CS EXECUTIVE

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COMPANY LAW

CS EXECUTIVE

CS DHEERAJ TYAGI

Topics cover:- introduction, types of company, incorporation of company, MOA & AOA

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CH-1 Introduction DEFINATION OF A COMPANY

Section- 2(20)

Section-2(67)

It means a company incorporated Under this Act or

Any of the previous Companies law i.e companies act,1956/1943/1912/1867/1857/1850.

CHARACTERSTICS OR FEATURES OF A COMPANY (SEC.9)

1. Artificial Person A Company is an artificial person created by law. It is not a human being but it acts through human beings. It is considered as a legal person which can enter into contracts, possess properties in its own name, sue and can be sued by others etc. Case law:- Union Bank of India v. Khader International Construction and Other In this case, the question which arose before the Court was whether a company is entitled to sue as an indigent (poor) person. The Court observed that the word ‘person’ had to be given its meaning in the context in which it was used and being a benevolent provision, it was to be given an extended meaning. Thus a company may also file a suit as an indigent person.

2. Separate Legal Entity A Company is legal person in the eyes of law distinct forms its members

A company is a separate person having its own rights and obligations

Case law’s:-

Salomon v. Salomon & co. Ltd.

Discussed later.

Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath Dass C In other words, the entity acts like a natural person but only through a designated person, whose acts are processed within the ambit of law.

New Horizons Ltd. v. Union of India The experience of a shareholder of a company can be regarded as experience of a company. The tender of the company, New Horizons Ltd., for publication of telephone directory was not accepted by the

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Tender Evaluation Committee on the ground that the company had nothing on record to show that it had the technical experience required to be possessed to qualify for tender. On appeal the rejection of tender was upheld by the Delhi High Court. The judgement of the Delhi High Court was reversed by the Supreme Court

3. 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. Perpetual succession, means that the membership of a company may keep changing from time to time, but that shall not affect its continuity.

Professor L.C.B. Gower rightly mentions,

“Members may come and go, but the company can go on forever. During the war all the members of one private company, while in general meeting, were killed by a bomb, but the company survived — “not even a hydrogen bomb could have destroyed it”.

Separation of ownership

from

management

The members do not participate in the day to day affairs of the Company.

The management of the Company lies in the hands of elected representatives of members, commonly called as Board of Directors. Or directors or simply the board.

The directors are appointed as well as removed by the members Thus the Act has ensured the ultimate control of members over the company.

Separate property A Company can own and enjoy property in its own name.

Members are not owners or co-owner of the company’s property

Members have no insurable interest in the property of the company.

Case law:- Macaura v. Northern Assurance Co. Ltd.

Perumal v. H. John Deavin

held that “no member can claim himself to be the owner of the company’s property during its existence or in its winding-up”.

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A member does not even have an insurable interest in the property of the company. CASE EXAMPLE

Mrs. Bacha F. Guzdar v. The Commissioner of Income Tax, Bombay The Supreme Court in this case held that, though the income of a tea company is entitled to be exempted from Income-tax up to 60% being partly agricultural, the same income when received by a shareholder in the form of dividend cannot be regarded as agricultural income for the assessment of income-tax. It was also observed by the Supreme Court that a shareholder does not, as is erroneously believed by some people, become the part owner of the company or its property; he is only given certain rights by law, e.g., to receive notice of or to attend or vote at the meetings of the shareholders. The court refused to identify the shareholders with the company and reiterated the distinct personality of the company.

Capacity to sue and sued

A company can sue others and be sued in its own name.

Limitation of actions A company cannot go beyond the power stated in its MOA. The MOA of the company regulates the powers and fixes the objects of the company.

PRINCIPLE OF SEPARATE LEGAL ENTITY

Meaning A company is a legal entity separate from its members

It is known by its own name & has rights and liabilities of its own.

Salomon v Salomon & Co. Ltd.

Transfer of sole proprietorship business to company. Mr. Salomon was carrying on the business of boot manufacturing as a sole proprietor. He incorporated a company named Salomon & Co. Ltd. for the purpose of taking over this business.

Member are in the company- Salomon, his wife, his daughter, and his four son

Payment of purchase consideration by the company

(a) Total consideration-----------------------------------£38,782

Cash paid-----------------------------------------------------£8,782

Fully paid shares of £1 each issued to Salmon------£20,000

Secured Debentures issued to salmon---------------£10,000

Constitution of Salomon & Co. Ltd. The 7 members of the family of Mr. Salomon were issued one share each. Salomon was the managing director of Salomon & Co. Ltd. Salomon & Co. Ltd.

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Inability to pay debts by the company in liquidation :In the course of business ,the company borrowed from unsecured creditors to the extent of £ 8,000. due to trade depression the company ran in to financial difficulties and eventually went into liquidation .The assets realized only £ 6,050.

Contention of unsecured creditors. The unsecured creditors contended that Salomon was carrying on business in the name of Salomon & Co. Thus Salomon Co. was agent for Salomon only.

Decision of the Court:

a) Was in favour of Salomon. b) It was held that Salmon & Co. Ltd was a real Company fulfilling

all the legal requirements. It had an identity different from its members. And therefore the secured debentures were to be paid in priority to unsecured creditors.

Note*- this case law originate new concept such as:-

One man company, limited liability, company separate from its member’s & at one time a person can be member, a creditor, and employee of the company & as well as a director.

EFFECTS or

Implications of the rule of ‘Separate legal entity

There can be a transfer of property from a member to the company and vice versa

A company has the rights and duties of its own

A company is not an agent of members or directors.

.

SOME IMPORTANT DIFFERENCES

Company and HUF:

1. A company consists of heterogeneous members, whereas a Hindu Undivided Family Business consists of homogenous members since it consist of members of the joint family itself.

2. In Hindu Joint Family Business the Karta (manager) has the sole authority to contract debts for the purpose of the business other coparceners cannot do so. There is no such system in a company.

3. A person becomes a member of Joint Hindu Family business by virtue of birth. There is no provision to that effect in the company.

4. Non Registration is compulsory for carrying on business for gain by a Hindu Joint Family even if the number of members exceeds twenty. Registration of a company is compulsory.

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DIFFERENCE BETWEEN COMPANY AND A FIRM

BASIS OF DISTINCTION COMPANY PARTNERSHIP FIRM

1. Mode of creation

A company comes into existence only when it is incorporated under the company Act.

A firm comes into existence by an agreement between the partners. Registration of a firm is optional.

2. Separate Legal entry

A company has an identity of its own.

A firm is merely a collection of partners. It has no separate. It has no separate identity.

3. Management A company is managed by the directors.

A firm is managed by the partners themselves.

4. Liability The liability of the members is generally limited.

The liability of the partners is always unlimited.

Difference between LLP and a COMPANY

A basic difference between an LLP and a company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act) whereas for an LLP it would be by a contractual agreement between partners. The management-ownership divide inherent in a company is not there in a limited liability partnership. LLP have more flexibility as compared to a company. LLP have lesser compliance requirements as compared to a company.

Detailed difference would be in LLP chapter.

LIFTING OR PIERCING OF CORPORATE VEIL

Meaning of corporate veil

By fiction of law a company is seen as a distinct entity .yet in reality it is an association of person who are in fact the beneficial owners of all the corporate property .This fiction is created by a fictional veil i.e. the corporate veil.

Effect of corporate veil

Only a company is liable for the acts and defaults done in the name of the company even though member’s directors or any officer or employee of the company had acted on behalf of the company.

Meaning of lifting or piercing the corporate veil

Lifting of corporate veil means ignoring the separate identity of a company.

Lifting of corporate veil means disregarding the corporate personality and looking behind the real persons who are in the control of the company.

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Lifting is permissible only in exceptional cases

Lifting of corporate veil is permissible only in following cases:-

It is permitted by the statute.

There is a clear evidence of abuse of the device of incorporation.

The court has the discretion whether or not to lift the corporate veil

It is not possible to lay down a specific set of circumstances in which corporate veil may be lifted.

Lifting of corporate Veil as per judicial pronouncement.

LIFTING OF CORPORATE VEIL UNDER JUDICIAL PRONOUNCEMENTS

Protection of Revenue

(Re. Sir Dinshaw Maneckjee petition)

An Assessed was receiving huge dividend and interest income on certain investment.

He formed four private companies .The whole of the investments were transferred to these private companies.

The interest and dividend received by these companies were within the exempted limits under the Income Tax Act of that time.

These companies did not have any business or asset except these investments.

The income received on investment by these companies was diverted to the assesse in the form of pretended loans, which were never paid back by him.

The court held that the only purpose of incorporating these private companies was to evade taxes. Therefore income earned by all these private companies was treated as income of the assesses.

Prevention of fraud or improper conduct

Case law:-Gilford Motor Co. v Horne

An employee entered into a contract with his employer that he will not solicit the customers of the employer after leaving the employment.

After leaving the employment, the employee incorporated a company .He his wife and one other person where the only members of this company

The company started soliciting the customers of the employer.

The court held that the purpose of formation of the company was to avoid a legal obligation arising from a contract which was not permissible

Therefore the company was restrained from soliciting the customers of employer.

Determining the character of the Company

Case law:-Daimler Co. Ltd. Vs Continental Tyre & Rubber Co. Ltd.)

A company was formed in England for the purpose of selling tyres made by a German company .The German company virtually held the entire share capital of the English company. All the directors were German residents.

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NOTE:- However, the shareholders cannot ask for the lifting of the veil for their purposes. Stated better in below case.

Premlata Bhatia v. Union of India.

Wherein the premises of a shop were allotted on a licence to the individual licensee. She set up a wholly owned private company and transferred the premises to that company without Government consent. She could not remove the illegality by saying that she and her company were virtually the same person.

SOME MORE CASE STUDIES FOR BETTER UNDERSTANDING OF THE CONCEPT

Re. R.G. Films Ltd. (1953) An American company produced a film in India technically in the name of a British Company, 90% of whose capital was held by the President of the American company which financed the production of the film. Board of Trade refused to register the film as a British film which stated that English company acted merely as the nominee of the American corporation.

CASE EXAMPLE The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar v. The

Associated Rubber Industries Ltd., Bhavnagar and another

The facts of the case were that a new company was created wholly by the principal company with no assets of its own except those transferred to it by the principal company, with no business or income of its own except receiving dividends from shares transferred to it by the principal company i.e. only for the purpose of splitting the profits into two hands and thereby reducing the obligation to pay bonus. The Supreme Court of India 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 workmen. The amount of dividends received by the new company should, therefore, be taken into account in assessing the gross profit of the principal company.

whether an enemy company

During the First World War, the English company commenced an action to recover a trade debt from another English company.

It was held that the corporate personality of the company be ignored and the persons in the ultimate control the company were enemies, the suit was not maintainable.

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Kapila Hingorani v. State of Bihar In this case, the petitioner had alleged that the State of Bihar had not paid salaries to its employees in PSUs etc. for long periods resulting in starvation deaths. But the respondent took the stand that most of the undertakings were incorporated under the provisions of the Companies Act, 1956, hence the rights etc. of the shareholders should be governed by the provisions of the Companies Act and the liabilities of the PSUs should not be passed on to the State Government by resorting to the doctrine of lifting the corporate veil. The Court observed that the State may not be liable in relation to the day-to-day functioning of the PSUs but its liability would arise on its failure to perform the constitutional duties and the functions of these undertakings. It is so because, “life means something more than mere ordinal existence. The inhibition against deprivation of life extends to all those limits and faculties by which life is enjoyed”.

Lifting the Corporate Veil of Small Scale Industry

Where small scale industries were given certain exemptions and the company owning an industry was controlled by some group of persons or companies, it was held that it was permissible to lift the veil of the company to see whether it was the subsidiary of another company and, therefore, not entitled to the proposed exemptions.

Case law;- Inalsa Ltd. v. Union of India,

Q 1. Under which of the following circumstances does the Court permit the lifting of the corporate veil?

NATURE OF CORPORATE

Company as person:- Company is an artificial person created by law. It is not a human being

but it acts only through human beings. It is considered as legal person which can enter into

any contracts.

It is termed as “Person”

Company as citizen: ………………………………… discussed below.

A company is not a citizen

Citizenship under the Citizenship Act, 1955 OR under C.O.I is available only to (natural) individual. Therefore, no Company can be a citizen of India.

No rights of citizens

Since a company is not a citizen, the fundamental right which are available only to a citizen, are not available to a company. But The Constitution of India grants Certain fundamental rights to

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COMPANY Example:- Article-14 i.e right to equality

Case law;- R.C. COOPER V. UNION OF INDIA

COMPANY CAN HAVE ITS NATIONALITY, DOMICILE AND RESIDENCE

In general we can say that company is not CITIZEN, Still it has domicile and residence.

Domicile- domicile of company is depends upon the registration of company.

Residence-residence is depends upon where the central control and mgmt. of its business is

exercised.

Note points: Body Corporate have no domicile.

MANDATORY USE OF ‘LIMITED’ OR PRIVATE LIMITED’

ILLEGAL ASSOCIATION (Section 464)

Meaning of illegal association

An association or partnership is an illegal association if—

It consists of more than 100 PERSON. &

Its object is the acquisition of gain by

The association or partnership; or

The individual members thereof,

If it is not incorporated or registered

As a company under the Companies Act. 2013; or

In pursuance of some other Indian Law. Than it is termed as illegal associations Exceptions are as follow:-

However, HUF carrying on business shall not be an illegal

Mandatory use of ‘Limited’ or ‘ private limited’ (Sec.4(1) (a)

Every company shall use, at the end of its name –

The word ‘private Limited’ – if it is a private Limited company

The word ‘Limited’ – if it is a public Limited company.

This section is not applicable on NPO i.e. sec.8 of companies act, 2013.

Prohibition on improper use of ‘limited’ (Sec. 453)

No person shall use the word ‘limited’ or private limited’ at the end of the name or title under which he carries on business, if do so then penalty shall be imposed, which is not less than Rs. 500 but may be extended to Rs. 2000 for per day.

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association.

Association which are governed by special act.

Effect of illegal association

(a) The members of an illegal association shall be personally liable for all the acts and dealings made in the name of such association.

(b) The association cannot enter into any contract in its own name.

(c) The association cannot sue or be sued in its own name.

(d) Every member of illegal association shall be liable to a penalty of up to Rs. 100,000.

(e) Even a subsequent reduction in number of members cannot make it legal.

(f) An illegal association cannot be wound-up under the provisions of the Companies Act. 2013.

*Note:-

If business is carried on by two or more joint families, while computing the number of persons, all the male and female members of such joint families shall be counted, but minor members shall be excluded.

NOTE:- Rule 10 of companies (miscellaneous) rules, 2014 also state that number of person must not exceed 50.

Q.2 Which of the activities are barred to an association that is considered illegal?

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RELATIVE- SEC.2 (77) READ ALONG WITH RULE-4 OF COMPANIES (SPECIFICATION OF DEFINITION DETAILS) RULES, 2014.

PUBLIC FINANCIAL INSTITUIONS (Sec. 2(72)

Answer keys to question stated earlier

Answer 1.

Where the company has abused its corporate personality for an unjust and inequitable purpose.

Where the veil has been used for evasion of taxes.

Where the Corporate Veil conflicts with public policy.

Avoidance of welfare legislation by the company

Specified relationship A person shall be deemed to be a relative of another , if – (a) They are members of a Hindu Undivided family; or (b) They are husband and wife.

Relationships given in RULE-4 (8 RELATIONS)

Two persons shall be relatives if one is related to the other:-

Father, include step father.

Mother, include step mother.

Son, include step son.

Son wife.

Daughter.

Daughter husband.

Brother, include step-brother.

Sister, include step-sister.

Specified public financial institutions

The following financial institutions shall be regarded as public financial institutions.

(i) Industrial Credit and Investment Corporation of India Limited (ICICI)

(ii) Industrial Finance Corporation of India (IFCI) (iii) Industrial Development Bank of India (IDBI) (iv) Life Insurance Corporation of India (LIC) (v) Unit Trust of India (UTI)

Notified Public finance institution

CG may, by notification in the official Gazette, specify such other institution as it may think fit to be a public financial institution, if-

Such institution is established under any Central/state Act. OR CG Holds 51% or more paid- up share capital of such institution.

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ANSWER 2.

Entering into any contract.

Suing any member or an outsider by a company.

Sued by a member or an outsider against the company.

PRACTICE QUESTION AND ANSWER

Q1. Two companies are incorporated with the same set of shareholders. Are they same or

distinct under the companies act, 2013? Discuss. (4 marks)

Answer:

By registration a company becomes vested with corporate personality, which is

independent and distinct from its members. Even if two companies are incorporated with

the same set of shareholders, they are distinct and cannot to be treated as same company.

Q2. The entire assets of a company are acquired by another company. Will it constitute

taking over the management of the company. (4 marks)

Answer:

By registration a company becomes with corporate personality, which is independent and

distinct from its members. The advantage of incorporation is that the company never

creases to exist. It has perpetual succession and remains in existence however often its

members change, until it is dissolved by liquidation. The company has an identity and

existence independent of the estate and undertakings owned by it, so that even if the estate

is taken over by the government, that does not constitute a taking over of the management

of the company

Q3. Rani is a wealthy lady enjoying large dividend and interest income. She has formed

three private companies and agreed with each of them to hold a block of investment as an

agent for it. Income received was credited in the accounts of the company but the

company handed back the amount to her as a pretended loan. This way, she divided her

income in three parts in a bid to reduce her tax liability. Discuss the legality of the purpose

for which the three companies were formed. ( 5 marks)

Answer:

When a company is formed as per provisions of the companies act, 2013 they are clothed

with corporate personality and there association is known by the name of the company.

However, sometime this veil of corporate personality is used for some dishonest and

fraudulent purpose. In such cases court will look into reality and remove the corporate veil.

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As per the facts given in case, rani has formed the four companies to avoiding tax and

company is nothing more than assesses himself.

Thus, applying the above principle Rani and four companies will be treated one and same

person.

Q4. A shareholder who holds 99% of the share capital of a company can be held for the

acts of the company. Comment. (5 marks)

Answer:

The company is vested with a corporate personality quite distinct from individuals who are

its members. A company, being a separate legal entity different from its members, can enter

into contracts for the conduct of the business in its own name. in case of company limited

by shares, liability is limited up to unpaid amount on shares.

In leading case Salomon vs. Salmon & co. Ltd., it was held that company separate distinct

person form its members and it is immaterial whether member has large or small

proportion of share capital. As a separate legal person, a company liable for its own act and

members are not personally liable for the acts of the company, even if held entire share

capital of the company.

June 2014 Q5. In an annual general meeting of Amar Pvt. Ltd. , all the shareholders were

killed in a bomb blast. State, whether the company is still in existence?( 4 marks)

Answer:

By registration under the companies act, 2013 a company becomes vested with corporate

personality, which is independent and distinct from its members.

The membership of an incorporated company may change either because one shareholder

has transferred his shares to another or his shares devolve on his legal representatives on

has death or he ceases to be a member. Thus, perpetual succession denotes the ability of a

company to maintain its existence by the constant succession of new individuals who step

into the shoes of those who cease to be members of the company. Professor L.C.B. Gower

rightly mentions, “members may come and go, but and company can go on forever. During

the war all the members of one private company, while in general meeting, were killed by a

bomb, but the company survived- not even a hydrogen bomb could have destroyed it”.

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CH-2 PROMOTION AND INCORPORATION OF COMPANIES

Introduction:-For incorporating a company, initially promoter plays the important role.

PROMOTION AND PROMOTER As per Section 2(69) of Companies Act, 2013 “promoter” means a person—

(a) Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:

Note:- person who is acting merely in a professional capacity IS NOT CONSIDERED as promoter ex. Cs, advocate etc. As per SEBI (ICDR), 2009:- PROMOTER INCLUDES:-

The person who are in control of the issuer.

The person named in the offer document as a promoter.

in Twycross v. Grant, That promoter is "one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose".

Phosphate Sewage Co. v. Hartmount Promoter is a person who as principle procures or aids in procuring the incorporation of a company. But a person may be a promoter even if he has undertaken a lesser active role in the formation of a company. Any person who becomes a director, places shares or negotiates preliminary agreements, may be covered by this term.

Meaning of promotion

(a) ‘Promotion’ means the preliminary steps undertaken by the promoter to bring a company into existence.

(b) The term ‘promotion’ also includes such steps as are required after incorporation of the company until company is entitled to commence its business.

(c) In other words, ‘promotion’ continues until the Board of directors assumes the management of the company.

Stages in promotion

‘promotion’ involves the following 3 stages:

Generation of idea of starting a new company

Registration of the company

Floatation, i.e. raising of capital or arranging the financial resources so as

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to carry on its business operations.

Legal Position of promoters

A promoter is neither an agent nor a trustee of the company, since the company has not yet come into existence. However, his position is similar to that of an agent and trustee

A promoter stands in a fiduciary capacity towards the company.

Duties of Promoters

1.Not to make Secret profit

Nature of profit make is to be disclosed. The promoters should not make a secret profit from the company. The law does not prohibit making of a profit by the promoters or paying any remuneration to promoters. What the law prohibits is making of secret profit by promoters.

In other words, a promoter can make a profit in respect of any transaction with the company, only if he makes a full and fair disclosure of such profit.

Disclosure to whom? 1. To an independent directors 2. In the articles of association 3. In the prospectus 4. To existing shareholders

2.Full and fair disclosure of interest

A promoter must make full and fair disclosure of his interest in every transaction or contract with the company in which he is, directly or indirectly interested.

In Gluckstein v. Barnes, it was held that where a promoter makes some profits in connection with a transaction to which company is a party and does not make full disclosure of his profits; the company has the right to affirm the contracts and promoter should handover his profits to the company. (b) A promoter is not allowed to derive a profit from the sale of his own property to the company unless all material facts are disclosed.

Remedies available to the company against the promoters

Where a promoter makes a secret profit, and afterwards this fact becomes known to the company the company will have the following remedies:

Rescission

The company may rescind the contract, even though the company had adopted the contract and communication the fact of adoption to the other party to the contract. However, rescission must be made within a reasonable time.

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Recovery of secret profit

The company may recover the secret profit made by the promoters.

Suit for breach of trust

The company may sue the promoters for breach of trust.

Liabilities of promoter

Incorporation of company by furnishing false information:- As per section 7(6), where, at any time after the incorporation of a company, it is proved that the company has been got incorporated by furnishing any false or incorrect information. The promoters, the persons named as the first directors of the company and the persons making declaration shall be liable for fraud under section 447. Others liabilities are set out in prospectus chapter.

Sec.26,

Sec36,

Sec38

Right of promoters to receive Remuneration. (no right)

a) The promoters shall have no right to-

Receive any remuneration from the company; or

Recover the PRELIMINARY expenses properly incurred by them for incorporation of the company,

Unless the company after incorporation has contracted the same. b) Even where the articles provide that the company shall pay remuneration

to the promoters or reimburse expenses incurred by them, such a provision is not binding on the company.

Mode of payment of remuneration to promoters

Remuneration may be paid to the promoters in any of the following ways:

Issue of shares at face value

Earlier in the previous Act, the shares can be issued at Discount as well

Right to subscribe the company’s shares in future at a fixed price.

Purchase of property of promoters at a higher price.

Paying any lump sum remission to promoters on the purchase price of any property purchased by the company.

Payment of commission to promoters on shares sold by the promoters.

Q.1 Is a director/officer/employee of the issuer a promoter?

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PROCEDURE FOR INCORPORATION OF COMPANY

1. To incorporate a company, promoters have to take initial steps:-

As per Section.3(1) Some requirements for promoters are given in corporation of company:-

seven or more persons, where the company to be formed is to be a public company;

two or more persons, where the company to be formed is to be a private company;

one person, where the company to be formed is to be One Person Company

Procedures are:

Obtain DIN NO.

Acquire DSC and registered it with MCA.

Selecting the name of the company:-

At least 1 promoter shall apply to ROC with

a) E-from INC 1 along with fee of Rs. 1000 (at present). b) Six proposed name along with proper justification of the proposed name should

be given. c) Proposed name should not be identical with any existing company/trade mark. d) And person authorized to file application shall sign through (DSC)

REVALIDATION OF NAME AVAILABILITY

1. After receiving the application, ROC shall check the given names are:-

OR

Desirable Undesirable

Than name will be available for

adoption for next 60 days

He may reject the applications and then ask for

resubmission.

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DRAFTING & PRINTING OF MOA & AOA

1. It is desirable to take suggestion from ROC& than gets printed as per (Section 4 and

Section 5).

2. Prepare a draft of MOA. A model of MOA is given in Table A, B, C, D & E of schedule I

of companies Act, 2013.

3. Prepare a draft of AOA. A model of AOA is given in Table F, G, H, I & J of schedule I of

companies Act, 2013.

A → For Limited by shares For MOA B → For Limited by guarantee & not having share capital (Section 4(6)) C → For Limited by guarantee having Share capital. D → For unlimited companies & not having Share Capital E → For unlimited companies & having Share Capital

TABLE GIVEN BELOW:-

Table of AOA F → For Limited by shares Of Section 5(6) G → For Limited by guarantee having Share capital H → For Limited by guarantee & not having share capital

I → For unlimited companies & having Share Capital J → For unlimited companies & not having Share Capital

STAMPING & SIGNING OF MOA & AOA

(i) Stamping as per Indian stamp Act, 1899.

(ii) Should be signed by at least 7 subscribers (public co.) 2 subscribers (pvt co.) 1 Subscriber (opc)

(iii) And signing also witnessed by 1 and should also be signed. (Preferred

two)

Q. WHO IS RESPOSIBILE FOR CHARGING /COLLECTING STAMP DUTY?

ANSWER:- S.G

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DATING OF MOA & AOA

Date may be a date of stamping or date later than date of stamping.

But is no case, date cannot be prior to the stamping.

FILINGS OF DOCUMENTS AND FORMS OF REGISTRATION

Document Required:-

E-form- INC 7 → Application for incorporation and (In case of incorporation of OPC, E-form-

INC-2 will be used)

statutory declaration, signed by a practicing CS, CA, or director of company.

E-form-INC 22 → Notice of Registered office

Tell us about where registered office of company is situated.

E-form-DIR 12 → Particulars of Directors

An affidavit from each subscriber and from each person named as first director in the articles

Content of such affidavit:-

He is not convicted if any offence in connection with promotion, formation or

management of any company,

He is not been found guilty of any fraud or misfeasance or of any breach of duty to

any company during preceding five years, and

All the documents filed with the registrar contain correct, complete and true

information to the best of his knowledge and belief.

Where AOA appoints any person to acts as a director, then information regarding director is

required to be filed to ROC

Now if registrar satisfies that all the aforesaid requirements have been complied with, he

will register the company and place its name on the register of company.

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CERTIFICATE OF INCORPORATION SECTION 7(2)

On registration, the registrar will issue a certificate of incorporation in E-FORM-INC-11 ,

registrar of company issue a certificate of incorporation bearing a corporate identity

number(CIN) consisting of 21 digits.

Format of Corporate identity number

1st Digit Listing Status

Next 5 digits Economic Activity (industry)

Next 2 digits State

Next 4 digits Year of Incorporation.

Next 3 digits Ownership

Next 6 digits Sequential number assigned by ROC(Registered Number).

LEGAL EFFECT OF INCORPORATION IS:-

Same as characteristics of the Company

SIMPLIFIED PROFORMA FOR INCORPORATING COMPANY ELECTRONICALLY (SPICe)- For the purpose of simplifying the filing of forms for incorporation of a company, rule 38 introduced this system under companies act, 2013.

the application for allotment of Director Identification Number upto three Directors, reservation of a name, incorporation of company , application for PAN and appointment of Directors of the proposed company shall be filed in Integrated Form No. INC – 32, For One Person Company , private company, public company and producer company, with the Registrar within whose jurisdiction the registered office of the company is proposed to be situated.

The promoter or applicant of the proposed company shall propose only one name in e-form No. INC-32. The promoter or applicant of the proposed company may prepare Memorandum of Association(e-MOA) as per templates in Form INC – 33 and may opt for templates of Articles of association(e-AOA) in Form INC-34 in accordance with the provisions. But in case of section 8 companies for filing of MOA, e-form-INC-13 and for AOA e-form-INC-31 will be used.

Where the Registrar, on examining e-form INC-32, finds that it is necessary to call for further information he shall give intimation to the applicant to remove the

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defects and re-submit the e form within fifteen days from the date of such intimation given by the registrar.

After the resubmission of the document , if the registrar still finds that the document is defective he shall give one more opportunity of fifteen days to remove such defects or deficiencies.

In case, the registrar is of the opinion that the document is defective or incomplete in any respect after giving such two opportunities, the e-form INC-32 of the proposed company shall be rejected.

The certificate of Incorporation shall be issued by the registrar in Form No. INC – 11.

PROVISION SPECIFICALLY RELATED TO THE INCORPORATION OF:-

ONE PERSON COMPANY. Nomination by the subscriber or member of One Person Company the memorandum of One Person Company shall indicate the name of the other person, with his prior written consent in the prescribed form (INC-3), who shall, in the event of the subscriber’s death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles. company shall nominate such person in form INC 2 along with the nominee’s consent obtained in INC 3.

COMPANIES WITH CHARITABLE OBJECTS UNDER SECTION 8 Rule 19-20 of Companies (Incorporation) Rules, 2014. Rule 19. License under section 8 for new companies with charitable objects etc.- (1) A person or an association of persons shall make an application in Form No.INC.12 along with the fee to the Registrar for a license. (2) The memorandum of association of the proposed company shall be in Form No.INC.13. The application shall be accompanied by the following documents, namely:—

The draft memorandum and articles of association of the proposed company;

The declaration in Form No.INC.14 by Company Secretary in practice,

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An estimate of the future annual income and expenditure of the company for next three years, specifying the sources of the income and the objects of the expenditure;

the declaration by each of the persons making the application in Form No. INC.15. Rule 20 – License for existing companies.-

(1) A limited company registered under this Act shall make an application in Form No.INC.12.

(2) The application shall be accompanied by the following documents, namely:-

the memorandum and articles of association of the company;

the declaration as given in Form No.INC.14 by Company Secretary in Practice.

a statement showing in detail the assets and the liabilities of the company, as on the date of the application or within thirty days preceding that date.

an estimate of the future annual income and expenditure of the company for next three years, specifying the sources of the income and the objects of the expenditure;

the certified copy of the resolutions passed in general/ board meetings approving registration of the company under section 8; and

a declaration by each of the persons making the application in Form No.INC.15. The company shall, within a week from the date of making the application to the Registrar, publish a notice at his own expense, and a copy of the notice, as published, shall be sent forthwith to the Registrar and the said notice shall be in Form No. INC.26 and shall be published-

(a) at least once in a vernacular newspaper in the principal vernacular language of the

district in which the registered office of the proposed company is to be situated. (b) on the websites as may be notified by the Central Government.

The Registrar shall, after considering the objections, if any, received by it within thirty days from the date of publication of notice decide whether the license should or should not be granted. The license shall be in Form No.INC.16. or Form No.INC.17, as the case may be.

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Proposed name is identical or resembles with other guidelines:- Rule 8 Companies (Incorporation) Rules, 2014 (As updated on 26th January, 2016) 1. In determining whether a proposed name is identical with another, the differences on account of the following shall be disregarded- (a) The words like Private, Pvt., (P) Ltd, Ltd., LLP, Limited Liability Partnership (b) words appearing at the end of the names – company, and company, co., co, corporation, corp, corpn, corp.;

(c) plural version of any of the words appearing in the name; (d) type and case of letters, spacing between letters and punctuation marks; (e) joining words together or separating the words does not make a name distinguishable from a name that uses the similar, separated or joined words. (f) the addition of an internet related designation, such as .com, .net, .edu, .gov, .org, .in does not make a name distinguishable from another, even where (.) is written as ‘dot’. (g) the addition of words like New, Modern, Nav, Shri, Sri, Shree, Sree, Om, Jai, Sai, The, etc. does not make a name distinguishable from an existing name and similarly, if it is different from the name of the existing company only to the extent of adding the name of the place, the same shall not be allowed; such names may be allowed only if no objection from the existing company by way of Board resolution is submitted.

(2) The name shall also be considered undesirable, if-

(i) The proposed name is identical with or too nearly resembles the name of a limited liability partnership; (ii) The company’s main business is financing, leasing, chit fund, investments, securities or Combination thereof, such name shall not be allowed unless the name is indicative of such Related financial activities, viz., Chit Fund or Investment or Loan, etc.; (iii) it resembles closely the popular or abbreviated description of an existing company or limited liability partnership. (3) the proposed name contains the words ‘British India. (4) the proposed name is identical to the name of a company dissolved as a result of liquidation proceeding and a period of two years have not elapsed from the date of such dissolution.

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(5) it is identical with or too nearly resembles the name of a limited liability partnership in liquidation or the name of a limited liability partnership which is struck off up to a period of five years. (6) the proposed name includes the word “State”, the same shall be allowed only in case the company is a government company.

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CONCLUSIVENESS OF “ CERTIFICATE OF INCORPORATION “

Certificate of

incorporation

to be

conclusive

evidence

A certificate of incorporation issued by the registrar shall be conclusive evidence that –

1. All the requirements of the companies Act have been complied with in respect of registration and matters precedent and incidental thereto

2. The association has been duly register under companies Act

Meaning

of Conclusive

evidence

The term conclusive evidence means that “no inquiry shall be allowed to be made regarding the correctness or incorrectness of any particulars contained in the certificate of incorporation

In other words issued, the certificate of incorporation cannot be challenged in any court of Tribunal on any grounds whatsoever.

The certificate of incorporation shall remain valid even in the following cases :

(a) Where one person has signed on behalf of all the subscribers. (b) Where all the signatories to memorandum are minors. (c) What all the signatures on the memorandum are forged (d) Where the memorandum was already after signing by subscribers, but

before its registration. (e) Where illegal objects are incorporated in the object clause. (in this case

only remedy is winding up of company)

Jubilee Cotton Mills Ltd. v. Lewis, The validity of the registration cannot be questioned after the issue of the certificate.

Moosa v. Ebrahim the Memorandum of Association of a company was signed by two adults and by a guardian of the other 5 subscribers, who were minors. The Registrar, however, registered the company and issued under his hand a Certificate of Incorporation.

IT WAS HELD THAT CERTIFICATE IS VALID

PRE-INCORPORATION CONTRACTS

Meaning of pre-incorporation/preliminary/promoter’s contract

Pre-incorporation Contracts are contracts purported to be made on behalf of a company

before its incorporation.

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Before incorporation, a company is non-existent and has no capacity to contract.

Hence a contract, by a promoter purporting to act on behalf of a company prior to its

incorporation, never binds the company because at the time the contract was concluded,

the company was not in existence.

The promoters alone, therefore, remain personally liable for any contract they purport to

make on behalf of the company.

Case law:- D.R. Patil v. A.S. Dimilov, It was held that a promoter is personally liable to third parties upon all contracts made on behalf of the intended company, until with their consent; the company takes over this liability.

Ratification of pre-incorporation contract?

Even a company cannot ratify a pre-incorporation contract. However, it is always open for a

company to enter into a new contract after its incorporation to give effect to a contract

made before its formation. This is called novation of contracts.

Since the pre- incorporation contract is a nullity, even the Company cannot sue the vendor

of property, if he fails to carry out such contract.

Exception to pre-incorporation

Section 15(h) provides that where a pre- incorporation contract is warranted by the terms

of incorporation of company, the Company may, if it has accepted the contract and has

communicated such acceptance to the other party to the contract, obtain specific

performance of the contract.

Section 19(e) provides that specific performance may be enforced against the Company by

other party to the contract under similar circumstances.

CASE LAW:- Kelner v. Baxter The company could not ratify contract made by a promoter before its incorporation. Specific performance of a contract may be enforced against a company in respect of contracts entered into by promoters on behalf of the company, if such a contract is warranted by the terms of incorporation and the company has accepted the contract and communicated the acceptance to the other party. (Section 15 of the Specific Relief Act,1963). Section 19 of the same Act provides that the other party can also enforce the contract if the company has adopted it after incorporation and the contract is within the terms of incorporation. As long as the company does not ratify, as required by the Specific Relief Act, 1963 the position remains the same as under the common law.

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ANSWER KEY

ANSWER 1.

A director/officer/employee who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise is considered as a promoter. As per section 2 (27), “Control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner. However, a director or officer or employee of the issuer or a person, if acting as such merely in his professional capacity, shall not be deemed as a promoter.

PRACTICE QUESTION AND ANSWER

Q1. The promoters of a new company have decided to start their company with the name

‘i2 Technologies Ltd.’. However, the jurisdictional registrar of companies (ROC) has

declined to allow the name starting with small alphabets. Is the ROC’s contention valid

under company law as prevalent in India? ( 4 marks)

Answer:

For deciding the availability of names, the ministry of corporate affairs has issued name

availability guidelines, 2011 w.e.f. 24/7/2011. The guidelines are issued in supersession of all

the previous circulars and instructions regarding name availability, issued by the ministry of

corporate affairs from time to time.

As per the same guideline currently there is no restriction as to use of small letter at the

starting of the name. Hence, the ROC’s contention is not valid.

Q2. A,B,C&D Developed a nosiness plan. To implement the plan, it was decided that A and

B will incorporate a company and C, chartered accountant, will provide them his

professional services for the same. It was also decided that D will provided loan to the

company. The loan to be regarded as a promoter of the company.

Answer:

The term ‘promoter’ is defined in section 2(69) of the companies act, 2013. Considering the

definition of promoter and facts given in the problem, answer is as follows:

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(a) C is not a promoter because a person who is acting merely in a professional capacity

cannot be treated as promoter.

(b) D is promoter and he was involved in developing a business plan and the loan

provided by him was essential for starting the business.

Q3. Based on the information given in the memorandum of association, smart Ltd. was

incorporated and the certificate of incorporation was issued by the registrar of companies,

new delhi. The memorandum of association was duly signed, except that X, Y and Z signed

it on behalf of five minors. Examine the validity of the certificate of incorporation issued

by the registrar of companies.( 4 marks)

Answer:

A certificate of incorporation given by the registrar in respect of any association shall be

conclusive evidence that all the requirements of the act have been complied with in respect

of registration and matters precedent and incidental thereto, and that the association is a

company authorized to be registered and duly registered under the act.

The facts of the given case are similar to Moosa vs. Ebrahim , wherein it was held that the

certificate is conclusive for all-purpose. The certificate prevents anyone from alleging that

the company does not exist.

Thus, the validity of the registration cannot be questioned after the issue of the certificate.

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CH-3 TYPES OF COMPANIES

CLASSIFICATION OF COMPANIES Classification of companies is to be done through various ways. But, if we try to classified them then they can classified on basis of:-

a) Incorporation. b) Liability. c) Miscellaneous….

CLASSIFICATION OF COMPANIES ON BASIS OF ITS INCORPORATION

Here companies are classified into 3 further types:-

Statutory company:- These companies are created through special act of parliament/ state legislature. The provisions of Companies Act, 2013 do not apply on them.

Ex. LIC, RBI.

Registered companies:- These companies are incorporated under provision of companies Act, 2013 by getting themselves registered with authority( R.O.C). Ex. Private company, public company and one person Company.

Chartered companies :- a company created by the grant of charter by the crown is called a chartered company and is regulated by that charter. Charter is document like MOA . ex. Standard chartered bank.

PRIVATE COMPANY u/s 2 (68) Definition of Private Company

Private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,— (i) Restricts the right to transfer its shares; (ii) Limits the number of its members to two hundred, Except opc

while calculating number of members, exclude following:-

a) Persons who are in the employment of the company; and b) Persons who, having been formerly in the employment of the

company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

(iii) Prohibits any invitation to the public to subscribe for any securities of the

company;

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*Note:-Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

NOTE:-

It must be noted that it is only the number of members that is limited to two hundred. A private company may issue debentures to any number of persons, the only condition being that an invitation to the public to subscribe for debentures is prohibited.

A private company can only accept deposit from its members up to a particular limit in accordance with section 73 of the Companies Act, 2013.

The words ‘Private Limited’ must be added at the end of its name by a private limited company.

As per section 3 (1), a private company may be formed for any lawful purpose by two or more persons, by subscribing their names to a memorandum and complying with the requirements of this act in respect of registration.

Private company shall have minimum number of director two and only two member may also be the two directors of the private company.

PUBLIC COMPANY {Sec2 (71)} Definition of Public Company

Public Company means a Company which a) Is not a private company. b) Has a minimum paid – up capital, as may be prescribed. c) A private company which is subsidiary of a public company is not a

private company.

As per section 3 (1) (a), a public company may be formed for any lawful purpose by

seven or more persons, by subscribing their names or his name to a memorandum.

The securities of a public company may be quoted on a Stock Exchange.

The number of members is not limited to two hundred.

As per section 58(2), the securities or other interest of any member in a public company shall be freely transferable.

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Western Maharashtra Development Corpn. Ltd. V. Bajaj Auto Ltd It was held that the Companies Act, makes a clear distinction in regard to the transferability of shares relating to private and public companies. By definition, a “private company” is a company which restricts the right to transfer its shares. In the case of a public company, the Act provides that the shares or debentures and any interest therein, of a company, shall be freely transferable.

CLASSIFICATION OF COMPANIES ON BASIS OF LIABILITY. As per sec 3(2), a company formed under this act either

a) A company limited by shares b) company limited by guarantee c) Unlimited company

Here, companies are classified into further three types:-

Unlimited company:-members of such company are liable for the company debt in proportion to their respective interest and liability is unlimited. Such company can be public or private and may or may not have share capital. Sec2(92)

These companies are rare these days. Note:- Under Section 18, a company registered as an unlimited company may subsequently re-register itself as a limited company, by altering its memorandum and articles of the company.

Company limited by guarantee:- Liability of member is limited to that amount only which he undertake to give to contribute to assets of company in event of winding-up of company. Here, members are placed like guarantor. These companies are further classified into having a share capital or not having a share capital company. Sec2 (21)

Ex. Clubs, trader associations and societies.

Company limited by shares:- Liability of such member limited to amount unpaid up on share capital. These are most common form of company. Sec 2(22)

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Some more types of companies as classified under companies and various acts.

GOVERNMENT COMPANIES 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.

Hindustan Steel Works Construction Co. Ltd. v. State of Kerala The Government company is neither a Government department nor a Government establishment

A.K. Bindal v. Union of India Since employees of Government companies are not Government servants, they have no legal right to claim that the Government should pay their salary or that the additional expenditure incurred on account of revision of their pay scales should be met by the Government. It is the responsibility of the company to pay them the salaries.

Andhra Pradesh Road Transport Corporation v. ITO The Andhra Pradesh State Road Transport Corporation claimed exemption from taxation by invoking Articles 289 of the Constitution of India according to which the property and income of the State are exempted from the Union taxation. The Supreme Court, while rejecting the Corporation’s claim, held that though it was wholly controlled by the State Government, it had a separate entity and its income was not the income of the State Government. The Court observed that the companies which are incorporated under the Companies Act, have a corporate personality of their own, distinct from that of the Government of India. The land and buildings are vested in and owned by the companies, the Government of India only owns the share capital.

INVESTMENT COMPANY (SEC.186) Investment company is company whose principal business is to acquiring/ holding/ dealing in shares and securities. Income of such company is raised through by way of interest or dividend or purchasing shares on lower rate and sells them on higher rates.

*Note- if this type of company deals in some extent to other business than such company shall not be treated as Investment Company

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FOREIGN COMPANY SEC. 2(42) A foreign company means any company is which is in incorporated in a country outside India under the law of that country and has a place of business in India.

Section 379 to section 393 deal with such companies. Under 379 of Companies Act, 2013: Foreign Company means a Company, where not less than fifty percent of the paid-up share capital, (whether equity or preference) of a foreign company is held by one or more citizens of India or by one or more companies in India,

Under Section 380- Every Foreign Company which has place of business in India must file the followings details within 30 days to the ROC.

Followings Details Need To Filled.

Certified Copies of MOA, charter or statutes.

Full and complete address of registered office.

List of Directors and Secretary.

Full and completed address of principal office.

Any other information as may be prescribed.

Section 381:- accounts of foreign company.

Every foreign company shall, in every calendar year make out balance sheet/profit and loss account in such form as prescribed and deliver a copy to ROC.

Tovarishestvo Manufacture Liudvig Rabenek, It was held that where representatives of a company incorporated outside the country frequently stayed in a hotel in England for looking after matter of business, it was held that the company had a place of business in England. BUT in a certain case, it was held that mere holding of property cannot amount to having a place of business.

HOLDING, SUBSIDIARY COMPANIES On the basis of control companies can be classified into holding, subsidiary and associate companies.

Holding company As per Section 2 (46), holding company, in relation to one or more other companies, means a company of which such companies are subsidiary companies.

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Subsidiary company Section 2 (87) provides that 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: Provided that such class or classes of holding companies, shall not have layers of subsidiaries beyond the prescribed limit i.e max 2 companies. (c) the expression “company” includes any Body corporate; The MCA has vide its General circular No. 27/2013 dated 27th December 2013 clarified that the shares held by a company or power exercisable by it in another company in a ‘fiduciary capacity’ shall not be counted for the purpose of determining the holding-subsidiary relationship in terms of the provision of section 2(87) of the Companies Act, 2013. The Companies (Specification of Definitions details) Rules, 2014 As per 2(1)(r) “total Share Capital”, for the purposes of sub- sections (6) and (87) of section 2, means aggregate of the:- (a) paid-up equity share capital and (b) convertible preference share capital. Subsidiary company not to hold shares in its holding company [Section 19]

Section 19 (1) seeks to provide that subsidiary company shall not either by itself or through its nominees hold shares in its holding company. And

No holding company shall allot or transfer its shares to any of its subsidiary companies and

any such allotment or transfer of shares to its subsidiary company shall be void.

Therefore, no subsidiary company shall hold any interest in its holding company. Following are the circumstances, where a subsidiary can hold the shares of its holding company:

where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or

where the subsidiary company holds such shares as a trustee; or

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where company is a shareholder even before it became a subsidiary company of the holding company:

ASSOCIATE COMPANY SEC.2 (6) A company in relation to another company, means a company in which that other company has significant influence, but which is not subsidiary company and include joint venture.

Note:- significant influence means when one company control at least 20% of total share capital of company.

Total share capital means combination of paid-up equity share capital and convertible preference share.

NIDHI COMPANIES The primary object of Nidhis is to carry on the business of accepting deposits and lending money to member-borrowers only against jewels, etc., and mortgage of property. The area of operation was local – within municipalities and panchayats. Members are only individuals. Bodies Corporate or Trusts are never to be admitted as Members.

Prevailing Regulatory Aspects of Nidhi As per section 406 of the Companies Act, 2013, “Nidhi” means a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit.

Incorporation of Nidhi

A Nidhi to be incorporated under the Companies Act, 2013 shall be a public company and shall have a minimum paid up equity share capital of five lakh rupees.

Nidhi company shall not issue preference shares.

If preference shares had been issued by a Nidhi before the commencement of the Companies Act, 2013, such preference shares shall be redeemed in accordance with the terms of issue of such shares.

No Nidhi shall have any object in its Memorandum of Association other than the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit.

Every Company incorporated as a “Nidhi” shall have the last words ‘Nidhi Limited’ as part of its name.

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Requirements for minimum number of members and net owned funds Rule 5(1) of the Nidhi Rules, 2014 deals with requirements for minimum number of members, net owned fund etc. It provides that: Every Nidhi shall, within a period of one year from the commencement of these rules, ensure that it has—

not less than two hundred members;

Net Owned Funds of ten lakh rupees or more;

unencumbered term deposits of not less than ten per cent of the outstanding deposits and

ratio of Net Owned Funds to deposits of not more than 1:20. It may be noted that “Net Owned Funds” means the aggregate of paid up equity share capital and free reserves as reduced by accumulated losses and intangible assets appearing in the last audited balance sheet. Further, the amount representing the proceeds of issue of preference shares shall not be included for calculating Net Owned Funds .

Return of statutory compliances by Nidhi Companies Within ninety days from the close of the first financial year after its incorporation and where applicable, the second financial year, Nidhi shall file a return of statutory compliances in Form NDH-1 with the Registrar duly certified by a company secretary in practice.

General restrictions or prohibitions on Nidhi companies. In terms of Rule 6, Nidhi shall not — (a) carry on the business of chit fund, hire purchase finance, leasing finance, insurance or acquisition of securities issued by any body corporate; (b) issue preference shares, debentures or any other debt instrument (c) open any current account with its members; (d) acquire another company by purchase of securities or control the composition of the Board of Directors of any other company (e) carry on any business other than the business of borrowing or lending in its own name. (f) accept deposits from or lend to any person, other than its members.

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Membership of Nidhi (1) A Nidhi shall not admit a body corporate or trust as a member. (2) Every Nidhi shall ensure that its membership is not reduced to less than two hundred members at any time. (3) A minor shall not be admitted as a member of Nidhi.

Rate of interest on any loan given by a Nidhi The rate of interest to be charged on any loan given by a Nidhi shall not exceed seven and half per cent above the highest rate of interest offered on deposits by Nidhi and shall be calculated on reducing balance method.

Directors in a Nidhi Company The Director shall be a member of Nidhi. The Director of a Nidhi shall hold office for a term up to ten consecutive years on the Board of Nidhi. The Director shall be eligible for re-appointment only after the expiration of two years of ceasing to be a Director.

Appointment of Auditor Nidhi shall not appoint or re-appoint an individual as auditor for more than one term of five consecutive years and Nidhi shall not appoint or re-appoint an audit firm as auditor for more than two terms of five consecutive years.

Filing of half yearly return As per Rule 21 of the Nidhi Rules, 2014, every Nidhi company required file half yearly return with the Registrar in Form NDH-3 within thirty days from the conclusion of each half year duly certified by a company secretary in practice.

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NON- PROFIT MAKING ORGANIZATION OR SECTION – 8 COMPANY

Rule 21:- Conditions for conversation of a company registered under section 8 into company of any other kind

(1) A Company registered under section 8 which intends to convert itself into a company of any other kind shall pass a special resolution at a general meeting for approving such conversion.

Rule 23:- Intimation to Registrar of revocation of license issued under section 8

License to whom?

(a) CG may grant a license u/s 8, if a company with limited liability is proposed to be incorporated satisfying all the conditions specified u/s 8.

(b) CG may grant a license u/s 8, if a company, after incorporation under the Companies Act, 1956 complies with all the conditions specified u/s 8.

Condition for obtaining license u/s 8

(a) The objects of the company are to promote commerce, art, science, religion, charity or any other useful object.

Key :-SAARCC (b) The company shall apply its income in promoting the objects of the

company. (c) The company shall prohibit payment of dividend to its members.

Effects of license

A company license u/s 8 is not required to use the word(s) ‘Limited’ or ‘private’ Limited’ at the end of its name.

Alteration of objects

Alteration of objects clause of memorandum require approval of shareholder as Special resolution for alteration of object.

Privileges of a licensed company

A firm may become a member of a license company

However, on dissolution of the firm, it shall cease to be member of the company.

Revocation of license by CG

Grounds for Revocation

(a) Alteration of objects – without obtaining the previous approval of CG; or

(b) Violation of any terms and conditions subject to which the license u/s 8 was issued.

Conditions for revocation

Opportunity of being heard – shall be given to the company.

Effects of revocation (a) ‘Limited’ / Private Limited’-inserted at the end of name.

(b) Exemptions by CG—Cease to be available.

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Where the license granted to a company registered under section 8 has been revoked the company shall apply to the Registrar in Form No.INC.20 along with the fee to convert as status and change of name accordingly.

SMALL COMPANY SEC.2 (85)

Small company means a company other than public company,

Paid-up share capital of which does not exceed Rs. 50 lac or such higher amount as

may be prescribed which shall not be more than Rs.5 crore. “AND”

Turnover of which does not exceed Rs. 2 crore or such higher amount as may be

prescribed which shall not be more than Rs. 20 crore.

Note:- Small company is new form of private company under companies act, 2013

Privileges of a Small Company

Section Nature of exemptions/privileges

2(40) The financial statement, with respect to Small Company may not include the cash flow statement

121(1) Need not prepare a report on Annual General Meeting

149(1) Small company need not have more than two directors in its Board.

149(4) Need not appoint Independent directors on its Board

ONE PERSON COMPANY SEC.2 (62)

OPC is private company in which there is only 1 member.

OPC shall have a minimum of one director.

Read rule- 3,5,6,7 of Companies (incorporation)rules,2014 in companies rule, 2014. For OPC

RULE-3

(1) 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.

“Resident in india” means a person who has stayed in India for a period of not less than 180 days during immediately preceding calendar year.

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

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(3) No minor shall become member or nominee of the One Person Company or hold-share with beneficial interest.

(4) Such company cannot be incorporated or converted into a (NPO) under Section 8 of the act.

(5) Such company cannot carry out Non-Banking Financial Investment activities including investment in securities of anybody corporate.

(6) No such company can convert voluntarily into any kind of company unless two years have expired from the date of the incorporation One Person Company, expect threshold limit (paid up share capital) is increases beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees.

RULE-5 Penalty

1. If one Person company or any officer of such company contravenes the provisions of these rules. One Person Company or any officer of the One Person Company shall be punishable with fine which may extend to ten thousand rupees and with a further fine which may extend to one thousand rupees for every day.

Note:-As per section 152 (1), in case of a One Person Company an individual being its member shall be deemed to be its first director until a director or directors are duly appointed by the member in accordance with the provisions of that section.

One Person company to convert itself into a public company or a private in certain cases (Rule 6)

1. Where the paid up share capital of an Person Company exceeds fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees, it shall case to be entitled to a continue as a One Person Company.

2. Such one Person Company shall be required to convert itself, within six months of the date on which its paid up share capital is increased beyond fifty lakh rupees or the relevant period during which its average turnover exceeds two crore rupees as the case may be into either a private company with minimum of two members and three directors.

3. The One Person Company shall within period of sixty days from the date of the applicability of sub-rule (1) give a notice to the Registrar in Form No, INC-5Informing that it has ceased in be a one Person Company.

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PRIVATE COMPANY INTO ONE PERSON COMPANY RULE-7

1. A private company other than NPO registered under section 8 of the Act having paid up share capital of fifty lakhs rupees or less or average annual turnover during the passing a special resolution in the general meeting.

2. Before passing such resolution, the company shall obtain No objection in writing from the members and creditors.

3. The one Person company shall file copy of the special resolution with the Registrar of Companies within thirty days from the days from the date of the passing such resolution in Form No MGT, 14

Privileges of a One Person Company The privileges enjoyed by an OPC over other companies are as follows:

Section Nature of Privileges

2(40) The financial statement, with respect to One Person Company, may not include the cash flow statement;

67(2)

Financial assistance can be taken by the member from the OPC for purchase of or subscribing to its own shares

92(1)

The annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company. In other words it need not be signed by a company secretary in practice.

96(1) Need not hold annual general meeting

121(1) Need not prepare a report on Annual General Meeting

134(1) Financial statement and Board’s report can be signed only by one director

149(1) One person company need not to have more than one director on its Board.

149(4) Need not to appoint Independent directors on its Board

Difference between a Sole Proprietorship and an OPC

The fundamental difference between a sole proprietorship and an OPC is the way liability is treated in the latter.

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A one-person company is different from a sole proprietorship because it is a separate legal entity that distinguishes between the promoter and the company. The promoter’s liability is limited in an OPC in the event of a default or legal issues. On the other hand, in sole proprietorships, the liability is not restricted and extends to the individual and his or her entire assets.

PROVISIONS OF COMPANIES ACT 2013 RELATING TO DORMANT COMPANIES

MEANING OF DORMANT COMPANY

Section 455(1) of the Act defines that when 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 in form no. MSC. 1

a) Meaning of inactive company - means a company which has not been

carrying on any business or operation , or

has not made any significant accounting transaction during the last two financial years, or

has not filed financial statements and annual returns during the last two financial years

b) Significant Accounting Transaction -means any transaction other than (i) Payment of fees by a company to the Registrar; (ii) Payment made by it to fulfill the requirements of this Act (iii) Allotment of shares to fulfill the requirements of this Act; (iv) Payments for maintenance of its office and records

Section and Nature of exemptions/privileges

Sec 2(40) The financial statement, with respect to a dormant company, may not include the cash flow statement;

Sec 173 (5) It is required to hold at least one meeting of the Board of Directors in each half of a calendar year and the gap between the two meetings should not be less than ninety days.

STATUTORY CORPORATIONS

A Company formed under an Act of Parliament or State Legislature is called a Statutory Company/ Corporation.

Change in its structure is possible only by a legislative amendment.

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Such companies do not use the word “limited” as part of their names, e.g., Reserve Bank of India, LIC, etc.

Principal Characteristics of Statutory Corporations

It is owned by the State.

It is created by a special law of Parliament or State Legislature defining its objects, powers and Privileges.

Immunity from Parliamentary Scrutiny: A basic and fundamental characteristic of a statutory corporation is its immunity from Parliamentary enquiry into its day-to-day working, as distinct from matters of policy.

Freedom in regard to personnel: Another distinguishing characteristic of a public corporation is that excluding the officers taken from the Government department on deputation.

A body corporate: Each statutory corporation is a body corporate and can sue and be sued, enter into contracts and acquire property in its own name.

Distinct relation with the Government: The most important provision which regulate the relationship of public corporation and Government is the latter’s power to issue directions.

Q. WHETHER CORPORATIONS ARE “STATE”?

The Courts in India until Raman Dayaram Shetty v. International Airport Authority, considered the statutory character of the corporation as a definitive criterion to identify it with “STATE” withinthe meaning of Article 12 of the Constitution of India. Some of the test which will identify corporation as a ‘’STATE’’ are given below:-

The source of the share capital,

The extent of state control over the corporation,

Whether the corporation has monopoly status,

Whether functions of the corporation are of public importance and closely related to Governmental functions, and

Whether what belonged to a department of government formerly was transferred to the corporation.

Neither of these is a conclusive test, nor is an exhaustive list of operational indices.

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PRACTICE QUESTION AND ANSWER

Q1.“A body corporate cannot be a member of a company which is its holding company

and any allotment or transfer of shares in a company to its subsidiary shall be void.”

Explain the statement and comment on the exception to the said general clause.

(4 marks)

Answer:

Subsidiary company not to hold shares in its holding company [section 19]: subsidiary

company shall not either by itself or through its nominees hold shares in its holding

company and no holding company shall allot or transfer its shares to any of its subsidiary

companies and any such allotment or transfer of shares of a company to its subsidiary

company shall be void.

Therefore, no company shall hold any interest in its holding company.

Exceptions: in following circumstances, a subsidiary can hold the shares of its holding

company:

(a) Where the subsidiary company holds such shares as the legal representative of a

deceased member of the holding company.

(b) Where the subsidiary company holds such shares as a trustee.

(c) Where the subsidiary company is a shareholder even before it became a subsidiary

company of the holding company

(d) However, the subsidiary company referred above shall have voting right only in

respect of the shares held by it as a legal representative or as a trustee.

Q2. To consider a body corporate as a foreign company, a place of business in India is to

be established. State the activities that do not constitute carrying of business in India. (4

marks)

Answer:

Foreign company means a company which is incorporated outside India under the law of

that other country and has a place of business in India.

The following activities are held as not constituting “carrying on of business”:

(a) Carrying small transactions

(b) Conducting meetings of shareholders or even directors

(c) Operating bank accounts

(d) Transferring of shares or other securities

(e) Operating through independent contractors

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(f) Procuring orders

(g) Creating or financing of debts, charges, etc. on property

(h) Securing or collecting debts or enforcing claims to property of any kind.

Q3. Grow more ltd. is a government company in which the central government and many

state governments in India are members. The company has recently convened its annual

general meeting at its registered office. Does the legislature have any access to the annual

reports of such a company? Give your advice. (4 marks)

Answer:

As per sections 394 & 395, in case of government companies, the central government must

place before both the houses of parliament an annual general meeting together with a copy

of the audit report and any comments upon or supplement to such report made by the

comptroller and auditor general of India. Where a state government is a member of a

government company, the annual report is likewise to be placed before the state

legislature.

Q4. Mahesh is a creditor of an unlimited company. The company was wound-up. Mahesh,

therefore, wants to sue the members of the company to recover the dues. Advise Mahesh

regarding the remedy available to him. (4 marks)

Answer:

Unlimited company [section 2(92)]: unlimited company means a company not having any

limit on the liability of its members. Thus, the maximum liability of the member of such a

company, in the event of its being wound up, might stretch up to the full extent of their

assets to meet the obligations of the company by contributing to its assets.

The members of an unlimited company are not liable directly to the creditors of the

company. The liability of the members is only towards the company and in the event of its

being wound up only the liquidator can ask the members to contribute to the assets of the

company which will be used in the discharge of the debts of the company.

Thus, Mahesh cannot directly sue the members of the company for recovery of his dues. He

can file a claim to the liquidator of the company.

Q5. Masons Pvt. Ltd. is a private limited company as per the article of association of the

company. However, a public company acquired shares in masons Pvt. Ltd. thereby making

the masons Pvt. Ltd., a subsidiary of that public company. State the impact of such

acquisition of shares by the public company on masons Pvt. Ltd. (4 marks)

Answer:

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As per section 3(1)(iv), a company which is a subsidiary of a company, not being a private

company, shall be deemed to be public company even where such subsidiary company

continues to be a private company in its articles. This means, if private company is

subsidiary of public company then it will be treated as public company.

Thus, if a public company acquires shares in masons Pvt. Ltd making it subsidiary of that

public company, the masons Pvt. Ltd. will be treated as public company under the

companies act, 2013 even though masons Pvt. Ltd continues to be a private company in its

articles.

Q6. ABC Ltd. is a company incorporated under the companies act, 2013. The paid-up share

capital of the company is held as under:

- Government of India 20%

- Government of Andhra Pradesh 20%

- Government of Tamil Nadu 10%

- Government of Maharashtra 10%

Explaining the provisions of the companies act, 2013, state whether the said company be

called a ‘government company’ and also state whether the employees of a government

company can claim their salaries from the government of India. (4 marks)

Answer:

As per section 2(45), government company means any company in which not less than 51%

of the paid-up share capital is held by the central government, or by and 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.

As per the facts given in case, more than 51% capital is held in ABC ltd. by the central

government and state government; hence it is a government company.

Claiming of salary by the government employee from the government : employees of

government companies are not government servants, they have no legal right to claim that

the government should pay their salary or that the additional expenditure incurred on

account of revision of their pay scales should be met by the government. It is the

responsibility of the company to pay them the salaries.

Q7. Referring to the provisions of the companies act, 2013, state as to when shall a

company incorporated outside India be considered as a ‘foreign company’ within the

meaning of the companies act, 2103. Also examining the provisions of the act, state

whether in the following cases, the company shall be considered as a ‘foreign company’:

(4 marks)

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(i) A company incorporated outside India has a representative in India, who on behalf

of the company merely receives orders from the customers.

(j) A company incorporated outside India holds its board meetings and general

meetings in India.

Answer:

As per section 2(42), 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.

In simple words, foreign company means a company which is incorporated outside India

under the law of that other country and has a place of business in India. A foreign company

has to comply the provision of sections 379 to 393 of the companies act, 2013.

If a representative of a foreign company in India merely receives the orders from customers

it cannot be said that it has ‘place of business’ in India. Hence, sections 379 to 393 of the

companies act, 2013 relating to foreign companies are not applicable and need not be

complied.

Similarly, conducting board meeting and general meeting in India by a foreign company has

held to be not “carrying on of business”.

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MEMORANDUM OF ASSOCIATION

The memorandum of association is a document which sets out the constitution of a company it defines the scope of the company’s activities and its relations with the outside world.

According to Section 2(56) of the Companies Act, 2013 “memorandum” means the memorandum of association of a company as originally framed and altered from time to time in pursuance of any previous company law or this Act.

FORM OF MEMORANDUM OF ASSOCIATION

Section 4(6) of the Companies Act, 2013 Provides that the memorandum of Association should be in any one of the forms specified in tables A,B,C,D, or E of schedule I to the Act.

CONTENTS OF MEMORANDUM

The above clause are compulsory and are designated as designated as “conditions” prescribed by the Act, on the basis of which a company is incorporated.

NAME CLAUSE

A Company being a legal entity must have a name of its own to establish its separate identity. The name of the company is a symbol of its independent corporate existence. The company may adopt any suitable name provided it is not undesirable.

According to section 4(2), the name stated in the memorandum shall not—

Be identical with or resemble too nearly to the name of an existing company registered under this Act.

Be such that its use by the company:- Is undesirable in the opinion of the Central Government.

The Registrar must make preliminary enquiries to ensure that the name is not misleading with reference to the Objects Clause of the memorandum. The Registrar is not, however, required to carry out any elaborate investigation at the time of registration of the company.

CASE LAW Ewing v. Buttercup Margarine Co. Ltd. the plaintiff, who carried on business underthe name of the Buttercup Dairy Co., obtained an injunction against the defendant (Buttercup Margarine Co.Ltd.), on the grounds that the public might think that the two businesses were connected, the word“Buttercup” being a fancy one.

CH-4 MEMORANDUM OF ASSOCIATION AND

ARTICLES OF ASSOCIATION

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The rule will apply also to foreign companies or traders, whose goods are imported into the country.

CASE LAW Atlas Cycles (Haryana) Ltd. v. Atlas Products Pvt. Ltd. use of the brand name as corporate name was settled. Both the plaintiff and the defendant companies belong to the same family. The Appellant-plaintiff was the proprietor of the trade mark in the name “Atlas”. The Respondent-defendant company containing the name “Atlas” in its corporate name started dealing in bicycles. The plaintiff objected to the use of the name “Atlas” by the defendant company. Were restrained from using the word ‘Atlas’ in their corporate/trade name in respect of bicycles and bicycle parts. But mere similarity of name is not in itself enough to give a right to an injunction. the law does not give a person a right to prevent the use of a name by another person. In the case of companies, however, registration will be refused only if there is likelihood of deception or confusion. A person cannot be permitted to name a company even after his personal name if that name resembles the name of an existing company.

PUBLICATION OF NAME

The name of the company and the address of its registered office must be painted or displayed outside every office or place at which its business is carried on, in a conspicuous position and in legible letters in English and in the language in general use in that locality. The name must also be engraved on the company’s common seal.

However, where a company has changed its name during the last two years, it shall paint or display or print, as the case may be, along with its name, the former name so changed during the last two years as required above.

Further in case of One Person Company, the words ‘‘One Person Company’’ shall be mentioned in brackets below the name of such company.

SITUATION CLAUSE

The name of the State in which the registered office of the company is to be situated must be given in the memorandum. But the exact address of the registered office is not required to be stated therein. Within 15days of its incorporation, and at all times thereafter, the company must have a registered office The company must also furnish to the Registrar verification of its registered office within a period of thirty days of its incorporation.

OBJECTS CLAUSE

Under section 4(1)(c) of the Companies Act, 2013, all companies must state in their memorandum the objects for which the company is proposed to be incorporated The objects clause is of great importance because it determines the purpose and the capacity of the company. The purpose of the objects clause is to enable the persons dealing with the company to know its permitted range of activities. The acts beyond this ambit are ultra vires and hence void. Even the entire body of shareholders cannot ratify such acts.

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The subscribers to the memorandum of association enjoy almost unrestricted freedom to choose the objects. The only restriction is that objects should not be illegal and against the provisions of the Companies Act,2013.

LABILITY CLAUSE

Section 4 1(d) of the Companies Act, states that the liability of members of the company, whether limited or unlimited, and also state,—

1. 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.

2. In the case of a company limited by guarantee, the amount up to which each member undertakes to contribute—

a) To the assets of the company in the event of its being wound-up while he is a member one year after he ceases to be a member, for payment of the debts and liabilities of the company.

b) To the costs, charges 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 registered. The shares into which the capital is divided must be of fixed value, which is commonly known as the nominal value of the share. The capital is variously described as “nominal”, “authorised” or “registered”.

The amount of nominal capital is determined having regard to the present as well as future requirements of the company with reference to its objects. The usual way to state the

capital in the memorandum is: “The capital of the company is ` 10,00,000 divided into

1,00,000 equity shares of ` 10 each”.

If there are both equity and preference shares, then the division of the capital is to be shown under these two heads. A company is not authorised to issue capital beyond its authorised/nominal/registered capital. If it receives applications for shares beyond the shares covered by the authorised capital, the amount received on excess number of shares should be returned.

According to Section 60 of the Act, if the amount of the authorised capital (nominal capital), of the company is stated in any notice, advertisement, official publication, business it shall also contain a statement in an equally prominent position and in equally conspicuous terms the amount of capital which has been subscribed and the amount paid-up.

DECLARATION FOR SUBSCRIPTION

The statutory requirements regarding subscription of memorandum are that:

Each subscriber must take at least one share;

Each subscriber must write opposite his name the number of shares which he agrees to take.

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SIGNING OF MEMORANDUM

RULE 13 COMPANIES (INCORPORATION) RULES 2014 The Memorandum and Articles of Association of the company shall be signed in the following manner, namely:-

(1) The memorandum and articles of association of the company shall be signed by each subscriber.

(2) Where a subscriber to the memorandum is illiterate, he shall affix his thumb impression.

(3) Where the subscriber to the memorandum is a body corporate, the memorandum and articles of association shall be signed by director, officer or employee of the body corporate.

SUBSCRIPTION INDUCED BY MISREPRESENTATION

A subscriber to the memorandum cannot, after the issue of the certificate of incorporation, repudiate his subscription on the ground that he was induced to sign by misrepresentation.

ALTERATION OF MEMORANDUM OF ASSOCIATION

Section 13(1) of the Companies Act, 2013 (1) By changing its name (2) By altering it in regard to the State in which the registered office is to be situated. (3) By altering its objects. (4) By altering its share capital. (5) By reorganizing its share capital. (6) By reducing its capital.

ALTERATION OF NAME CLAUSE

The name of the company can be altered by a special resolution and with the approval of the Central Government in writing. Approval of the Central Government is not necessary if the change relates to the addition/deletion of the word ‘Private’ to the name of the company consequent to the conversion of a private company into a public company and vice versa.

RECTIFICATION OF NAME:- Section 16 provides that if a name has been registered which is identical too nearly resembles the name of an existing company whether registered under this Act. The Central Government may direct the company to change its name. The company shall change its name within a period of 3 months from the issue of the above direction after passing an ordinary resolution for the purpose. If a company is so directed by the Central Government, it must change the name within 3 months of the direction after passing an ordinary resolution.

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This section also gives enhanced power to the Central Government to order rectification of name where such name in its opinion constitutes an infringement of a registered trademark. The proprietor of the registered trade mark may make an application to the Central Government for an order for rectification of name because it is identical to or too nearly resembles the applicant’s registered trademarks. Such application must be made within three years from the date of incorporation or the registration. In such a case the Central Government may direct the company to change its name and the company shall change its name, within a period of six months from the issue of such direction, after passing an ordinary resolution for the purpose.

Where a company changes its name or obtains a new name, it shall within a period of fifteen days from the date of such change, give notice of the change to the Registrar along with the order of the Central Government.

EFFECT OF CHANGE The change of name shall not affect any rights or obligations of the company,

However, where a company changes its name and the new name has been registered by the Registrar, the commencing of legal proceedings in the former name is not valid In spite of a change in name the entity of the company continues. The company is not dissolved nor does any new company come into existence. If any legal proceeding is commenced, after change in the name, against the company in its old name, the company should be treated as if it is not in existence. It is not an incurable defect and the plaint can be amended to substitute the new name.

ALTERATION OF REGISTERED OFFICE CLAUSE

a) Change within the local limits of same town: According to Section 12(5), a company can change its registered office from one place to another within the local limits of the city, town or village, where it is situated, by merely passing a Board resolution. A notice of the change is required to be given to the Registrar in Form no INC 22, within 15 days of such change.

b) Change from one city to another within the same State: if the registered office is to be shifted from one city, town or village to another city, town or village within the same State, a special resolution has to be passed in the general meeting of the company. A notice of the change is required to be given to the Registrar in Form no INC 22, within 15 days of such change along with Form no MGT 14, towards special resolution passed...

c) Change within the same State from the jurisdiction of one Registrar of Companies to the jurisdiction of another Registrar of Companies: Section 12(5) provides that confirmation by the Regional Director will be necessary for changing registered office of a company from one place to another if the change of registered office is from the jurisdiction of one Registrar to the jurisdiction of another within the same State.

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Section 12(6) states that the Regional Director, after hearing the parties shall pass necessary orders within a period of thirty days from the date of the receipt of the application. Thereafter, the company concerned shall file a copy of the said order with the Registrar of Companies (ROC) within a period of sixty days from the date of the confirmation order by Regional Director. The said ROC shall record the ordered changes in its records.

RULE 28 OF COMPANIES (INCORPORATION) RULES 2014 STATES THAT

An application seeking confirmation from the Regional Director for shifting the registered office within the same State from the jurisdiction of one Registrar of Companies to the jurisdiction of another Registrar of Companies, shall be filed by the company with the Regional Director in Form no. INC. 23.

d) Change of registered office from one state to another

The change of registered office from one State to another State involves alteration of memorandum, and the change can be effected by a special resolution of the company which must be confirmed by the Central Government on an application made to it.

The Central Government shall dispose of the application within a period of sixty days and before passing its order may satisfy itself that the alteration has the consent of the creditors, debenture holders and other persons concerned with the company that a sufficient provision has been made by the company either for the due discharge of all its debts and obligations or that adequate security has been provided for such discharge.

A company shall, in relation to any alteration of its memorandum involving change of registered office from one State to another, file with the Registrar the special resolution passed by it in MGT 14.

A certified copy of the order of the Central Government approving the alteration shall be filed by the company with the Registrar of each of the States and the Registrar of the State where the registered office is being shifted to, shall issue a fresh certificate of incorporation indicating the alteration.

RULE 30-31 OF COMPANIES (INCORPORATION) RULES 2014 Rule 30 states that An application for the purpose of seeking approval for alteration of memorandum with regard to the change of place of the registered office from one State Government or Union territory to another, shall be filed with the Central Government in Form No. INC.23.

Rule 31. The certified copy of the order of the Central Government, approving the alteration of the memorandum for transfer of registered office of the company from one State to another, shall be filed in Form No.INC.28 along with the Registrar of the State within thirty days from the date of receipt of certified copy of the order.

Where the alteration is affected by changing the registered office from one State to another State, the loss of revenue in one State would be accompanied by increase in revenue in the

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other and in such a case the interest of a particular State ought not to be considered but it is the interest of the country as a whole which should be considered. A company was allowed to shift its registered office from Bihar to West Bengal in spite of the fact that Bihar Government had granted lease of land for the company’s factory on the condition that it would not shift its registered office. The CLB also held that interest free loans, sales tax, electricity and other subsidies would have no bearing on the shifting.

EMPLOYEES’ RIGHT TO OBJECT IN CASE OF SHIFTING OF REGISTERED OFFICE FROM ONE STATE TO ANOTHER – SOME LEGAL CASES

In the case of Bharat Commerce and Industries Ltd. it was held that employees’ union, which was a registered body and which represented quite a number of the employees atthe registered office of the company, would have the legal standing to appear before the court and oppose the application on the ground that their interests are likely to be prejudicially affected if the resolution for shifting the registered office of the company from one state to another is confirmed by the court. However, it was held that the employees’ union cannot oppose on the ground that there would be loss of revenue or unemployment in the State.

Where the shifting of the registered office was in accordance with a scheme approved by the BIFR, it was held that the workers had no right of objection because their continuation in the company’s employment was ensured unless, of course, a worker preferred voluntary retirement.

ALTERATION OF OBJECTS CLAUSE OF THE COMPANY

According to section 13(1), a company may, by a special resolution and after complying with the procedure specified in this section, alter the provisions of its memorandum.

Further in case of a listed company, the special resolution for alteration in the objects clause of the Memorandum of Association needs to be passed through Postal Ballot in terms of section 110. Further, section 13(8) lays down that a company, which has raised money from public through prospectus and has any unutilized amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and—

The dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control.

REGISTRATION OF ALTERATION

Section 13(6)(a) provides that a company shall, in relation to any alteration of its memorandum, file with the Registrar :

a) The special resolution passed by the company b) The approval of the Central Government if the alteration involves any change inthe

name of the company. The special resolution shall be filed with the Registrar within thirty days.

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ALTERATION OF LIABILITY CLAUSE

According to section 13(1), a company may, by a special resolution alter the provisions of its memorandum. It means that a company can change the liability clause of its memorandum of association by passing a special resolution. Further section 13(6)(a)provides that a company shall, in relation to any alteration of its memorandum, file with the Registrar the special resolution passed by the company under section 13(1).

ALTERATION OF CAPITAL CLAUSE

A limited company having a share capital may make the following types of alterations in its memorandum by an ordinary resolution, if so authorised by its articles,

a) Increase its authorised share capital b) Consolidate and divide all or any of its share capital into shares of a larger amount

than its existing shares: c) Convert all or any of its fully paid-up shares into stock, and reconvert that stock into

fully paid-up shares d) Sub-divide its shares, into shares of smaller amount than is fixed by the

memorandum, e) Cancel shares which, at the date of the passing of the resolution in that behalf, have

not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.

All the above alterations do not require the confirmation by the Tribunal except that alteration relating to consolidation and division which results in changes in the voting percentage of shareholders shall not take effect unless it is approved by the Tribunal on an application made in the prescribed manner.

ALTERATION OF MEMORANDUM OF ASSOCIATION

Name Change Clause

Pass Special Resolution

Approval of Central Government

To delete the word “private” approval from Central Government is not required in case of conversion of private company to public company.

Change in Registered office

Change within local limits

Change of state Change in jurisdiction of Registrar

Pass Board Resolution and Special Resolution Notice of change to registrar in INC 22 within 15 days of such change

Approval of Central Govt. In INC 23 The Approval should be registered with Registrar for Incorporation Certificate

Get confirmation by Regional Director Communication of confirmation by Regional Director to the company within 30 days

Change in Object

Pass Special Resolution

From the date of filing Special Resolution the Registrar should within

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30 days, certify the same.

Change in Liability

Needs Special Resolution to be passed.

File the same with Registrar in form MGT. 14

Change in Capital

alteration of capital clause to be authorised by the Articles of Association [section 61]; Ordinary Resolution

If by division or consolidation in capital the voting % gets affected then a confirmation from Tribunal is mandatory.

Notify the alterations made and a copy of Resolutions passed shall be filed with Registrar within 30 days.

Registrar shall record the notice and make alterations required.

ARTICLES OF ASSOCIATION

NATURE OF ARTICLES

According to Section 2(5) of the Companies Act, 2013, ‘articles’ means the articles of association of a company as originally framed or as altered from time to time 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.

“The articles play a part that is subsidiary to the memorandum of association.

The articles regulate the internal management of the affairs of the company by way of defining the powers of its officers and establishing a contract between the company and the members and between the members inter se.

Articles Subordinate to Memorandum

The articles of a company are subordinate to and subject to the memorandum of association and any clause in the Articles going beyond the memorandum will be ultra vires. But the articles are only internal regulations, over which the members of the company have full control and may alter them according to what they think fit. But neither the articles nor the memorandum can authorise the company to do anything so as to contravene any of the provisions of the Act.

REGISTRATION OF ARTICLES Section 7(1) provides that at the time of incorporation of a company there shall be filed with the Registrar within whose jurisdiction the registered office of a company is proposed to be situated, the memorandum and articles of the company duly signed by all the subscribers to the memorandum in the prescribed manner.

Every type of company whether public or private must register their articles of association.

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The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such company. [Section 5(6)].

Q. ENTRENCHMENT PROVISIONS

The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures that are more restrictive than those applicable in the case of a special resolution, are met or complied with. [Section 5 (3)]

The entrenchment provisions allow for certain clauses in the articles to be amended upon satisfaction of certain conditions or restrictions (such as obtaining a 100% consent) greater than those prescribed under the Act. This provision acts as a protection to the minority shareholders and is of specific interest to the investment community.

The provisions for entrenchment referred to in section 5(3) shall be made either on formation of a company ,or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company.

Where the articles contain provisions for entrenchment, the company shall give notice to the Registrar of such provisions.

STATUTORY REQUIREMENTS

The articles must be printed, divided into paragraphs, numbered consecutively, stamped adequately, signed by each subscriber to the memorandum and duly witnessed and filed along with the memorandum. The articles must not contain anything illegal or ultra vires the memorandum, nor should it be contrary to the provisions of the Companies Act, 2013.

CONTENTS OF ARTICLES

The articles should contain generally the following matters:

1. Adoption of preliminary contracts. 2. Number and value of shares. 3. Issue of preference shares. 4. Allotment of shares. 5. Calls on shares. 6. Transfer and transmission of shares. 7. Nomination. 8. Forfeiture of shares. 9. Alteration of capital. 10. Buy back. 11. Share certificates. 12. Nominee directors. 13. Additional directors. 14. Seal.

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15. General meetings. 16. Directors meetings. 17. Winding up.

Utmost caution must be exercised in the preparation of the articles of association of a company. At the same time, certain provisions of the Act are applicable to the company "notwithstanding anything to the contrary in the articles". Therefore, the articles must contain provisions in respect of all matters which are required to be contained therein so as not to hamper the working of the company later.

ALTERATION OF ARTICLES OF ASSOCIATION

A company may, by a special resolution, alter its articles any alteration having the effect of conversion of a public company into a private company shall not take effect except with the approval of the Tribunal. Every alteration of the articles under this section and a copy of the order of the Tribunal approving the Alteration shall be filed with the Registrar, within a period of fifteen days who shall register the same.

However, in spite of the power to alter its articles, a company can exercise this power subject only to certain limitations. These are: 1. The alteration must not exceed the powers given by the memorandum. 2. The alteration must not be inconsistent with any provisions of the Companies Act 3. The Articles must not include anything which is illegal or opposed to public policy. 4. The alteration must be bona fide for the benefit of the company as a whole. 5. The alteration must not constitute a fraud on the minority by a majority. 6. The Articles of Association cannot be altered so as to have retrospective effects. 7. The alteration must not be inconsistent with an order of the Court.

EFFECT OF ALTERED ARTICLES

Alteration binds members in the same way as original articles.

SECTION 8 COMPANY CANNOT ALTER ARTICLE EXCEPT WITH THE APPROVAL OF CENTRAL GOVERNMENT

A company registered under section 8 i.e. companies with charitable objects shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government.

BINDING AND LEGAL EFFECTS OF AOA (SEC. 10)

Meaning of Sec.10

Effect of memorandum and articles (1) Subject to the provisions of this Act ,the memorandum and articles

shall when registered ,bind the company and the members thereof to the same extent as if they respectively had been signed by the

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company and by each member ,and contained convents on its and his part to absolve all the all the provisions of the articles .

(2) All money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.-------( very important).

Company is bound to members

(a) Every member is given some individual rights under the Act and the articles .if a company deprives any of its members of such rights .such a member can sue the company for enforcement of his rights .

(b) The company is bound to comply with all the terms and conditions contained in the memorandum and articles. Therefore the following conclusions may be drawn :

If a company is about to commit a breach of any terms and conditions of memorandum and articles, any member can obtain an injunction order from the Court thereby restraining the company from committing such breach.

If a company has already committed a breach of any terms and conditions of memorandum and articles, any members can sue the company, directors and the persons responsible for such breach.

Members are bound to company

When memorandum and articles are registered .it shall be deemed that these documents were signed by every member of the company individually.

Every member shall be bound to comply with the provisions contained in the memorandum and articles.

In case of non-compliance, the company may sue a member.

Members are bound to each other (i.e. with each other )

There are no privity of contract between the members.

However a member any enforce his rights against another member through the company, but not directly.

Company is not bound to outsiders

The memorandum and the articles do not bind a company to the outsider’s .This is based on the general rule of the law that a stranger to a conduct does not acquire any rights under the contract.

DISTINCTION BETWEEN MEMORANDUM & ARTICLES

BASIS MEMORANDUM ARTICLES

Meaning The memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated.

The Articles are the rules for the management of the internal affairs of the company.

Nature of document Memorandum is fundamental document.

Articles are subordinate to memorandum.

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Powers and rules Memorandum contains the objects and power of the company.

Articles contain the rules and regulation for the internal management of the company.

Hierarchy In case of any inconsistency .the memorandum shall prevail over the articles.

The articles subordinate to the memorandum.

Retrospective amendment

The memorandum cannot be amended retrospectively.

The articles can be amended retrospectively

DOCTRINE OF ULTRA VIRES

Meaning and effect of the doctrine

Ultra means beyond or in excess of and vires means ‘powers’ Thus ultra vires means an act or transaction beyond or in excess of the powers of the company

An act or transaction shall be ultra vires if- It is not permitted or authorized by the Companies Act ,1956 It fails outside the object clause of memorandum and Its falls outside the provision of AOA.

Ashbury Railway Carriage & Iron Company Ltd. v. Richie

Effect of object clause. The object clause of an industrial company contained the following objects besides some other objects

(a) To make ,sell or lend or hire ,railway carriage and wagons (b) To carry on the business of mechanical engineers and general

contractors (c) To purchase ,lease ,work and sell mine minerals land and

buildings Nature of contract made by the company. The company entered into a contract with Richie for the financing of a construction of a railway line in Belgium.

Decision of the court .The court held that the word general contractors had to be given a restricted meaning.

Only such contracts could be covered in the term general contractors as are in some way related or connected with mechanical engineering.

Therefore the company could not finance the construction of a railway line by alleging that such a business falls under the business of general contractors.

Effect of ultra vires transactions

The transaction is void ab-inito (as per general rule)

An act which ultra vires the company is void and has no legal effect. Neither the company nor the other contracting party derives any right under an ultra vires contract.

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Even ratification of an ultra vires contract by the whole body of shareholders does not make an ultra vires contract valid or enforceable.

No ratification or estoppel

An ultra vires contract cannot become valid by estoppels or ratification

Injunction against the company

Any member may obtain an injunction order from the Court.

Personal liability of directors

If funds of the company are misapplied or wasted by entering into ultra vires transactions the directors shall be personally liable to the company for breach of trust.

Ultra vires property If the company acquires some property under an ultra vires transaction, the company has the right to hold that property and protect it against damage by other parties.

Right of third parties in respect of ultra vires transactions

Sue the directors The lender may sue the directors for breach of warranty of authority and recover any loss sustained by him

Injunction If the money is in specie (i.e. in the same form) the lender can obtain a tracing order from the Court and the company shall be liable to repay such money.

Charge on assets purchased

If the company purchased an asset out of such money, the lender shall have a first charge on such asset.

Effect of acts ultra vires the directors or articles

Acts ultra vires the directors or articles means those acts which are beyond the

powers of the directors or powers given under the articles.

Such acts are not altogether void and inoperative .such acts may be ratified by the

members.

DOCTRINE OF CONSTRUCTIVE NOTICE Applicability of doctrine

The doctrine operates in favor of the company i.e. it creates a presumption in favor of the company .It operates against the persons dealing with the company.

Effect of the doctrine

Once MOA and AOA is registered with ROC than it will become public documents. It is always presumed that the person contracting with company has read it and also correctly interpret it. If person sign the contract, than in case of default, he can’t enforced the contract against the company.

Example KotlaVenakataswamy v C. Ramamurthy

The articles of a company required that all the documents and debts

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of the company shall be signed by MD the secretary and a working director of the company.

A mortgage deed was signed by the secretary and a working director only.

It was held that the mortgage deed was invalid even though the plaintiff had acted in good faith and money was utilized for benefit of the company.

DOCTRINE OF INDOOR MANAGEMENT OR TURQUAND ‘S RULE Purpose of doctrine

The doctrine of indoor management operates in favour of the outsiders i.e. this doctrine creates a presumption in favour of the outsiders

Meaning of the doctrine

As per this doctrine, outsiders dealing with the company are not required to enquire into the internal management of the company.

Outsiders dealing with the company are entitled to assume that as far as internal proceeding of the company are concerned everything has been done regularly.

Thus the doctrine protects an innocent outsider from any irregularity present in the working of the company

Effect of the doctrine

If a contract is entered into on behalf of the company by any director or officer of the company .it is enforceable against the company.

Example Royal British v. Turquand The articles of a company stated that the directors could borrow money on behalf of the company, if they are so authorized by a resolution passed by the shareholders in G.M. The directors borrowed money from Turquand without obtained any authorization from shareholders . Turquand had lent the money to the company assuming that the shareholders had authorized the directors to borrow money as per the requirements of the articles . It was held that borrowing of money by the directors without any authorization from the shareholders amounted to a mere internal irregularity and since Turquand had no knowledge of such irregularity hence have no effect of such internal irregularity.

Conclusion The benefit of doctrine of indoor management can be availed only if the person dealing with the company:-

Has no knowledge of internal irregularity.

EXCEPTIONS OF DOCTRINE OF INDOOR MANAGEMENT Knowledge of Irregularity:

Where the person dealing with the Company have knowledge of an irregularity, therefore the benefit of doctrine of indoor management, shall not be available in such a case. Howard v. Patent lvory manufacturing Company.

The directors of a company could borrow up to £ 1,000 without the

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sanction of members in G.M.

The consent of the shareholders was required to borrow in excess of £1,000.

The directors themselves lent £3,500 to the company.

It was held that the directors had the notice of the internal irregularity and therefore the company was liable to them only for £ 1,000.

Negligence

If there are suspicious grounds surrounding a transaction but the person dealing with the company fails to make reasonable inquiry, the benefit of doctrine of indoor management will not be available.

Anand BihariLal v. Dinshaw& company

An accountant of the company entered into a contract on behalf of the company with a third party to sell the property of the company.

It was held that the third party could not assume that the accountant was authorized by the company to sell the property of the company.

Therefore the third-party could not enforce such a contract against the company even though the third party had acted bonafide.

Forgery

Ruben v Great Fing all Consolidated Company

A share certificate was issued under the common seal of the company.

The secretary of the company had signed on the share certificate.

However, the signatures of two directors were also required on it, which were forged by the secretary.

The holder of the share certificate contended that he was not aware of the fact of forgery .it was not possible for him to determine whether the signatures were genuine or forged and therefore, the certificate issued to him should be held as valid .

The court held that in case of forgery, there is not a defect in consent, but absence of consent and therefore the certificate issued by way of forgery is void .Thus, the certificate was held to be invalid.

DOCTRINE OF ALTER EGO It is used by the courts to ignore the status of shareholders, officers, and directors of a company in referenceto their liability in their respective capacity so that they may be held personally liable for their actions whenthey have acted fraudulently or unjustly. In Lennards Carying Co. Ltd. v. Asiatic Petroleum Co. Ltd The House of Lords stated that the default ofthe managing director who is the “directing mind and will” of the company, would be attributed to him and hebe held for the wrong doing of the company.

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PRACTICE QUESTION AND ANSWER

Q1. Can the state government opposes shifting of the registered office contending that

they would be deprived of the revenue? Decide wit case law. (4 marks)

Answer:

Central government may direct notice to be served on the state if it is of the view that the

interest of the state will be affected by the alteration. Where the alteration is affected by

changing the registered office from one state to another state, the loss of revenue in one

state would be accompanied buy increase in revenue in the other and in such a case the

interest of a particular state ought not to be considered but it is the interest if the country

as a whole which should be considered.

The decision to shift the registered office of the company to another state being a domestic

matter rests with shareholders and the company is the best judge of how to run its business

more economically, efficiently or conveniently, even though it would result in loss of

revenue to the state.

A company was allowed to shift its registered office from Bihar to west Bengal in spite of the

fact that Bihar government had granted lease of land for the company’s factory on the

condition that it would not shift its registered office. The CLB also held that interest free

loans, sales tax, electricity and other subsidies would have no bearing on the shifting.

Q2. Can a listed company change its name as and when necessary? Give reasons in

support of your answer. ( 4 marks) extra question for practice.

Answer:

Name change requirement under clause 32 of Listing Agreement: all listed companies which

decide to change their names shall be required to comply with the following conditions:

1. A time period of at least 1 year should have elapsed from the last name change.

2. At least 50% of its total revenue in the preceding 1 year period should have been

accounted for by the new activity suggested by the new name, or the amount

invested in the new activity/project (fixed assets + advances + work in progress) is at

least 50% of the assets of the company. The advances shall include only those

extended to contractors and suppliers towards execution of project, specific to new

activity as reflected in the new name. To confirm the compliance, the company have

to submit auditor’ certificate to the exchange.

3. The new name along with the old name shall be disclosed through the websites of

the respective stock exchanges where the company is listed for a continuous period

of one year, from the date of the last name change.

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Q3. A registered office was shifted from one state to another. A labour litigation was

pending before the Tribunal. So, the employees objected to transfer. Whether the

objection of the employee is sustainable. (4 marks)

Answer:

It was held that employees union, which was a registered body, would have the legal

standing to appear before the court and oppose the application on the ground that their

interests would be likely to be prejudicially affected if the resolution for shifting the

registered office of the company from one state to another is confirmed by the court.

However, the employees union cannot oppose on the ground that there would be loss of

revenue or unemployment in the state or that the meeting at which the special resolution

was passed was not itself valid. [Bharat Commerce & Industries Ltd.]

If the shifting of the registered office was in accordance with a scheme approved by the

BIFR, it was held that the workers had no right of objection because their continuation in

the company’s employment was ensured unless, of course, a worker preferred voluntary

retirement. [Metal Box India Ltd.]

A different dimension to the employees right can be seen in the case of Kwality Ice Creams

(India). In that case, the company’s petition for carrying its registered office from west

Bengal to Delhi was opposed by two employees of the head office on the ground that their

action against the company would be prejudiced. The CLB said that the facility for litigation

is not a valid ground to stall shifting. There was no restraint order from any court against the

proposed shifting. The CLB allowed shifting subject to the condition that the interest of

none of the employees at the registered office would be prejudiced by retrenchment or

otherwise.

Dec. 2009 Q4. With the approval of the board, an amount of rs. 50 croreswas spent by

speed jet ltd., in producing a commercial film, not covered under its objects clause. The

film was a complete flop and the company lost an amount of rs. 40 crores. Some of the

members of the company objected to such investments not covered by the objects clause

of the company. They filed a suit making the directors personally responsible and to make

good the loss. Will they succeed? Support your answer with reasons. (6 marks)

Answer:

An act which is ultra vires is void, and does not bind the company. Neither the company nor

the other contracting party can use on it. The company cannot make it valid, even if every

member assents to it.

It is one of the duties of directors to ensure that the corporate capital is used only for the

legitimate business of the company and hence if such capital is diverted to purposes foreign

to company’s memorandum, the director will be personally liable to replace it.

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In Jehangir R. Modi v. ShamjiLadha , the Bombay High Court held that a shareholder can

maintain an action against the directors to compel them to restore to the company’s funds

that have by them been employed in transactions that directors have no authority to enter

into.

Thus, members of the speed jet ltd. will succeed in their claim making directors personally

responsible and to make good the loss.

Dec. 2014 Q5. Abha ltd. was incorporated on 15th march, 2012. A company with identical

name and similar objects was incorporated on 5thaugust, 2013. On account of similarity of

name, Abha ltd., i.e., the company which was previously registered, filed a petition on

15thapril, 2014 with the central government seeking issue of direction for change of name

by the later company sent an order to the later company to change its name. examine the

aforesaid case and the validity of the order of the central government. ( 4 marks)

Answer:

According to the section 16(1)(a), if by inadvertence or otherwise a name has been

registered which is identical to or too nearly resembles the name of an existing company,

the central government may direct the company to change its name. the company shall

change its name within a period of 3 months from the issue of the above direction after

passing an ordinary resolution.

Thus, Abha ltd. (first registered company) can make an application to central government to

direct second company to change its name. second company shall change its name within a

period of 3 months from the issue of direction by passing an ordinary resolution.

Dec. 2015 Q6. Surprise ltd. was incorporated under the companies act, 2013. The

memorandum of association of the company in its objects clause stated that the company

was established to make and sell or to carry on the business of mechanical engineers and

general contractors. The company entered into a contract with prominent ltd., a firm of

railway contractors to finance the construction of a railway line in Mumbai. The contract

was ratified by the shareholders in general meeting. Subsequently, the contract was

repudiated by the company on the ground that the contract was ultra vires the objects

clause. Prominent Ltd. filed a suit claiming damages for the breach of contract. Explaining

the meaning of doctrine of ultra vires, decide whether prominent ltd. will succeed. ( 4

marks)

Answer:

The facts of the given case are similar to Ashbury Railway Carriage and Iron Co. ltd. v. Riche (

which dales with doctrine of ultra vires.

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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 other contracting party

can sue on it. Also, the company cannot make it valid, even if every member assents to it.

Contract entered by the surprise ltd. with prominent ltd. is to finance the construction of a

railway line which is not covered by the MOA of surprise Ltd. as its object is to make and sell

or to carry on the business of mechanical engineers and general contractors. Thus,

prominent ltd. will not succeed in claiming damages from surprise Ltd.