Lecture

on
THE COMPANIES ACT, 2013

Presented By:
VIVEK SAURAV
Assistant Professor of Law
 DEFINITION OF “COMPANY”

⮚ The word ‘company’ is derived from the Latin word (COM = with or

together; PANY =bread), and it originally referred to an association of persons

who took their meals together.

⮚ 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).

⮚ According to Section 2(20) of the Companies Act, 2013 “company” means

a company incorporated under this Act or under any previous company

law.
⮚ Lord Justice Lindley has defined a company as

“an association of many persons who contribute money or money’s worth to a

common stock and employ it in some trade or business and who share the
profit and loss arising there from.”

The common stock so contributed is denoted in money and is the capital of the
company. The persons who contributed in it or form it, or to whom it belongs,
are members. The proportion of capital to which each member is entitled is his
“share”.
 NATURE AND CHARACTERISTICS OF A COMPANY

A company is the creation of law, it is not a human being, it is an ARTIFICIAL

JURIDICAL PERSON (I.E. CREATED BY LAW); it is clothed with many
rights, obligations, powers and duties prescribed by law; it is called a ‘person’.
Being the creation of law, it possesses only the powers conferred upon it by its
Memorandum of Association which is the charter/constitution of the company.
The most striking characteristics of a company are:
❖ Corporate personality ❖ Capacity to Sue and Be Sued
❖ Liability – Limited or Unlimited ❖ Contractual Rights
❖ Perpetual Succession ❖ Limitation of Action
❖ Separate Property ❖ Administration & Management
❖ Transferability of Shares ❖ Common Seal
 CORPORATE PERSONALITY – SEPARATE LEGAL IDENTITY
It is a different ‘person’ from the members who compose it. Therefore it is
capable of owning property, incurring debts, borrowing money, having a bank
account, employing people, entering into contracts and suing or being sued in
the same manner as an individual.
SALOMON Vs. SALOMON & CO.LTD.

PERPETUAL SUCCESSION
An incorporated company never dies, except when it is wound up as per law. A
company, being a separate legal person is unaffected by death or departure of
any member and it remains the same entity, despite total change in the
membership. A company’s life is determined by the terms of its Memorandum of
Association.
 SALOMON Vs. SALOMON & CO.LTD.

Mr. ARON SALOMON

“Aron Salomon” had for many years carried on a prosperous “sole – proprietor”, hand made leather
shoes manufacturing business. His sons showed their interest to join the business, but since it was a
sole – proprietor business, only Aron Salomon can remain the ‘sole’ owner of the same, and therefore,
he decided to start his own private company.

SALOMON & Co. Ltd.

SHAREHOLDERS/MEMBERS SHAREHOLDING EQUITY CAPITAL

CONTRIBUTION
Aron Salomon 20,000 shares of 1 pound each 20,000 pound
Aron Salomon’s Wife 1 share of 1 pound 1 pound
Aron Salomon’s Daughter 1 share of 1 pound 1 pound
Aron Salomon’s 4 Sons 1 share each of 1 pound 4 pound
Total: 20,006/- pound
The company, Salomon & Co. Ltd purchased the sole – proprietor business of Salomon and paid him
£ 38,000 = £ 20,000/- (equity capital) + £ 8,000/- (in cash which the company has taken from small
creditors – unsecured - for doing business) + £ 10,000/- in form of Debentures to Mr. Aron Salomon
(form of loan – secured in nature, because Aron Salomon in lieu of this debenture/loan took charge
over the assets of the company (collateral security))

For running the daily affairs of the company Mr. Aron Salomon became the director of the company
along with two of his sons.

The company almost immediately ran into financial difficulties and only a year later, became
insolvent. As per the order of repayment of debt, preference is always given to Secured Creditor first,
and then Unsecured Creditor. Since Mr. Aron Salomon was himself the secured creditor of the
Company, he got his debt cleared first. After paying off the debenture holder nothing was left for the
unsecured creditors. An action was brought by the unsecured creditors against Salomon, contesting on
the independent existence of the Company.
 ARGUMENT:
The Company & Mr. Salomon both are the same entities. The business was solely conducted for and
by him, ‘it’s a one man show’ and the company was mere sham and fraud. Being a company’s director
he shall not be given preference for repayment of debts.
JUDGMENT:
The court held that, Mr. Salomon and the Salomon & Co. Ltd. are two separate entities, altogether.
Company enjoys a separate position from that of the position of the members who comprises it.
Therefore, a Company having its own legal existence can:

✔ Have properties in its own name

✔ Enter into contracts with other legal entities

✔ Incur Debts

✔ Have a bank account

✔ Employee people in its own name

✔ Can sue people and can be sued by others.
 LIMITED LIABILITY
The company, being a separate person, is the owner of its assets and bound by its
liabilities. The liability of a member as shareholder, extends to the contribution to
the capital of the company up to the nominal value of the shares held by him. In
other words, a shareholder is liable to pay the balance, if any, due on the shares
held by him, when called upon to pay and nothing more, even if the liabilities of
the company far exceed its assets.
Exceptions to the rule of Limited Liability:
❖ Unlimited Company
❖Incorporation by furnishing False Information
❖Misleading Prospectus
❖Acceptance of deposits with the intent to defraud the depositors
❖Liability for fraudulent conduct of the business.
 SEPARATE PROPERTY
A company being a legal person and entirely distinct from its members, is
capable of owning, enjoying and disposing of property in its own name. The
company is the real person in which all its property is vested, and by which it is
controlled, managed and disposed off.

TRANSFERABILITY OF SHARES
The capital of a company is divided into parts, called shares. The shares are said
to be movable property and, subject to certain conditions, freely transferable, so
that no shareholder remains permanently or necessarily associated to a company.
A member may sell his shares in the open market and realise the money invested
by him. The Stock Exchanges provide adequate facilities for the sale and
purchase of shares.
 COMMON SEAL
Upon incorporation, a company becomes a legal entity with perpetual succession
and a common seal. Since the company has no physical existence, it must act
through its agents and all contracts entered into by its agents must be under the
seal of the company. The Common Seal acts as the official signature of a
company. The name of the company must be engraved on its common seal.

CAPACITY TO SUE AND BE SUED

A company being a body corporate, can sue and be sued in its own name. To sue,
means to institute legal proceedings against (a person) or to bring a suit in a court
of law. All legal proceedings against the company are to be instituted in its name.
Similarly, the company may bring an action against anyone in its own name.
 CONTRACTUAL RIGHTS
A company, being a legal entity different from its members, can enter into
contracts for the conduct of the business in its own name.
LIMITATION OF ACTION
A company cannot go beyond the power stated in its Memorandum of
Association. The Memorandum of Association of the company regulates the
powers and fixes the objects of the company and provides the edifice upon which
the entire structure of the company rests.
ADMINISTRATION & MANAGEMENT
Companies can not control their administration or management works on its own
and therefore Directors are appointed to conduct the corporate functions. In other
words, the company is administered and managed by its managerial personnel.
 LIFTING OF CORPORATE VEIL
(Study form the word doc.)

[A] JUDICIAL GROUNDS FOR LIFTING OF VEIL:

⮚ Prevention of Fraud or Improper Conduct
⮚ Tax evasion
⮚ Avoidance of Welfare Legislation
⮚ Determination of the Character of a company

[B] STATUTORY GROUND OF LIFTING OF CORPORATE VEIL:

DEALING WITH FRAUD
⮚ Wrongful gain
⮚ Mis-description of company
⮚ Misrepresentation in Prospectus
⮚ Failure to return application money
 TYPES OF COMPANY
I. CLASSIFICATION ON THE BASIS OF INCORPORATION :
❖ STATUTORY COMPANIES:
These are constituted by a special Act of Parliament or State Legislature. The statutory companies are
also known as statutory corporations or public corporations, these are actually public bodies
established and operated by a special Act or Statute.
• Reserve Bank of India – RBI Act, 1934
• State Bank of India – SBI Act, 1955
• Life Insurance Corporation – LIC Act, 1956
• Airports Authority of India – AAI Act, 1994
• National Highways Authority of India – NHAI Act, 1988
• Central Warehousing Corporation – CWC Act, 1962
• Inland Waterways Authority of India – IWAI Act, 1985
• Food Corporation of India – FCI Act, 1964
• National Human Rights Commission – NHRC Act, 1993
Provisions of Companies Act, 2013 shall apply to Statutory Companies only till they remain in
consonance with the special acts.
 ❖ REGISTERED COMPANIES:
The companies which are incorporated under the Companies Act, 2013 or under any
previous company law, with ROC fall under this category.
Any previous company law will include:
⮚ Companies Act, 1882
⮚ Companies Act, 1913
⮚ Companies Act, 1956
 II. CLASSIFICATION ON THE BASIS OF LIABILITY:

UNLIMITED LIMITED
LIABILITY LIABILITY
COMPANY COMPANY

LIMITED BY LIMITED BY
SHARE GURANTEE
 II. CLASSIFICATION ON THE BASIS OF LIABILITY:

(a) UNLIMITED LIABILITY COMPANIES: In this type of company, the

members are liable for the company's debts in proportion to their respective
interests in the company and their liability is unlimited. Such companies may
or may not have share capital. They may be either a public company or a
private company.
(a) COMPANIES LIMITED BY GUARANTEE: A company that has the
liability of its members limited to such amount as the members may
respectively undertake, by the memorandum, to contribute to the assets of the
company in the event of its being wound-up, is known as a company limited
by guarantee. The members of a guarantee company are, in effect, placed in the
position of guarantors of the company's debts up to the agreed amount.
(b) COMPANIES LIMITED BY SHARES: A company that has the liability of
its members limited by the memorandum to the amount, if any, that they have
either paid fully or remain unpaid on the shares respectively held by them is
termed as a company limited by shares.
For example, a shareholder who has paid Rs.75 on a share of face value
Rs.100 can be called upon to pay the balance of Rs. 25 only. Companies
limited by shares are by far the most common and may be either public or
private.
III. CLASSIFICATION ON THE BASIS OF NUMBER OF
MEMBERS

PRIVATE COMPANY

Vs.

PUBLIC COMPANY
 PRIVATE COMPANY PUBLIC COMPNAY

MINIMUM PAID UP 0 5 lakh

CAPITAL

LIMIT ON THE Maximum no. of No limit.

MAXIMUM NO OF members 200.
MEMBERS.

MINIMUM NO. OF Minimum No. 2 Minimum No. 7

MEMBERS

INVITATION TO THE It prohibits any invitation It can invite the public to

PUBLIC FOR to the public to subscribe subscribe for any
SUBSCRIPTION OF for any security of the securities of the company.
SECURITIES company.

MINIMUM NO. OF Must have at least 2 Must have at least 3

DIRECTORS Directors Directors
 Restriction on making an Public Issue of Shares
ISSUE OF SHARES
invitation to public – Issue of
Shares is done through private
placement.

Restriction on the There is no restriction on

TRANSERFER OF
transferability of the shares the transferability of the
SHARES shares 

2 members personally present 5 if members <= 1000;

QUORAM FOR
15 if members >1000 &
MEETINGS <=5000;
30 if members > 5000

Not required Mandatory, for public listed

INDEPENDENT
companies
DIRECTORS
CLASSIFICATION ON
THE BASIS
OF
CONTROL = Voting
Power
 HOLDING COMPANY

A holding company is a parent company that owns enough voting stock (more
than 50%) in a subsidiary to make management decisions , influence  and
control the company's board of directors

SUBSIDIARY COMPANY

Subsidiary company or subsidiary, in relation to any other company (that is to

say the holding company), means a company in which the holding company—
i. controls the composition of the Board of Directors; or
ii. exercises or controls more than one-half of the total share capital either at
its own or together with one or more of its subsidiary companies
 ASSOCIATE COMPANY

Associate company, in relation to another company, means a company in

which that other company has a significant influence, but which is not a
subsidiary company but includes joint ventures.
In accounting and business valuation is a company in which another company
owns a significant portion of voting shares, usually 20–50%.
 FOREIGN COMPANY
As per the Companies Act, 2013 a “foreign company” means any company or body corporate
incorporated outside India which —

a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
b) conducts any business activity in India in any other manner

Electronic Mode – Carrying out electronically, whether the main server is installed in India or not,
and includes -

✔ B2B & B2C transactions, data interchange, digital supply transactions

✔ Financial Settlements, Web-Based marketing advisory services, transactional services,

database services and supply chain management

✔ Online Services – telemarketing, telecommuting, telemedicine, education, info research

✔ Data Communication Services

The Companies Act, 2013 lays down that every foreign company which establishes a place of business
in India must, within 30 days of the establishment of such place of business, file with the Registrar of
Companies for registration:

⮚ A certified copy of the charter or Memorandum and Articles, of the company;

⮚ The full address of the registered or principal office of the company;

⮚ A list of the directors;

⮚ The name and address of one or more persons resident in India authorised to accept on behalf of
the company service of process and any notices or other documents required to be served on the
company;

⮚ The full address of the office of the company in India which is deemed to be its principal place of
business in India;

Every foreign company has to ensure that the name of the company, the country of incorporation, the
fact of limited liability of members is exhibited in the specified places or documents.

Foreign companies have an option to form private or public limited companies in India at their
choice without any limitation 
 DORMANT COMPANY
According to Section 455 of the Companies Act, 2013, where a company is formed
and registered under this Act for a future project or to hold an asset or intellectual
property and has no significant accounting transaction, such a company or an
inactive company may make an application to the Registrar in such manner as may
be prescribed for obtaining the status of a dormant company.

GOVERNMENT COMPANY

Section 2(45) defines a “Government Company” as any company in which not less
than fifty one per cent of the paid-up share capital is held by the Central
Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, and includes a company
which is a subsidiary company of such a Government company.
 SMALL COMPANY

As per section 2(85) ‘‘small company’’ means a company, other than a public
company,—
i. Paid-up share capital of which does not exceed fifty lakh rupees or such
higher amount as may be prescribed which shall not be more than five crore
rupees; or
ii. Turnover of which as per its last profit and loss account does not exceed two
crore rupees or such higher amount as may be prescribed which shall not be
more than twenty crore rupees:
 ONE PERSON COMPANY
❖ As per the Companies Act, 2013, “One Person Company” means a company which has only one
person as a member.

❖ It is a form of private company.

✔ It shall have no minimum paid-up capital

✔ It shall prohibit any invitation to public to subscribe for the securities of the company.

❖ Only a natural person who is an Indian citizen and resident in India-

a) shall be eligible to incorporate a One Person Company;

b) shall be a nominee for the sole member of a One Person Company.

⮚ Minimum Director: 1; Max. Directors: 15

⮚ No person shall be eligible to incorporate more than a One Person Company or become
nominee in more than one such company.

⮚ No minor shall become member or nominee of the One Person Company.

⮚ RESTRICTIONS ON OPC:

✔ OPC cannot carry out Non-Banking Financial Investment activities including

investment in securities of any body corporates & cannot be converted as a
Section 8 Company – A company with charitable objects.

✔ No such company can convert voluntarily into any kind of company unless two
years have expired from the date of incorporation of One Person Company,

✔ The size of the OPC is restricted to the following:

• Maximum Paid Up Share Capital: Rs. 50 lakh

• Average annual turnover in a financial year: Rs. 2 crores.

If it exceeds the above mentioned limits, then it shall cease to be an OPC and
will have to be converted into a private or public company, within 6 months
from the date on which it exceeds the above mentioned limits.
 Section 8 Company –
FORMULATION OF COMPANIES
WITH
CHARITABLE OBJECTS

Section 8 of the Companies Act, 2013 empowers the central government to register a person or
association of persons having charitable objects, i.e. this type of company are incorporated for charity,
social welfare, social promotion and their main aim is to promote social welfare and work for
society and not to earn profits. Their main objects depict the reasons for their incorporation like -
Sports, Promote commerce, art, science, education, research, social welfare, religion, charity,
protection of the environment, or any such other object.

Examples such as:

Mohan Bagan Club, Federation of Indian Chambers of Commerce and Industry (FICCI),
Confederation of Indian Industries (CII), the Delhi Gymkhana Club Limited, the National Sports of
India, Infosys Foundation, Reliance Foundation, TATA Foundation, Reliance Research Institute are
some of the examples of Sec 8 companies registered under the Act.
⮚ No minimum capital:

As compared to other companies, section 8 companies don’t require any prescribed

minimum paid-up share capital.

⮚ Limited liability:

Section 8 companies also forms as a private limited or public limited company having
limited liability. Members of this company have limited liability as per their share
subscribed.

⮚ No dividend distribution

This form of company’s doesn’t issue a dividend to its members, because it is

restricted from the law. They cannot distribute their earned profit as dividends to its
member; they can use their profit in promoting their business objectives only.
⮚ Restrictions on Conversion

i. A company registered under this section shall not alter the provisions of its
Memorandum of Association or articles of Association except with the previous
approval of the Central Government.

ii. A company registered under this section may convert itself into company of any
other kind only after complying with such conditions as may be prescribed by the
central government.
 MEMORANDUM OF ASSOCIATION

According to PALMER:
‘Memorandum of Association’ contains the object for which the company is
formed, and therefore identifies the possible scope of its operations beyond
which its action cannot go. It defines as well as confines the power of the
company. If anything is done beyond these powers, that will be ultra vires the
company and therefore void.
 MOA as a ‘PUBLIC DOCUMENT’

⮚ MOA is a public document, whereby, everyone dealing with the company is

presumed to know its content.
⮚ A company shall, on being so requested by a member, send to him within
seven days of the request and subject to the payment of such fees as may be
prescribed. 
⮚ If a company makes any default in complying with the provisions of this
section, the company and every officer of the company who is in default
shall be liable for each default, to a penalty of one thousand rupees for each
day during which such default continues or one lakh rupees, whichever is
less.
 CONTENTS OF MOA

1. Name Clause
2. Situation or Registered Office Clause
3. OBJECT CLAUSE
4. Liability Clause
5. Capital Clause, in case company having a share capital
6. Association or Subscription Clause
7. Nomination Clause, in case of ONE PERSON COMPANY.
 NAME CLAUSE
❖ The name stated in the MOA shall not be identical with a resemblance too
nearly to the name of an existing company.
❖ The name shall not be such that its use by the company will constitute an
offence under any law for the time being in force.
❖ The name shall not be undesirable in the opinion of the Central Government.
❖ A company shall not be registered with a name which contains any word or
expression which is likely to give an impression that the company is in any way
connected with, or having the patronage of, the central government, or any state
government or any local authority, corporation or body constituted by the
Central Government or any State Government under any law for the time being
in force.
 REGISTERED OFFICE CLAUSE

The second clause must specify the State in which the registered office of the
company is to be situated. This is important for two reasons:
1. Firstly, the registered office is necessary for fixing the domicile of the company.
The High Court of that State has jurisdiction in which the registered office of the
company is situated.
2. Secondly, the Companies Act, 2013 provides that every company shall prepare
and keep at its registered office, financial statements along with books of
account and other relevant books and papers for every financial year.
3. A company shall, on and from the fifteenth day of its incorporation and at all
times thereafter, have a registered office capable of receiving and
acknowledging all communications and notices as may be addressed to it
 OBJECT CLAUSE

The third compulsory clause in the memorandum sets out the objects for which the
company has been formed. Under the Companies Act, 2013, all companies must
state in their memorandum the objects for which the company is proposed to be
incorporated and any matter considered necessary in furtherance thereof.
❖ It indicates and determines the purpose for which the company has been set up
and its actual capability and capacity.
❖ It states affirmatively the ambit and extent of powers of the company and, states
negatively, that nothing should be done beyond that ambit and that no attempt
shall be made to use the company for any other purpose than that which is
specified.
❖ Protection of Investors/Creditors: it protects the investors and creditors in the
company so that they may know the objects in which their money is to be
employed, and ensures that the company’s funds, to which they must look for
payment, are dissipated in any unauthorized activities
 LIABILITY CLAUSE
The Companies Act, states that the memorandum shall state the liability of
members of the company, whether limited or unlimited.
i. In the case of a company limited by shares, that liability of its members is
limited to the amount unpaid, if any, on the shares held by them; and
ii. In the case of a company limited by guarantee, the amount up to which
each member undertakes to contribute—
⮚ to the assets of the company in the event of its being wound-up while he is a
member; and
⮚ to the costs, and expenses of winding-up.
 CAPITAL CLAUSE
This is the fifth compulsory clause which must state the amount of the capital with
which the company is to be registered and the division thereof into shares of fixed
value or amount and the number of shares which the subscribers to the
memorandum agree to subscribe; and the number of shares each subscriber to the
memorandum intends to take, indicated opposite his name.

NOMINATION CLAUSE

The Memorandum of a company shall state that in case of one person company,
the name of the person who, in the event of death of the subscriber (that One
Person) shall become the member of the company.
 ASSOCIATION OR SUBSCRIPTION CLAUSE
Lastly, the Memorandum contains a declaration that the person subscribing their
signatures to the memorandum are desirous of forming themselves into an
association in pursuance to the memorandum. Each of the subscriber must sign
the MOA in presence of at least one witness who shall attest the signature.
 ARTICLES OF ASSOCIATION

❖ The articles of association of a company are its bye-laws or rules and

regulations that govern the management of its internal affairs and the
conduct of its business. The articles play a very important role in the
affairs of a company. It deals with the rights of the members of the
company inter se.
❖ They are subordinate to and are controlled by the memorandum of
association.
❖ It is also a public document.
CONTENTS OF ARTICLES
1. Number and value of shares.
2. Issue of preference shares.
3. Allotment of shares.
4. Calls on shares.
5. Transfer of shares.
6. Nomination.
7. Forfeiture of shares.
8. Alteration of capital.
9. Buy back.
10. Share certificates.
11. Voting rights and proxies.
12. Meetings and rules regarding committees.
13. Directors, their appointment and delegations of powers.
14. Issue of Debentures and stocks.
RELATIONSHIP BETWEEN MEMORANDUM OF
ASSOCIATION AND ARTICLE OF ASSOCIATION

1. Articles are subsidiary to memorandum.

2. The memorandum and articles must be read together, but the
terms of the memorandum cannot be modified or controlled by the
article of association.
3. The power of alteration of articles is subject only to what is
prohibited by the memorandum expressly or impliedly.
 MEMORANDUM ARTICLE
MEA It is the charter of the company, i.e., it contains Articles of Association is a
NING the fundamental conditions upon which the document containing all the rules
company has been incorporated. and regulations that governs the
company.

PURP It defines and confines the scope of activities of Being subsidiary to the
OSE the company. Memorandum, it defines the ways
for carrying out the objects of the
company, legally.

ALTE Both by special resolution and by the approval of By passing special resolution.
RATI the Central Government or Tribunal/Court also.
ON

RATIF Any act which is ultra vires the company is void Anything done by the company in
ICATI and cannot be ratified even by the unanimous contravention of the Articles is
ON consent of the share holders. only ‘irregular’ and can be ratified
by the shareholders.

COM Required Not required

PULS
ORY
FILIN
G AT
 Doctrine of ULTRA VIRES
ULTRA (beyond) + VIRES (power) = Beyond the Power

⮚ The Object Clause of the MOA defines and confines the objective of the company and thereby lay
down the permitted range of activities the company can undertake. In other words, a company
cannot do any activity which is not allowed by the object clause and if it does so that such activity
will be considered ULTRA VIRES and thereby VOID.
⮚ The doctrine of ultra vires was created to protect the company which is an artificial legal person,
from the burden of wrong decisions made by its directors. Any contract entered into by its directors
outside the scope of its memorandum, is not binding on the company.
⮚ Moreover, this doctrine provides protection to the investors by enabling them to know the objects in
which their money is to be employed and affords protection to the creditors by ensuring that the
company funds to which they must look for payment are not wasted in any unauthorized activities.
⮚ An act which is ultra vires the company cannot be ratified even by the unanimous consent of all the
shareholders.
⮚ If an act is ultra vires the AOA, it can be ratified by altering the AOA itself by a special resolution at
a general meeting.
 Doctrine of ULTRA VIRES
Ashbury Railway Carriage Company Ltd.
vs.
Riche
Facts:
The objects of Ashbury Railway Carriage and Iron Co Ltd were ‘to make or sell, or lend on
hire, railway-carriages and waggons, and all kinds of railway plant, fittings, machinery
and rolling-stock; to carry on the business of mechanical engineers and general
contractors. The directors of the company entered into a contract with Riche, wherein a
railway line was to be constructed in Belgium, and the contract was for the financing of the
construction. The contract which was thus entered into by the company was ratified
unanimously by all the members of the company. Later, the company repudiated the
contract as being Ultra Vires. Mr. Riche filed a case for the breach of contract.
Argument of Mr. Riche:
Mr. Riche’s contention was that the contract was well within the meaning of the word
general contractors (literal interpretation) and hence within its power. Moreover, he
emphasized on the part that the contract was ratified by all the shareholders, unanimously.
Judgment:
✔ The Court held the contract as void and the contention of Riche was rejected.
✔ The judgment in this case, laid the foundation of the rule of ‘ultra vires’, which meant that
the company was only allowed to do what it had been enabled to do in the object clause
of the MOA.
✔ The MOA of the company is placed with the Registrar of Companies, and anyone seeking
to enter into a transaction with a company would have had to access that concerned MOA
from the Registrar of Companies to ensure that the company was allowed to enter into
such transaction.
✔ An act which is ultra vires the company cannot be ratified even by the unanimous consent
of all the shareholders, and thereby, in this situation even if all the shareholders consented
the contract, it was still beyond the powers of the MOA.
 Doctrine of ‘CONSTRUCTIVE NOTICE’
❖ This Doctrine functions as a safety to the company while dealing with an outsider
party.
❖ There is no strict definition to constitute the Doctrine of Constructive Notice, but it can
be summed as follows:
✔ The documents such as Memorandum of Association and the Article of Association
of the company are PUBLIC DOCUMENTS and are open to public for inspection
whenever its required. (Section 399 of Companies Act, 2013)
Section 17 of Companies Act 2013 read with Rule 34 of the Company
(Incorporation) Rules 2014, provides that a Co. shall on payment of a
requisite fee send a copy of each of the following documents to a member or
outsider dealing with the Co. within 7 days of such request:
⮚ MOA
⮚ AOA
⮚ Every Resolution or Agreement like Board Resolutions, Special
Resolution and agreements framed therein.
Failure to do so will attract penalties.
✔ Therefore, the moment these documents are registered with the ROC, they become
public document and can be inspected by anyone by electronic means on payment
of the prescribed fee.
✔ Therefore, it is assumed that the outsider person, who is involving with the company
for business, has gone through these documents and understood them in their true
perspective, because it is a duty of outsider person to be aware of the rules and
regulations of the company as they are available in public domain
✔ Even if the party dealing with the company does not have the actual information or
notice of these documents it is presumed that he/she has an implied (constructive)
knowledge of the same.
THIS ASSUMPTION IS CALLED THE DOCTRINE OF CONSTRUCTIVE
NOTICE.
✔ In case if any dispute arises, the outsider will not be able to take the plea that he had
no knowledge or awareness of the matter.
 Doctrine of ‘INDOOR MANAGEMENT’
❖ The nature of the Doctrine of Indoor Management is wholly opposite or an exception to
that of the doctrine of the constructive notice. The former protects the outsider person
from the illegal actions of the company and the latter works as a protection to the
company from the illegal actions of the outsider person.
❖ This doctrine of indoor management is derived on the concept that the person getting into
the contract with the company operates in good faith and he shall not suffer by the illegal
actions of the company.
❖ The doctrine of Constructive Notice made things too convenient for the Co.’s directors
and shareholders to take the defence against the negligence of outsiders not being aware
of the contents of the ‘public documents’ even if the outsiders acted in good faith, but
what will happen if there is a grave irregularity in the internal affair of the company, the
knowledge of which is not supposed to be known to the outsider. In such cases the
director or the officer in charge shall remain liable for the default.
✔ In other words, the Doctrine of Indoor Managements states that outsider person has no
responsibility to have the knowledge about the internal affairs of the company. The
outsider person cannot be bound by the duty to review the internal functioning or the
internal managerial proceedings of the company. So, the outsider person shall not be
made liable for the irregularities in the internal proceedings of the company.
✔ Though, it is obligatory for the outsider person to check whether the contract is in
consistency with the MOA and AOA. If the object of the contract is in accordance with
and authorised by the MOA or AOA of the company, then the outsider person can
presume that all the internal regulations are being completed by the Company. The
obligation of the outsider person ends there and the company becomes responsible for
any irregularity in the contract.
ROYAL BRITISH BANK vs. TURQUAND

(A person who deals with the company needs to look only into the memorandum of
association and article of association to know the extent of authority and need not inquire
into the regularity of internal proceedings)
 ROYAL BRITISH BANK vs. TURQUAND

Facts:
The directors of the company, the Royal British Bank, were authorized under their Articles of
Association to borrow money on bonds, but it should be approved by a special resolution of the
company’s shareholders in a general meeting. This fact was known to Mr. Turquand. The
company while issuing bonds to Mr. Turquand made a clarification that they have obtained the
authorization of the shareholders through the special resolution in their general meeting, but in fact
this was not the case. No such resolution was passed. The bond so delivered to Mr. Turquand
possessed the seal of the company and was also signed by two directors and the secretary of the
company generating enough trust for Mr. Turquand to transfer the sum of money equivalent to the
bond amount. Later the mater came to light and Mr. Turquand filed a case against the company.
Judgment:
It was held that the Company is liable for fraud and must compensate Mr. Turquand for the
irregularity, under the rule that a person who deals with the company needs to look only into the
memorandum of association and article of association to know the extent of authority, but he need
not inquire into the regularity of internal proceedings.