SESSION 17

- 24
COMPANY LAW – BASICS;
KINDS OF COMPANIES; MOA
& AOA
 COMPANY LAW
• A company is a body or an entity that has a separate legal existence
from the members who comprise of it. It is a legal fiction that has
been created by the Companies Act, 2013.
• Section 3 of Companies Act, 2013 – a company may be formed for any
lawful purpose.
• Since a corporate body is the creation of law, it is not a human being,
it is an artificial legal person and it is clothed by many rights,
obligations, powers and duties prescribed by law.
 Corporate
Personality

Company is Limited
not a citizen Liability

Voluntary
association of Perpetual
profit (except
sec 8) Features succession

of
Company

Contractual Separate
rights Property

Capacity to
Transferability
sue and be
of shares
sued
 BASIC TYPES OF COMPANIES
• Public Company – any seven or more persons, when
the company is to be formed.
• Private Company – any two or more persons when the
company is to be formed.
• One person company – any one person, when the
company is to be formed.
 COMPANY

INCORPORATION LIABILITY OTHERS

COMPANIES COMPANIES HOLDING AND

STATUTORY REGISTERED UNLIMITED GOVERNMENT FOREIGN ASSOCIATE DORMANT
LIMITED BY LIMITED BY NOT FOR PROFIT SUBSIDIARY
COMPANIES COMPANIES LIABILITY COMPANIES COMPANIES COMPANIES COMPANIES
GUARANTEE SHARES COMPANIES
 MOA & AOA
• Memorandum of Association (MOA) is a document
that contains all the fundamental data which are
required for the company incorporation.
• Articles of Association (AOA) is a document containing
all the rules and regulations that govern the company.

Name Clause
Name of the registered
entity (Business/Company
name)
Association Clause
Information about its first
shareholders and number
of shares allocated to each
of them
MEMORANDUM OF
ASSOCIATION
Object Clause
Registered Office Clause
Aims and objectives of the
Registered office address
Company
Liability Clause
Capital Clause
Clause about its limited
Share capital, minimum liability. State the liability
paid-up capital, etc of each member

Allocation of shares and the
manner that how shares
have to be handled
List of Directors, including
first of directors or directors
for life, their appointment,
remuneration, qualifications,
powers, and proceedings of
Board of Directors’ meetings
Board of Directors and their
powers
ARTICLES
OF
ASSOCIATION
Procedure to elect the
List of Intellectual Property Chairman and his voting
Voting rights of members
Rights rights
General Meetings and
Dividends and reserves proceeding at General Alteration in Capital
(Dividing the profits) Meetings
How accounts and Audits How the Company can be
Borrowing Powers dissolved
will be managed
APPOINTMENT OF
DIRECTORS
• The directors are persons elected by the shareholders to
direct, conduct, manage or supervise the affairs of the
company.
• Can body corporates/association/firm be appointed as
directors?
 • Public company – min. 3
• Private company – min. 2
Number of directors • One person company – 1
• Maximum – 15 (in all the cases) – only in case of spl. Resolution, more than 15 can be
appointed.

• Every listed co.

• Every public limited co. having:
Woman director • Paid up share capital of Rs. 100 Crore or more; or
• Turnover of Rs. 300 crore or more.
• In all the above cases, at least one woman director shall be appointed.

Minimum Stay • Every company shall have at least one director who has stayed in India for a
total period of not less than 182 days in the previous calendar.

Independent Director • Every listed public company shall have at least one-third of the total number of
directors as independent directors.
 Classification
of Directors

Managing Whole-time
Director Director

Independent Nominee
Director Director
 PREVENTION OF OPPRESSION &
MISMANAGEMENT (sections 241 - 246)
• Lord Cooper defined Oppression as, “The essence of the matter
seems to be that the conduct complained of should at the lowest
involve a visible departure from the standards of fair dealing,
and a violation of the conditions of fair play on which every
shareholder who entrusts his money to the company is entitled
to rely”.
• Mismanagement is the situation when there is gross misconduct
and deviation from company’s original course of action which
leads to substantial failures of company / loss to public / to
company.
 OPPRESSION
Acts / circumstances which were held
to be Oppressive:
• Denial to shareholder of his right to
vote and receive dividend
• Appointment of a director at an EOGM
of which no notice was offered to the
minority.
• An attempt to force new and more
risky objects upon an unwilling
minority
• Exclusion of minority from profit
participation
Acts / circumstances which were not
held to be Oppressive:
• Failure to declare dividend
• Refusal to declare more than moderate rate of
dividend even if the profits earned could
justify a higher rate of dividend
• Denial of right of inspection to books of
accounts
• Failure to comply with formalities required in
the matter of giving notice of general meeting
• Drawing of salary by the director for his
services rendered, even though the company
is suffering losses
 MISMANAGEMENT
Acts / circumstances which were held
to be mismanagement:
• Preventing directors from complying with their responsibilities and
duties
• Absence of company’s records causing prejudice to company’s
business
• Sale of assets at a low price and without compliance with the act
• Non filing of documents with the Registrar of Companies
• Violation of provisions of memorandum and articles of the company
• Erosion of companies substratum due to irregularities in conduct of
affairs
• Misuse of funds
• Continuation in office even after expiry of term of managing director
• In fighting among the directors resulting in serious prejudice to the
company
Acts / circumstances which were not
held to be Mismanagement:
• Change in control and management of the
company and the appointment of new
directors which is not ultra vires to the
company
• Directors’ bona fide decision not to declare
dividend and to accumulate available profits
into reserves
• Where directors of a company in financial
difficulties arranged with the company’s
creditors that the creditors may become
shareholders and directors instead of being
creditors
 Doctrine of Constructive Notice & Indoor
Management
• In companies law the doctrine of constructive notice is a doctrine where all
persons dealing with a company are deemed (or "construed") to have knowledge
of the company's articles of association and memorandum of association. The
doctrine of indoor management is an exception to this rule.
• The AOA and MOA are regarded as “public documents” from the time the
business is registered. They are openly available to the general public for
observation. As a result, it is assumed that everyone interacting with the
corporation is well-versed in its laws and regulations. This assumption is known
as the Doctrine of Constructive Notice.
• The law of constructive notice applies not only to MOA and AOA, but also to all
other documentation needed to be registered with the Registrar of Companies,
like special resolutions stated in Section 117.
The harshness of the doctrine of constructive notice is somewhat reduced by the
"Rule of Indoor management" or "Turquand's Rule". The rule derives its name from
the case of Royal British Bank v Turquand, where the defendant was the liquidator
of the insolvent Cameron's Coalbrook Steam, Coal and Swansea and Loughor
Railway Company. The company had borrowed from Royal British Bank by giving a
bond worth £2,000.

The articles of the company stated that the directors could only borrow if
authorised by a resolution of the company's general meeting, and could not borrow
more than the amount specified in the resolution.

The articles were registered with Companies House so there was constructive
notice. But the bank could not have known about the resolution, as they were not
registrable and thus were not a public document. The bond was held valid and
there was no requirement to know the company's internal workings.
 LIFTING OF CORPORATE VEIL
• The separate personality of a company is a statutory privilege and it must be used
for legitimate business purposes only. Where fraudulent and dishonest use is
made of the legal entity, the individuals concerned will not be allowed to take
shelter behind the corporate personality. The Court will break through the
corporate shell and apply the principle/doctrine of what is called “lifting of or
piercing the corporate veil”.
• Section – 7(7) - deals with punishment for incorporation of company by furnishing
false information
• Section – 251(1) deals with liability for making fraudulent application for removal
of name of company from the register of companies
• Section - 339 deals with liability for fraudulent conduct of business during the
course of winding up
a. Where the corporate veil has been used for commission of fraud or improper conduct. In
such a situation, Courts have lifted the veil and looked at the realities of the situation.

b. Where a corporate facade is really only an agency instrumentality

c. Where the conduct conflicts with public policy, courts lifted the corporate veil for protecting
the public policy

d. In Daimler Co. Ltd. v. Continental Tyre & Rubber Co., (1916) 2 A.C. 307, it was held that a
company will be regarded as having enemy character, if the persons having de facto control of
its affairs are resident in an enemy country or, wherever they may be, are acting under
instructions from or on behalf of the enemy.

e. Where it was found that the sole purpose for which the company was formed was to evade
taxes the Court will ignore the concept of separate entity and make the individuals concerned
liable to pay the taxes which they would have paid but for the formation of the company

f. use of corporate veil for hiding criminal activities

 DOCTRINE OF ULTRA VIRES – “BEYOND
POWERS”
• In the case of a company whatever is not stated in the memorandum
as the objects or powers is prohibited by the doctrine of ultra vires. As
a result, an act which is ultra vires is void, and does not bind the
company. Neither the company nor the contracting party can sue on
it. Also, as stated earlier, the company cannot make it valid, even if
every member assents to it.
• The general rule is that an act which is ultra vires the company is
incapable of ratification. An act which is intra vires the company but
outside the authority of the directors may be ratified by the company
in proper form.