ guarantee. (Upto the
value of share). Conversion of Ltd. liability into unlimited is impossible but vice versa is possible as per provisions
under the Act, Special Resolution- E-form-newspaper- ROC) etc.)
Capital Clause
• It states the amount of the nominal capital of the company and the number and value of the shares into which it is
divided. E.g. Capital of 1 crore divided into 1 lakh shares of Rs. 100 each.
• A public company must have a minimum paid-up capital of Rs. 5 Lakhs or such higher amount as may be prescribed.
• A private company is required to have a minimum paid-up capital of Rs. 1 Lakh or such higher amount as may be
prescribed by its Articles.
THE REQUIREMENT AS TO MINIMUM PAID UP CAPITAL HAS BEEN OMITTED BY THE

COMPANIES (AMENDMENT) ACT, 2015, IN RESPECT OF BOTH PUBLIC AND PRIVATE COMPANIES.

The Association/ Subscription Clause
• Lastly, the memorandum contains a declaration that the persons subscribing their
signatures to the memorandum are desirous of forming themselves into an association
in pursuance to the memorandum.
• The memorandum has to be subscribed by at least 7 persons in the case of a public

company and by at least 2 persons in the case of a private company.
• After incorporation, no subscriber can withdraw his name on any ground whatsoever.
But he may withdraw his name before the memorandum is actually registered as up to
that time there is no contract at all.

DOCTRINE OF ULTRA VIRES
• A company has the power to do all such things as are (i) authorised to be done by the
Companies Act, (ii) essential to the attainment of its objects specified in the
memorandum, and, (iii) reasonably and fairly incidental to its objects.
• Everything else is ultra vires the company. ‘Ultra’ means ‘beyond’ and ‘vires’ means
‘power’. The term ultra vires a company means that the doing of the act is beyond the
legal power and authority of the company.
• An action outside the memorandum is ultra vires the company, such an act does not
create any legal relationship, and is absolutely void.
• The company should devote itself only to the objects set out in the memorandum and no
others.
• The power of the company to do various acts is to be exercised only for intra vires
purposes. Thus, the power to borrow money has to be exercised in order to promote the
company’s objects.
DOCTRINE OF ULTRA VIRES contd.
Leading Case: Ashbury Railway Carriage & Iron Co. Ltd. v. Riche (1875)
Facts
In this case, a company had been constituted with the following objects: (i) To make, sell or give on hire
railway carriage and wagons, and (ii) To carry on the business of mechanical engineers and general
contractors. The company entered into a contract with Riche, a firm of railway contactors, to finance the
construction of a railway line in Belgium. Later on, the company repudiated the contract as one ultra vires.
Riche brought an action for damages for breach of contract. His contentions were that the contract in
question came well within the meaning of the words “general contractors” and was, therefore, within the
powers of the company. Further, the contract was ratified by a majority of the shareholders.
Held
The power of a company are limited to the objects stated in the company’s memorandum of association. A
contract which is ultra vires the company is void ab initio. It cannot be made intra vires by a unanimous
consent of all the members of the company. The court adopted the “Main Objects Rule” of construction;
the words ‘general contractors’ must be read in connection with the main business of company.

Leading Case: Bell Houses Ltd. v. City Wall Properties Ltd. (1965)
Where the company’s object clause authorised it to carry on any other trade or business
which in the opinion of the Board of Directors could be carried advantageously in
connection with the company’s general business, the clause was held to be valid i.e. intra
vires the company.
Principal business: to buy vacant sites and build housing estates. It provided service to
defendant co. -Introduced financer to it and claimed fee for its services which was denied
by defendant co. contending the ultra vires act done by Plaintiff co.

The doctrine of ultra vires, however, is not always an unmixed blessing it can cause
hardships great as those which it prevent. While it handicaps the ambitious manager, it
lays a trap for the unwary creditor. That is why there has been a revolt against it almost
ever since its inception.
Consequences or effects of ultra vires transaction

• The company can be restrained to do an ultra vires act by any member/person by
bringing a suit for injunction.
• Personal liability of Directors in ultra vires torts.
• Property will be retained by Company
• Contracts- void

ARTICLES OF ASSOCIATION
• The Articles of Association is the second document which has to be registered along
with the memorandum. The Articles are next in importance to the Memorandum. It is
the document which regulates the rights of the members of co. amongst themselves and
the manner in which business of the co. shall be conducted.
• The Articles of Association are the rules, regulations and bye-laws for the internal
management of the affairs of a company. They are similar to the ‘partnership deed’ of a
partnership. They are framed with the object of carrying out the aims and objects as set
out in the memorandum of Association.
• The Companies Act gives the subscribers a free hand. Any stipulation as to the relations
between the company and its members, and between members inter se may be inserted
in the Articles.
ARTICLES OF ASSOCIATION should be inconsistent with MOA & Companies Act
Companies Act
MOA
AOA
AOA
vvbnn

ARTICLES AND MEMORANDUM: THEIR RELATION
• The articles are subordinate to memorandum - Articles cannot give powers to the
company which is not conferred by the Memorandum nor can they create rights
inconsistent with the memorandum.
• The memorandum must be read in conjunction with the articles.
• The terms of the memorandum cannot be modified or controlled by the articles.

DISTINCTION BETWEEN MEMORANDUM AND ARTICLES
Memorandum of Association Articles of Association
It is the charter of the company and defines the They are rules and regulations to govern the
fundamental conditions and objects of internal management of the company (between the
incorporation. company and its members or between the
members inter se).
It defines the scope of the activities of the They are the rules for carrying out the objects of
company, or the area beyond which the actions of the company as set out in the memorandum.
the company cannot go.
It cannot include any clause which is contrary to They are subsidiary both to the Companies Act
the provisions of the Companies Act. and the memorandum.
Cannot be easily altered (approval of Central Can be easily altered by a special resolution.
Government, Court etc. required).
Acts done by a company beyond memorandum are Anything done by a company in contravention of
void and ultra vires and cannot be ratified even by Articles, is only irregular and can always be
unanimous vote of all shareholders. ratified or confirmed by the shareholders.

DOCTRINE OF CONSTRUCTIVE NOTICE
• According to the doctrine of constructive notice, every outsider dealing with a
company is deemed or presumed to have notice of the contents of the Memorandum
and the Articles of Association.
• Anyone dealing with a company is presumed not only to have read the Memorandum
and the Articles but to have understood them properly i.e. according to their proper
meaning.
• As a result of the notice (constructive notice) of the contents of these documents, if a

person enters into a contract with a company which is not permitted by the
Memorandum or the Articles i.e. it is ultra vires the company, the company cannot be
made liable for the same. (caveat emptor)

DOCTRINE OF INDOOR MANAGEMENT
• The doctrine of indoor management constitutes an exception to the principle of
constructive notice. According to this doctrine, the outsiders dealing with a company
are entitled to assume that the internal proceedings of the company have been
regularly done.
• While doctrine of constructive notice seeks to protect the company against the
outsiders, the doctrine of indoor management operates to protect outsiders against the
company.
• The doctrine of indoor management is based on public convenience and justice. First,
the memorandum and articles are public documents and thus open to public
inspection. But the details of internal proceedings are not open to public inspection.

DOCTRINE OF INDOOR MANAGEMENT contd.
The genesis of this doctrine lies in Royal British Bank v. Turquand case (1856)
Royal British Bank v. Turquand case

• When there are persons conducting the affairs of the company in a manner which
appears to be perfectly consistent with the articles of association of the company then
so dealing with them externally is not to be affected by any irregularities which might
have taken place in the internal management of the company.
• Once it was found that the directors could borrow subject to a resolution, the plaintiff
had the right to infer that the necessary resolution must have been passed.

DOCTRINE OF INDOOR MANAGEMENT contd.
Exceptions to the doctrine of indoor management:
• Knowledge of irregularity: Howard v. Patent Ivory Mftg Co. (1888). Director who themselves
lent to the co. without obtaining consent of shareholders had knowledge of irregularity, cannot
take benefit of the doctrine.
• Negligence (suspicion of irregularity): Anand Bihari Lal v. Dinshaw (AIR 1942) P accepted
transfer of co’s property from its accountant. Transaction void-beyond authority. P should have
seen power of attorney in favour of accountant.
• Forgery: Personal liability of the person responsible. co,. Cannot be liable.
• Acts outside the scope of his apparent authority- P an sue only if the power to act has actually
been delegated to the officer.
THANK YOU

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Company Law

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COMPANY LAW

National Law University Delhi

NATIONAL LAW UNIVERSITY DELHI 1

 Modes of Doing Business

 Company v. Partnership Firm v. LLP

 Classifications/ Kinds of Companies

NATIONAL LAW UNIVERSITY DELHI 2

Sole Proprietorship Concern Business Associations

Company Partnership Firm LLP

NATIONAL LAW UNIVERSITY DELHI 3

NATIONAL LAW UNIVERSITY DELHI 4

NATIONAL LAW UNIVERSITY DELHI 5

(ii) Limited liability of Members

NATIONAL LAW UNIVERSITY DELHI 6

NATIONAL LAW UNIVERSITY DELHI 7

(iii) Perpetual Succession and Common Seal

(iv) Separate Property

(v) Transferable shares

(vi) Capacity to sue and be sued

(vii) Management divorced from ownership

NATIONAL LAW UNIVERSITY DELHI 9

(ii) Corporate Governance

(iii) Lifting the Corporate Veil

NATIONAL LAW UNIVERSITY DELHI 10

NATIONAL LAW UNIVERSITY DELHI 11

[B] Statutory Grounds of Lifting of Veil

NATIONAL LAW UNIVERSITY DELHI 12

NATIONAL LAW UNIVERSITY DELHI 13

In Re Sir Dinshaw Manekjee Pettit, AI.R. (1927)

NATIONAL LAW UNIVERSITY DELHI 14

Bacha F. Guzdar v CIT Bombay

NATIONAL LAW UNIVERSITY DELHI 15

Workman Employed in Associated Rubber Industries Ltd., Bhavnagar v. Associated

NATIONAL LAW UNIVERSITY DELHI 16

NATIONAL LAW UNIVERSITY DELHI 17

Registration/ Nature of A company must be Registration is optional. An LLP must be

Name of the Entity Must be approved by No approval is necessary . Must be approved by

Agreement Memorandum of Association May or may not be in writing. Agreement must be in

NATIONAL LAW UNIVERSITY DELHI 18

Number of Pvt. Ltd. Co. (Min.- 2, Max. – 200) Min. - 2 Min. – 2

Now a “One-Person Company” is

Liability of Limited Unlimited – partners are Limited to the amount of

NATIONAL LAW UNIVERSITY DELHI 19

Capital/ Capital of a company cannot be The capital contributed by The quantum of

Both a private company and a

NATIONAL LAW UNIVERSITY DELHI 20

Agency No member in a company is an Every partner is an agent A partner is an agent of the

NATIONAL LAW UNIVERSITY DELHI 21

NATIONAL LAW UNIVERSITY DELHI 22

NATIONAL LAW UNIVERSITY DELHI 23

I. Classification on the basis of incorporation

II. Classification on the basis of Liability

III. Classification on the basis of Registration and number of Members

NATIONAL LAW UNIVERSITY DELHI 25

 Statutory companies. They are Companies created by a special statute of the

NATIONAL LAW UNIVERSITY DELHI 26

NATIONAL LAW UNIVERSITY DELHI 27

 Private Companies (2 - 200)

NATIONAL LAW UNIVERSITY DELHI 28

a) Restriction on the right to transfer it shares.

NATIONAL LAW UNIVERSITY DELHI 29

NATIONAL LAW UNIVERSITY DELHI 30

i) not a private company, will be a public company. A private company, which is a