Expansion Inc: India has 8,65,000 companies The Economic Times: February 18, 2008

New Delhi: India is witnessing a massive increase in the number of corporate entities with about 55,000 companies being incorporated annually for the last two years. The total number of companies incorporated so far has risen to 8.65 lakh, Corporate Affairs Minister Prem Chand Gupta said while addressing the annual general meeting of FICCI here. This represents a more than 20% increase from the 7.12 lakh companies in 2005 end.

CIA-II QUESTIONS All answers must be neatly handwritten submitted in a blue book [DATE OF SBMISSION:30/11/2009]1 .Distinguish between:a) Partnership firm and Company b) Private Company & Public Company 2. Explain the procedure of formation of a company and procedure of conversion of private in to a public company and public in to private company 3. Classify different types of companies with description. 4. Explain the procedure of appointment ,re-appointment and removal of directors. 5. Explain Powers and duties of directors. 6. Classify and explain the various meetings of companies. 7. Explain the contents of Memorandum and procedure of its alteration. 8. Explain the contents of Articles of Association and procedure of its alteration. 9.. Write a note on the followings: a) Prospectus b)Information Memorandum c) Principle of Majority Rule d)Doctrine of Constructive Notice e) Doctrine of Indoor Management f) Quorum g) Rights and duties of auditors h)Voting Powers i) NCLT j) Official Liquidator.

company

History of Modern Company Law:

The history of modern company law in England began in 1844 when the Joint Stock Companies Act was passed. The Act provided for the first time that a company could be incorporated by registration without obtaining a Royal Charter or sanction by a special Act of Parliament. The office of the Registrar of Joint Stock Companies was also created. But the Act denied to the members the facility of limited liability

History of Modern Company Law:The English Parliament in 1855 passed the Limited Liability Act providing for limited liability to the members of a registered company. The act of 1844 was superseded by a comprehensive Act of 1856, which marked the beginning of a new era in company law in England. This Act introduced the modern mode of creating companies by means of memorandum and articles of associations.

Introduction Introduction The word 'Company' is an amalgamation of the Latin word 'Com' meaning "with or together" and 'Pains' meaning "bread". Originally, it referred to a group of persons who took their meals together. A company is nothing but a group of persons who have come together or who have contributed money for some common person and who have incorporated themselves into a distinct legal entity in the form of a company for that purpose.

Illegal Association :

Under the Companies Act, 1956, not more than 10 persons can come together for carrying on any banking business and not more than 20 persons can come together for carrying on any other of business, unless the association is registered under the Companies Act or any other Indian law. Any association which does not comply with the above norms is an illegal association. Therefore, a partnership of more than 10 or 20 members, as the case may be, is an illegal association unless the registered under the Companies Act or any other Indian law.

Section :25 Companies: Under the Companies Act, 1956, the name of a public limited company must end with the word 'Limited' and the name of a private limited company must end with the word 'Private Limited'. However, under Section 25, the Central Government may allow companies to remove the word Limited / Private Limited " from the name if the following conditions are satisfied :The company is formed for promoting commerce, science, art, religion, charity or other socially useful objects The company does not intend to pay dividend to its members but apply its profits and other income in promotion of its objects.

What is Company ?Indian Companies Act,1956 [Section 3(1)], defines company as mentioned below.

Company means a company formed and registered under this Act or an existing company .

What is a Company ?Existing company means a company formed and registered under any of the previous companies laws specified below:(a) any Act or Acts relating to companies in force before the Indian Companies Act,1866 and repealed by that Act; (b) the Indian Companies Acts,1866; (c) The Indian Companies Act,1882; (d) The Indian Companies Act,1913;

Characteristics of Company 1.Separate Legal Entity [Salomon vs.Salomon(1897)] 2.Limited Liability 3.Perpetual Succession 4.Common Seal 5.Transferability of Shares 6.Separate Property 7.Capacity to Sue 8.Artificial Person 9.Created by Law 10.One Share-One Vote

1.Separate Legal Entity: Salomon V. Salomon(1897)

S sold his boots business to a newly formed company for 30,000 pounds. His wife, one daughter and four sons took up one share of 1 pound each. S took 23,000 shares of 1 pound each and 10,000 pounds worth of debentures in the company The debentures gave S a charge over the assets of the company as the consideration for the transfer of business. Subsequently when the company was wound up, its assets were found to be worth 6000 pounds and its liabilities amounted to 17,000 pounds. Of which 10,000 pounds were due to S ( secured by debentures) and 7,000 pounds due are unsecured creditors. The unsecured creditors claimed that S and the company were one and the same person and that the company was a mere agent for S and hence they should be paid in priority to S . Held, the company was separate person independent from its members. Hence Solomon and the Company were not one & the same.

Lifting or piercing the Corporate Veil From the juristic point of view, a company is a legal person distinct from its members [Soloman vs. Soloman(1897)] This principle may be referred to as the veil of incorporation. The effect of this principle is hat there is a fictional veil (and not a wall) between the company and its members.

Lifting or piercing the Corporate Veil: .

1. Protection of revenue 2.Prevention of Fraud or improper conduct 3.Determination of character of a company whether it is enemy. 4.Where the company is a sham. 5.Company avoiding legal obligations. 6.Company acting as a trustee or agent of shareholders. 7.Avoiding of welfare legislations. 8.Protecting public policy.

Lifting or piercing the Corporate Veil: Exceptions or disadvantages of Incorporation : 1.PROTECTION OF REVENUE: [Sir. Dinshaw Maneckjee 1927 Bomb.] Eg. D, an assessee, who was receiving huge dividend and interest income, transferred his investments to 4 private companies formed for the purpose of reducing his tax liability. These companies transferred the income to D as a pretended loan.

Held, the companies were formed by D purely and simply as a meansof avoiding tax obligation and the companies were nothing more than the assessee himself. They did no business but were created simply as legal entities to ostensibly receive the dividends and interest and to hand them over to D as pretended loans.

Lifting or piercing the Corporate Veil: Exceptions or disadvantages of Incorporation : 1.PROTECTION OF REVENUE: Eg.The separate existence of a company may be disregarded when the only purpose for which it appears to have been formed is the evasion of taxes. [India Waste Energy Development Ltd Vs. Govt of NCT of Delhi(2003)] Lifting corporate veil permissible in cases of tax evasion even in the absence of any statutory provision ....................................................................................................... Eg.Courts (now NCLT) may ignore the corporate entity where it is used for tax evasion. [Juggilal Kamlapat ,Bankers v.Commissioner of Income-tax. SC(1969)]

Tax planning may be legitimate provided it is within the framework of law. Colorable device cannot be part of tax planning .

Lifting or piercing the Corporate Veil: Exceptions or disadvantages of Incorporation : 2.PREVENTION OF FRAUD OR IMPROPER CONDUCT The legal personality of a company may be disregarded in the interest of justice where the machinery of incorporation has been used for some fraudulent purpose like defrauding creditors or defeating or circumventing law. [Jones Vs. Lipman, All E R,1962] Eg. L agreed to sell certain land to J .He subsequently changed his mind and to avoid specific performance of the contract, he sold it to a company which was formed specifically for the purpose. The Company had L and a cleark of his solicitors as the only members . J brought an action for the specific performance against L and the Company. The Court looked to the reality of the situation, ignored the transfer, and ordered that the company should convey the land to J.

Lifting or piercing the Corporate Veil: Exceptions or disadvantages of Incorporation :3.Determination of character of a company whether it is enemy. A company may assume an enemy character when persons de facto control its affairs are residents in an enemy country . In such a case, the court may examine the character of persons in real control of the company, and declare the company to be an enemy company. E g. Daimler Company Ltd., Vs. Continental Tyre & Rubber Company Ltd.(1916) A company was incorporated in England for the purpose of selling in England tyres manufactured in Germany by a German company which held the bulk of shares in the English company The holders of the remaining shares , except one, and all directors were Germans, resident in Germany. During the first World War, the English company commenced an action for recovery of a trade debt. Held, the company was an alien company and the payment of debt to it would amount to trading with the enemy, and therefore the company was not allowed to proceed with the action.

Lifting or piercing the Corporate Veil: Exceptions or disadvantages of Incorporation : The Courts (now NCLT) also lift the veil where the company is a mere cloak or sham(hoax).The following case illustrates the point: Gilford Motor Co. Ltd. Vs. Horne(1933) Horne, a former employee of a company , was subject to a covenant not to solicit its customers. He formed a company to carry on business which, if he had done so personally, would have been a breach of the covenant. An injunction was granted against him and the company to restrain them from carrying on the business. The company was described in this judgment as device and as a mere cloak or sham for the purpose of enabling the defendant to commit a breach of his covenant against solicitation.

4.Where the company is a sham.

Lifting or piercing the Corporate Veil: Exceptions or disadvantages of Incorporation :

5.Company avoiding legal obligations. Where the use of an incorporated company is being made to avoid legal obligations, the Court may disregard the legal personality of the company and proceed on the assumption as if no company existed.

Lifting or piercing the Corporate Veil: Exceptions or disadvantages of Incorporation : 6.Company acting as a trustee or agent of shareholders

Company acting as trustee or agent of shareholders. Where a company is acting as trustee or agent for its shareholders, the shareholders will be liable for the acts of the company. It is question of fact in each case whether the company is acting as agent for its shareholders. There may be an express agreement to this effect or an agreement may be implied from the circumstances of each particular case.

Lifting or piercing the Corporate Veil: Exceptions or disadvantages of Incorporation :7.Avoidance of welfare legislations.

Avoidance of welfare legislation is as common as avoidance of taxation and the approach of the Courts (now NCLT) in considering problems arising out of such avoidance is generally the same as avoidance of taxation. It is the duty of the Courts in every case where ingenuity is expended to avoid welfare legislation to get behind the smoke screen and discover the true state of affairs.

Lifting or piercing the Corporate Veil: Exceptions or disadvantages of Incorporation :

8. Protecting Public Policy. The Courts (now NCLT) invariably lift the corporate veil to protect

the public policy and prevent transactions contrary to the public policy. Thus where there is a conflict with public policy, the Courts (now NCLT) ignore the form and take in to account the substance.

Lifting or piercing the Corporate Veil : Statutory Exceptions:1.Number of members below statutory minimum [Sec.45] 2.Failure to refund application money [Sec.69(5)] 3.Mis-description of companys name [Sec.147(4)] 4.Fraudulent trading [Sec.542] 5.Holding and subsidiary companies.

Lifting or piercing the Corporate Veil : Statutory Exceptions: 1.Number of members below statutory minimum . [Sec.45] .

If company carries on business for more than 6 months after the number of its members reduced to below 7 in case of a public company or 2 in case of private company, every person who knows the fact and is member during the time that the company so carries on business after the six months, is severally liable for the whole of the debts of the company contracted during that time, i.e., after six months.

Lifting or piercing the Corporate Veil : Statutory Exceptions:[contd)1.Number of members below statutory minimum It may be noted that in such a case, the continuing members (i.e., those who have withdrawn from the members after 6 months)(A) can be sued and not those who have withdrawn from membership; (B)Shall be liable only if they are aware of the fact of number falling below the statutory minimum.

..Lifting or piercing the Corporate Veil :

Statutory Exceptions: 2.Failure to refund application money [Sec.69(5)] The directors of a company are jointly and severally liable to repay the application money with interest if the company fails to refund the application money of those applicants who have not been allotted shares, within 130 days of the date of issue of the prospectus.

..Lifting or piercing the Corporate Veil : Statutory Exceptions: 3.Mis-description of companys name [Sec.147(4)] Where an officer or an agent of a company does any act or enters in to a contract without fully or properly mentioning the companys name and the address of its registered office, he shall be personally liable.

..Lifting or piercing the Corporate Veil : Statutory Exceptions: 4.Fraudulent trading [Sec.542]

Sometimes in the course of the winding up of a company it may appear that some business of the company has been carried on with intent to defraud creditors of the company or any other person or for any fraudulent purpose. In that case the members are personally liable.

..Lifting or piercing the Corporate Veil :Statutory Exceptions: 5. Holding and subsidiary companies. In the eyes of law, the holding company and its subsidiaries are separate legal entities. But in the following two cases, a subsidiary company may lose its separate identity to a certain extent: (1) Where at the end of its financial year, a company has subsidiaries, it must lay before its members in general meeting not only its own accounts, but also set of group accounts showing the profit or loss earned or suffered by the holding company and its subsidiaries, collectively, and their collective state of affairs at the end of the year (Sec.212) (2) The NCLT may, on the facts of a case, treat a subsidiary company as merely a branch or department of one large undertaking owned by the holding company. [ Free Wheel (India) Ltd vs. Ved Mitra ]

Company distinguished from Partnership 1. Regulating Act 2. Mode of Creation 3. Legal Status 4. Liability of Members 5. Management 6. Transferability of shares 7. Authority of members 8. Powers 9. Restrictions on powers 10. Insolvency of firm and winding up of a company 11. Debts and creditors 12. Audit of books 13. Number of members: Minimum and Maximum 14. Contracts between the parties 15. Dissolution

Kinds of Companies orCLASSIFICATION OF COMPANIES IS DONE-

3.On the basis of Number of

Members1. On the basis of a) Private Company Incorporationb) Public Company a) Statutory Companies 4.On b) Registered Companies the basis of Controla)Holding Company c) Chartered Companies

2. On the basis of Liability-

a)Companies Limited by Shares b)Companies Limited by Guarantee c)Companies with unlimited Liability

b)Subsidiary Company 5.On the basis of Ownershipa)Government Company b)Non-Government Company

Private Company means a company which has a minimum paid up capital of one lakh rupees or such higher paid up capital as may be prescribed, and by its Articles(a) restricts the right to transfer its shares, if any (b) limits the number of its members to fifty not including (i) persons who are not in the employment of the company; (ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment ceased , and (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

What is Private Company ?

What is a Public Company? Public Company means a company which(a) is not a private company; (b) has a minimum paid up capital of five lakh rupees /such higher paid up capital, as may be prescribed; (c) is a private company which is a subsidiary of a company which is not a private company.

Distinction between a Private company and Public company 1.Minimum Capital In case of Private Company, minimum Rs.1 lakh and in case of Public Company, minimum paid up capital of Rs.5 lakh. 2.Minimum number Two in case of Private Company and seven in case of public company 3.Maximum number In case of Private Company 50 and there is no limit in case of Public Co.

Distinction between a Private company and Public company 4.Number of Directors [Sec.252] Minimum two in case of Private Co. and minimum three in case of Public Company. 5.Restriction on appointment of directors [Sec.266] To become a director of public company, such persons have to agree to buy qualification shares and file a copy of consent with the Registrar of Companies giving their willingness to become director of public company. 6.Restriction on invitation to subscribe for shares A public Co. can invite the general public to subscribe for company s shares but not private company.

..Distinction between a Private company and Public company7.Transfer [Sec.82] Public companys shares are transferable but not private companys shares. 8.Special Privileges: A private company enjoys some special privileges but not a public company. 9.Quorum [Sec.174] If the Articles of Association do not provide for a greater quorum, then five members personally present is a quorum for public company. It is two in case of private company. 10.Managerial Remuneration [Sec.198]. Total managerial remuneration cannot exceed 11% of its net profit in case of public company , but there is no such restriction in case of public company.

SPECIAL PRIVILEGES OF

PRIVATE COMPANY

1.Number of members 2.Allotment before minimum subscription. 3.Prospectus or Prospectus in lieu of prospectus. 4.Issue of new shares 5.Kinds of shares

SPECIAL PRIVILEGES OF PRIVATE COMPANY

6.Commencement of business 7.Index of members 8.Statutory Meeting and Statutory Report 9.Demand for poll 10.Managerial Remuneration 11.Number of directors 12.Rules regarding directors

WHEN DOES A PRIVATE COMPANY BECOME PUBLIC COMPANY ?2 -

1. , 50

:[

43]. ( ), . . ,

When does a Private Company become Public company ?..1.Conversion by default:[Sec43]

NCLT may relieve the company from the consequences as aforesaid, if it is of opinion that the non-compliance was accidental or due to inadvertence or other sufficient cause. It may, however, impose such terms and condition as seem it just and expedient.

When does a Private Company become Public

company ?2.Conversion by Choice or Volition [Sec.44]. If a private company so alters it s Articles that they do not contain the provisions which make it a private company, it shall cease to be a private company as on the date of the alteration .It shall then file with the Registrar, within 30 days, either a prospectus or a statement in lieu of prospectus. When this is done , the company becomes a public company.

.2.Conversion by Choice or Volition [Sec.44].

A private company which becomes a public company shall also1.File a copy of the resolution altering the Articles, within, 30 days of passing thereof, with the Registrar 2.take steps to raise its membership to at least 7 if it is below that number on the date of conversion, and also increase the number of its directors to more than 2 if it is below that number. 3.alter the regulations contained in the Articles which are inconsistent with hose of a public company.

Conversion of a Public company in to Private company ? A public company may be converted in to a private company by passing a special resolution. The special resolution should be to change the Articles of the company so as to include the conditions as prescribed in Sec.3(1)(iii) which make a company a private company.[Contd..]

..Conversion of a Public company in to Private company ? An alteration made in the Articles which has the effect of converting a public company in to a private company, shall have effect only when such alteration has been approved by the Central Government.

[Contd.]

..Conversion of a Public company in to Private company ?Where the alteration has been approved by he Central Government, a printed copy of the Articles as altered shall be filed by the company with the Registrar within 1 month of the date of receipt of approval.

Rules applicable to GOVERNMENT COMPANY1.Appointment of auditor and audit reports(Sec.619).The auditor of a Government company shall be appointed or reappointed by the Central Government on the advice of the Comptroller and auditor General of India. Audit reports to be submitted to Comptroller and Auditor General of India. 2.Annual Reports to be placed before Parliament 3.Certain provisions of Companies Act need not apply(Sec.620).

Foreign Company It means a company incorporated outside India which has an established place of business in India [Sec.591(1)]. Rules applicable to foreign company. 1.Documents (Sec.592).Every foreign company shall, within 30 days of the establishment of a place of business in India, file with the Registrar the documents 2.The full address o f the registered or principal office of the company.

Formation of CompanyDocuments to be filed with the Registrar:1.Memorandum duly signed by the subscribers 2.The Articles of Association, if any, signed by the subscribers to the Memorandum of Association. A public company limited by shares need not have its own Articles of Association 3.The agreement if any, which the company proposes to enter with any individual for appointment as its managing or whole time director or manager

Formation of CompanyDocuments to be filed with the Registrar:.. 4.A list of directors who have agreed to become the first directors of the company(this applies to a public company limited by shares) and heir written consent to act as directors and take up qualification shares. 5.A declaration stating that all the requirements of the Companies Act and other formalities relating to registration have been complied with.

Documents to be filed with the Registrar:Such a declaration shall be signed by any of the following persons;

l. Advocate of High Court or Supreme Court, or 2. A secretary or a Chartered Accountant in whole practice or engaged in the formation of a company, or 3. A person named in the Articles as Director , Manager or Secretary of the company,or 4. An attorney or a pleader who is eligible to appear High Court [Sec33(2)], Within 30 days of the date of incorporation of the company, a notice of the situation of Registered Office address shall be given to the Registrar who shall record the same [Sec.146].

Certificate of IncorporationConclusiveness of Certificate of IncorporationJubilee Cotton Mills VS. Lewis(1924)

Effects of Incorporation Promoter- functions-Legal status-Fiduciary Position-Duty-Remuneration

Pre-incorporation contractsPosition of promoters as regards pre-incorporation contracts

1.Company not bound by pre incorporation contracts. English Colonial Produce C.Ltd., Re(1906) 2.Company cannot enforce pre-incorporation contracts. Natal Land Colonization Co.Ltd Vs. Pauline Colliery & Development Syndicate Ltd(1904) 3.Promoters personally liable. Kelner Vs.Baxter(1866)

Memorandum of AssociationMeaning:

It contains the fundamental conditions upon which alone the company is allowed to be incorporated. It also regulates the external affairs of the company in relation to outsiders. Its purpose is to enable shareholders and those who deal with the company to know what its permitted range of activities are.

PURPOSE of Memorandum of Association

1.The prospective shareholders shall knowthe field in, or the purpose for, which their money is going to be used by the company and what risk they are undertaking in making investment. 2.The outsiders dealing with the company shall know with certainty as to what the objects of the company are and as to whether the contractual relation in to which they contemplate to enter with the company is within the objects of the company.

Printing and signing of Memorandum MA of a company shall be(a) printed, (b) divided in to paragraphs numbered consecutively, & signed by 7 (2 in case of private co.) subscribers Each subscriber shall sign (and add his address, description and occupation, if any) in the presence of of at least 1 witness who shall attest the signature and shall likewise add his address, description and occupation, if any.

Memorandum of

Association

Contents of Memorandum of Association (MA)

1.Name Clause 2.Registered Office Address Clause 3.Objects Clause 4.The Capital Clause 5.The Liability Clause 6.The Association Clause

CONTENTS OF MEMORANDUM OF ASSOCIATION [Sec.13] 1.NAME CLAUSE [SEC.20] The name of a company establishes its identity and is the symbol of its existence.A company may, subject to the following rules, select any suitable name(1) Undesirable name to be avoided. A company cannot be registered by a name which, in the opinion of the Central Government, is undesirable.It is undesirable name if it is either(a) Too similar to the name of another company;or [Contd]

CONTENTS OF MEMORANDUM OF ASSOCIATION [Sec.13]

(b) misleading i.e., suggesting that the company is connected with a particular business or that it is an association of particular type when this is not the case. 2.Injunction, if identical name adopted. Asiatic Govt.Security Life Insurance Co.Ltd. Vs New Asiatic Co.(1939)In this case although the names of the 2 companies, resembled to a large extent, it was held by the Court that the two names were not identical, and ,therefore , the defendants were not restrained from using their name.

CONTENTS OF MEMORANDUM OF ASSOCIATION [Sec.13]

3. Limited or Private Limited as the last word or words of the name. 4.Prohibition of certain names. [The Emblems and Names (Prevention of Improper Use) Act,1950. 5.Use of some key words according to authorized capital.

Use of some key words according to authorized capitalKey words Authorized Capital 1.Corporation 2.International, Globe, Universal, Continental, Inter-Continental,Asiatic, Asia being the first words of the company. 3.If any of the words at (2) above is used within the name (with or without brackets) 4.Hindustan, India, Bharat , being the first word of the name. 5.If any of the words at (4) above is used within the name the name (with or without brackets) 6.Industries/ Udyog 7.Enterprises/Products/Business,Manufacturing Required Rs.5 crores Rs.1 crore

Rs.50 lakhs Rs.50 lakhs Rs.5 lakhs Rs.1 crore Rs.10 lakhs.

Publication of Name[Sec.147] :Every company shall; a) paint or affix its name and the address of its registered office, on the outside of every office or place in which its business is carried on, b) have it engraved in legible characters in its seal, and c) have its name and address of its registered office mentioned in in legible characters in all business letters, bill heads, negotiable instruments, invoices, receipts, etc of the company.

2.REGISTERED OFFICE CLAUSE [Sec.146]: Every company shall have registered office from the day on which it begins to carry on business, or as from the 30 th day after the date of its incorporation, whichever is earlier.All communication and notices are to be addressed to that registered office.Notice of the situation of registered office and every change shall be given to the Registrar within 30 days after the date of incorporation of the company.

3.THE OBJECTS CLAUSE [SEC.13(1)]. The objects of the company shall be clearly set forth in the Memorandum.The objects clause both defines and confines scope of the companys powers. The purpose of the objects clause 1.to enable subscribers to the Memorandum to know the uses to which their money may be put, and 2.to enable creditors and persons dealing with the company to know what its permitted range of enterprise or activities is.[Egyptian Salt&Soda Company Ltd(1931)].

4.THE CAPITAL CLAUSE [Sec.13(4)]. The Memorandum of a company, having a share capital, shall state the amount of the share capital with which the company is to be registered and the division thereof in to shares of a fixed amount. The capital with which a company is registered is called registered, authorized or nominal capital.

5.THE LIABILITY CLAUSE[SEC.13(2)]. The Memorandum of a company limited by shares or by guarantee shall state that the liability of its members is limited.\ This means that the members can only be called upon to pay to the company at any time the uncalled or unpaid amount on the shares held by them, or up to the maximum amount which they have guaranteed.

6.ASSOCIATION CLAUSE [Sec.13(4)].

The association clause states, We, the several persons whose names and addresses are subscribed, are desirous of being formed in to a company in pursuance of number of shares in the capital of the company set opposite our respective names .

CONTENTS OF MEMORANDUM OF ASSOCIATION [Sec.13]

The Memorandum shall be signed by at least 7 subscribers in the case of a public company, and at least 2 subscribers in the case private company. The signature of each subscriber shall be attested by at least 1 witness who cannot be by of the subscribers.

Alteration of Memorandum Alteration Conditions: 1.Change of name:* By special resolution [Sec.21] followed by the approval from Central Government. * By Ordinary resolution[Sec.22]

If a company is registered by a name which, in the opinion of the Central Government, is identical with, or too nearly resembles, the name of an existing company.In such case, the companyWhen the Central Government so directs within 12 months of its registration.When so directed by the Central Government the company shall, by ordinary resolution and with the previous approval of the Central Government, change its name within the period of 3 months from the date of the direction.

Alteration of Memorandum1.Change of name: Fresh Certificate of Incorporation [Sec.23] Where a company changes its name, the Registrar shall enter the new name on the Registrar in the place of the former name. He shall also issue to the company a fresh certificate of incorporation. The change of name shall be complete and effective only on the issue of such a certificate. The Registrar shall also make necessary alteration in the Memorandum of Association of the company.

Alteration of Memorandum 2.Change of registered office: This may involve; (a) Change of registered office from one place to another within a state [Sec.17-A as introduced by the Companies Amendment) Act,2000].

A company can change the place of its registered office from one place to another within the state, if it is confirmed by the Regional Director.For this purpose company has to make an application to the Regional Director for confirmation.This confirmation shall be communicated to the company within four weeks.

Alteration of MemorandumThe company shall then file with the Registrar a certified a certified copy of the confirmation by the Regional Director, within 2 months from the date of confirmation, together with a printed copy of the Memorandum of Association as altered. The Registrar shall register the same within one month from the date of such document.

Alteration of Memorandum(b) Change of registered office from one State to another[Sec.17].

2. Change of Registered office (Address) Clause: A company may by special resolution, change the place of registered office from one place to another for certain purposes. Procedure of alteration: (1) Special Resolution. (2) Confirmation by the National Company Law Tribunal (3) Notice to affected parties. (4) Notice to Registrar (5) Power of the Tribunal to confirm change discretionary. (6) Rights and interests of members and creditors to be taken care. (7) Copy of special resolution and the order of the Tribunal to be filed with the Registrar within 3 months.(Sec.18). Effect of failure to register(Sec.19).

Alteration of Memorandum.3.Alteration of OBJECTS CLAUSE [Sec.17].

The objects of the company may be altered by special resolution so as to enable the company(a)To carry on its business more economically or more efficiently. (b)To attain its main purpose by new and improved means. To enlarge or change the local area of its operations (d)To carry on some business which may be conveniently or advantageously be combined with the objects specified in the Memorandum.

Alteration of Memorandum.3.Alteration of OBJECTS CLAUSE [Sec.17]. Contd (contd)The objects of the company

may be altered by special resolution so as to enable the company-

(e)To restrict or abandon any of the objects specified in the Memorandum: (f)To sell or dispose of the whole, or any part of the undertaking, or of any of the undertakings, of the company; or (g)To amalgamate with any other

Alteration of Memorandum.3. Change of OBJECTS CLAUSE [Sec.17]. PROCEDURE OF ALTERATION: (1) Special Resolution: A special resolution shall be passed at a general meeting so as to alter the objects of the company. (2) Copy of special resolution to be filed: The company shall file with the Registrar the special resolution within 1 month from the date of resolution with a printed copy of the Memorandum of Association as altered. (3) Certification of registration: The registrar shall register the special resolution and certify the registration under his hand within 1 month from the date of the filing of the special resolution.

Alteration of Memorandum For change in capital clause, which involves increase, reduction or re organization of capital will be part of the Module:Share Capital [will be discussed there].4.Change in Capital Clause

Alteration of Memorandum 5.Alteration of liability clause:

A company limited by shares or guarantee cannot change its memorandum so as to impose any additional liability on the members or to compel them to buy additional shares of the company unless all the members agree in writing to such change either before or after the change(Sec.38).

Doctrine of Ultra Vires A company has the power to do all such things are (1)authorized to be done by the Companies Act,1956; (2)essential to the attainment of its objects specified in the Memorandum: Everything else is ultra vires a company. Ultrabeyond and vires means powers.that The term ultra vires that the doing of the act is beyond the legal power and authority of the company.

Articles of Association [AA]. Articles of Association are the rules regulations and bye-laws for the internal management of the affairs of the company.AA next only in importance to the MA. AA are framed with the object of carrying out the aims and objectives as set out in the MA. In framing the articles care must be taken to see that regulations framed do not go beyond the powers of the company itself as contemplated by the Memorandum of Association.

Contents of Articles of Association1.Share Capital,Rights of Shareholders,Variation of these Rights,Payment of Underwriting Commission. 2.Lien on shares. 3.Transfer of shares 4.Transmission of shares 5.Forfeiture of shares 6.Conversion of shares in to stocks 7.Calls on shares 8.Share warrants 9.Alteration of Capital ..[cont d]10. General Meetings and Proceedings thereat 11.Voting rights of members ,voting & proxies 12.Directors,their appointment,remuneration,qual ifications, powers and proceedings of Board of Directors (Board). 13.Manager 14.Secretary 15 .Dividends and reserves 16.Accounts ,audit and borrowing powers. 17.Capitalization of profits 18.Winding up.

Form and signature of ArticlesThe Article shall be a) printed, b) divided in to paragraphs,and c) signed by each subscriber of the Memorandum (who shall add his address,description and occupation,if any)in the Articles.

Limitations to Alterations(AA). 1.Must not be inconsistent with the Act[ E.g., alteration cant give powers to company to buy its own shares].

2.Must not conflict with Memorandum. 3.Must not sanction anything illegal.

Contd..Limitations to alteration [AA]

4.Must be for the benefit of the company.[Brown Vs British Abrasive Wheel Co.Ltd.] 1919

5.Must not increase liability of members[unless there is a written consent].

6.Alteration by special resolution only.[Even clerical errors must be set right by a special resolution].

Limitations to alterations

[AA]

7.Breach of contract. 8.Approval of Central Government when a private co. is converted in to public co. 9.No power of the court to amend Articles. 10.Alteration may be with retrospective effect.The Articles may be altered from a back date [Eg., the inclusion of a lien clause which gives the company a lien on fully paid shares of members for debts incurred both before and after the inclusion of the clause.

Regulations required in case of an unlimited company,company limited by guarantee and private company limited by shares[Sec.27]

1.Unlimited Company:In case of an unlimited company ,the Articles shall state No .of .Members with which company is to be registered If it has a share capital,the amount of share capital with which company is to be registered.[Sec.27(1)]

2.Company limited by Guarantee In case of company limited by guarantee,the Articles shall state the, * No .of members with which company is to be registered [Sec.27(2)].

Companies which must have their own Articles (Sec.26)

A) Unlimited Companies B) Companies Limited by Guarantee C)Private Companies Limited by Shares

The Articles shall be , * printed, * divided in to paragraphs & * signed by each subscriber of the Memorandum( who shall add his address,description and occupation,if any) in the presence of at least one witness who will attest the signature and like wise add his address,description and occupation if any.

Form & Signature of Articles

Procedure for Alteration of Articles of Association

COMPANIES HAVE BEEN GIVEN VERY WIDE POWERS TO ALTER THEIR ARTICLES A company may by passing special resolution,alter regulations contained in its Articles anytime. A copy of every special resolution altering the Articles shall be filed with the Registrar within 30 days of its passing. Any alteration so made in the Articles shall be as valid as if originally contained in the Articles [Sec.31(1)].

Legal Effect of Memorandum & Articles The MA & AA ,when registered ,bind a company and the members thereof to the same extent as if they respectively had been signed by the company and to each member. The legal implications of these documents may be discussed as to how far these documents bind:

1.Members to the company: As between the members and the company ,the Memorandum and Articles constitute a binding contract.Eg.,[Borlands Trustee v/s. Steel Bros.Co.Ltd]1901.

The Articles of the company as altered provided that that the shares of a member who became bankrupt should be sold to certain persons at a fair price .B ,a share holder, became bankrupt and his trustee in bankruptcy claimed that he was not bound by the altered Articles. Held, Articles were a personal contract between B and the company,and as such B and his trustee were bound.

2.Company to members:A company is bound to the members: A company is bound to the members in the same manner as the members are bound to to the company .It can,therefore,exercise its rights ,as against any member ,only in accordance with the Memorandum and Articles. A member can obtain an injunction restraining a company from doing an ULTRA VIRES act.

Eg.,[Wood v/s Odessa Waterworks Co.Ltd.,] 1889The Articles of O.W .Co. provided that the directors may with the sanction of the company at general meeting declare a dividend to be paid to the members.A resolution was passed to give the shareholders debenture bonds instead of paying the dividend in cash. A member filed a suit to restrain the directors from acting on the resolution as it was not in accordance with the Articles of the company.The directors were restrained from acting on the resolution.

3.Members inter se[Among themselves].

The Articles &Memorandum constitute a contract between them [all members] and also binding on each member as against the other or others. Such a contract can, however, be enforced through the medium of the company.

Eg.,[Rayfield v/s Hands] 1960.The Articles of a company provided that if a member wanted to transfer his shares ,he must inform the directors of his intention and the directors must take the said shares equally between them at a fair value.The directors refused to take the shares and argued that the Articles did not impose any liability upon them.Held, the directors were obliged to take the shares .The Articles imposed an obligation on them not as directors but as members of the company (i.e., in their capacity as members )and it was not necessary for the company to be a party to that action.

4. Company to the outsiders: The Articles do not constitute any binding contract between the company and an outsider. An outsider cannot take advantage of the Articles to found a claim there on against the company.This is based on the general rule of law that a stranger to a contract cannot acquire any rights and liabilities under the contract. If the Articles provide that the company on incorporation shall purchase certain property and appoint the vendor as one of the directors , the vendor, on becoming a shareholder ,cannot sue the company on the basis of the Articles.

[Eley v/s Positive Government Association Co.] 1876. The Articles of a company provided that E should be the solicitor of the company for life and could be removed from office only for misconduct.E took office and became a shareholder. After some time the company dismissed him without alleging misconduct.E sued the company for damages for breach regulations in the Articles. Held, the Articles did not constitute any contract between the company and an outsider and as such no action would lie.

Constructive Notice of Memorandum &Articles Every outsider dealing with a company is deemed to have notice of the contents of the Memorandum and Articles of Association,which on registration with the Registrar assume the character of public documents. This is known as Constructive Notice of Memorandum and Articles.

Doctrine of Indoor Management There is one limitation to the Doctrine of Constructive Notice of Memorandum and Articles of a company. The outsiders dealing with the company are entitled to assume that as far as the internal proceedings of the company are concerned,everything has been regularly done. The outsiders need not enquire in to the regularity of the internal proceedings as required by MA &AA. This limitation of the doctrine of Constructive Notice is known as Doctrine of Indoor Management.

Turquand Rule[Doctrine of Indoor Management.] Royal British Bank V/s Turquand [1856] The directors of a company had issued a bond to T .They had the power under the Articles to issue such such bond provided they were authorized by a resolution passed by the shareholders at a general meeting of the company. Held,T could recover the amount of the bond from the company on the ground that he was entitled to assume that that the required resolution had been passed.[This is also known as Doctrine of Indoor Management or Turquands rule].

Exceptions to the Doctrine of Indoor Management. 1 .Knowledge of irregularity:Where a person dealing with a company has actual or constructive notice of the irregularity as regards internal management ,he cannot claim the benefit under the rule of indoor management .

Eg., for Knowledge of Irregularity. [T.R.Pratt(Bombay)Ltd v/s.Sassoon Co.Ltd.]1936. Company A lent money to Company B on mortgage of its assets.The procedure laid down in the Articles for such transactions was not complied with.The directors of two of companies were the same.Held,the lender had notice of the irregularity and hence the mortgage was not binding..

2 .Negligence: Where a person dealing with a company could discover the irregularity if he had made proper inquiries,he cannot claim the benefit of the rule of indoor management

Eg., for Negligence.

[A L Underwood v/s. Bank of Liverpool]1924. The sole director of a company in this case paid in to his own account checks drawn in favor of the company .Held the bank was liable as it ought to have made proper inquiries before creating the account of the director.

3.

Forgery:[Ruben v/s. Great Fingall Cosolidated Co.Ltd.(1906)]

A company can never be held bound for forgery.Eg; A share certificate was forged by a secretary of a company.The secretary then issued it to R under the seal of the company .R, the holder of the certificate ,claimed to be entitled to be registered as the holder of the shares.Held the certificate did not confer any right on the shareholder.

4.Acts outside the scope of apparent authority: If an officer of a company enters in to a contract with a third party and if the act of the officer is beyond the scope of his authority,the company is not bound.Eg., [Kreditbank Cassel V/s Schenkers Ltd(1927)].A branch manager of a company drew and indorsed bills of exchange on behalf of the company.He had no authority from the company to do so .Held company was not bound.

PROSPECTUS: Definition [Section 2(36)] defines a prospectus as,

any document described or issued as a prospectus and includes any notice,circular,advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate.

Dating of Prospectus.[Sec.55]. A prospectus issued by or on behalf of a company must be dated and that date is, unless the contrary is proved,taken as the date of publication of prospectus.

Registration of Prospectus.[Sec.60] A prospectus can be issued by or on behalf of a company or in relation to an intended company only when a copy thereof has been filed with the Registrar for registration. Registration must be made on or before the date of publication of prospectus. A copy must be signed by everyone who is named therein as director or proposed director of the company,or by his agent authorized in writing.

Contd.(Registration of prospectus) [Sec.60.]

The prospectus must be issued to the public within 90 days of the date on which a copy thereof is delivered to Registrar for registration. If a prospectus is not issued within this period,it is deemed to be a prospectus,a copy of which has not been delivered to the Registrar.

Penalty for Non-Registration. If a prospectus is issued without a copy thereof has not been delivered to the [R.o.C] Registrar for registration, or without the necessary documents or the consent of the experts, the company and every person, who is knowingly a party to the issue of prospectus,shall be punishable with fine which may extend to Rs. 5000/-.

Objects of Registration. (1) To keep an authenticated record of the terms and conditions of issue of shares or debentures,and (2) To pinpoint the responsibility of the persons issuing the prospectus for statements made by them in the prospectus.

The object of the promoters or directors in issuing a prospectus is to make it as attractive as possible.

Importance of Prospectus Prospectus is the window through which an investor can look in to the soundness of a companys venture. The investors must,therefore,be given a complete picture of the companys intended activities and its position. This is done through a prospectus which must secure the fullest disclosure of all material and essential particulars and lay the same in full view of all the intending purchasers of shares.

Contents of Prospectus The important contents of prospectus are as follows :

Part I of Schedule II:

1.General Information. 2.Capital Structure of the company. 3.Terms of the Present Issue. 4.Particulars of the issue

Contd.[Contents] 5.Company , management and project. 6.Particulars in regard to the company and other listed companies under the same management. 7.Outstanding Litigations. 8.Management perception of risk factors.

1.General Information. a] Name and Registered office address of the company. b] (i) Consent of the Central Government for the present issue and declaration of the Central Government about non-responsibility for financial soundness or correctness of statements. (ii)Letter of intent/Industrial License. c] Names of Regional Stock Exchange and other stock exchanges where application made for listing of present issue.

[Contd]. d] Provisions of sub-section(1) of the section 68A of the Companies Act, relating to punishment [imprisonment up to five years]for fictitious applications for shares in or debentures of a company.[Sec.68B] about issue of shares & debentures [IPO] in dematerialized form ,if issue of securities more than rupees ten Crores. e] Statement /declaration about refund of the issue, if minimum subscription of 90% is not received within 90 days from closure of the issue.

Gen.Information[Contd]. f] Declaration about the issue of allotment letters / refunds within a period of 10 weeks and interest in case of any delay in refund at the prescribed rate under section 73(2)/(2A). g] Date of opening of the issue. Date of closing of the issue. h] Names and addresses of auditors and lead managers.

Gen.Information.. [Contd] i] Name and address of trustee under debenture trust deed(in case of debenture issue). j] Whether rating from CRISIL / ICRA or any rating agency has been obtained for the proposed debenture /preference share issue If no rating has been obtained,this should be answeredas No. If Yesthe rating should be indicated.

k] Underwriting of the issue.(Names and addresses of the underwriters and the amount underwritten by them).

Gen.Information [Contd]. l]A statement by the Board of Directors stating that(i) All monies received out of the issue of shares or debenture to public shall be transferred to a separate bank account other than the bank account. (ii)Details of all monies utilized out of the issue shall be disclosed under an appropriate separate head in balance sheet of the company indicating the purpose for which such monies had been utilized; (iii) Details of all unutilized monies out of the issue of shares or debentures,if any,under appropriate head in the balance sheet.

2.Capital Structure of thecompany. a] Authorized,issued, subscribed and paid up capital. b] Size of present issue giving separately reservations for preferential allotment to promoters and others. c] Paid up capital: * after the present issue * after conversion of debenture (if applicable).

3.Terms of the Present Issue a] Terms of payments. b] Rights of the instrument holders c] How to apply availability of forms,prospectus and mode of payment. d] Any special tax benefits for the company and its share holders.

4.Particulars of the issue. a] Objects: b] Project cost: c] Means of financing [including contributions of promoters]:

5.Company,management and project.a] History and main objects,and present business of the company. b] Subsidiary(ies)of the company,if any. c] Promoters and their background . d] Names, addresses and occupation of manager, managing

director and other directors including nominee directors and whole time directors (giving their directorships in other companies).

5. ..Contd e] Location of project. f] Plant and machinery ,technology,process ,etc. g] Collaboration ,any performance guarantee or assistance in marketing by the collaborators. h] Infrastructure facilities for raw materials and utilities like water ,electricity, etc. i] Schedule of implementation of the project and progress made so far ,giving details of land acquisition ,civil works,installation of plant and machinery ,trial production,date of commercial production etc.

5. ..Contdj] The products: (i)Nature of product/s-consumer/industrial and users. (ii) Approach to marketing and proposed marketing set up (iii) Export possibilities and export obligations,if any (in case of a company providing any service particulars, as applicable, be furnished).

5. ..Contdk) Future prospects-expected capacity utilization during the first three years from the date of commencement of production,and the expected year when the company would be able to earn cash profits and net profits. Stock market data for shares/debentures of the company high/low price in each of the last three years and monthly high/low during during the last six months(where applicable).

6. Particulars in regard to the company and other listedcompanies under the same management:

Which made any capital issue during the last three[3] years. Name of the company. Year of issue. Type of issue(public/rights/composite). Amount of issue. Date of closure of issue. Date of completion of delivery of share/debenture certificates. Date of completion of project ,where object of the issue was financing of a project. Rate of dividend paid.

7.(a) Outstanding litigations pertaining to;[i] matters likely to affect Operation and finances of the company including disputed tax liabilities of any nature;and [ii] criminal prosecution launched against the company and the directors for alleged offences under the enactments under Companies Act 1956. (b) Particulars of default ,if any, in meeting statutory dues, institutional dues, and towards instrument holders like debentures, fixed deposits and arrears on cumulative preferences shares,etc. (c) Any material development after the date of the latest balance-sheet and its impact on performance and prospects of the company.

8.Management Perception of riskfactors: [i.e., sensitivity to foreign exchange rate fluctuations,difficulty in availability of raw materials or in marketing of products,cost/time over run, etc].

Part II of Schedule II. A]. General Information. 1. Consent of Directors,Auditors,etc their names and addresses. 2. Expert opinion obtained, if any. 3. Change,if any, in directors and auditors during the last three years,and reasons thereof.

Continued 4.Authority of the issue and details of resolution passed for the issue. 5.Procedure and time schedule for allotment and issue of certificates. 6.Names and addresses of company secretary,legal advisor,lead manager,comanager,auditors,bankers to the company,bankers to the issue,and brokers to the issue.

B.Financial Information:The following reports shall also be set out in the prospectus. 1.Report by the auditors: A report by the auditors of the company with respect to; a] its profits and losses and assets and liabilities. b] the rates of dividends paid by the company during the preceding five[5]years.

Continued.. 2] A report by the accountants. (who shall be be qualified under the Act for the appointment as auditors of a company and who shall be named in the prospectus) on profits or losses of the business for the preceding five[5] financial years,and so on the assets and liabilities of the business on a date which shall not be more than 120 days before the date of the issue of prospectus.

Contd here. This report is required to be given if the proceeds of the issue of the shares or debentures are to be applied directly or indirectly in the purchase of any business. 2 .A the similar report on the accounts of a body corporate by an accountant (who shall be named in prospectus)if the proceeds of the issue are to be applied in the purchase of shares of a body corporate becomes a subsidiary of the acquiring company.

C.Statutory and other information. 1.Minimum subscription. 2. Expenses of the issue giving separately fee payable to: a] Advisors. b] Registrars to the issue. c] Managers to the issue. d] Trustees for the debenture-holders.

Statutory and other information.[Contd] 3.Underwriting commission and brokerage. 4.Previous issue for cash, if any. 5.Previous public or rights issue, if any: [During last five years] a]Date of allotment ,Closing date, Date of refunds, Date of listing on stock exchange.

Continued.. b]If the issue(s) at premium or discount and the amount thereof. c]The amount paid or payable by way of premium,if any ,on each share which had been issued within two years preceding the date of prospectus or is to be issued , stating the date or proposed dates of issue and,where some shares have been or to be issued at a premium and other shares of the same class at a lower premium ,or at par or at a discount ,the reasons for the differentiation and how any premiums received have been or to be disposed off.

Continued. 6.Commission or brokerage on previous issue. 7.Issue of shares otherwise than for cash . 8.Debentures and redeemable preference shares and other instruments issued by the company outstanding as on the date prospectus and terms of the issue. 9. Option to subscribe.

C.Statutory&other Information [Contd]

10.Details of Purchase of property: If the company proposes to acquire a business which has been carried on for less than three years,the length of time during which the business has been carried on .

Continued.. 11.Details of directors,proposed directors ,whole-time directors their remuneration,appointment, remuneration of managing directors,interests of directors,their borrowing powers and qualification shares.

Contd. 12.Rights of members regarding voting,dividend,lien on shares and the process for modification of such rights and forfeiture of shares. 13.Restrictions if any,on transfer of shares and debentures 14.Revaluation of assets,if any during last 5 years. 15.Material contracts and inspection of documents.

Statements by experts.[Sec 57 to 59]. 1.Experts to be unconnected with formation or management of the company. Expert includes an engineer,a valuer,an accountant and any other person whose profession gives authority to a statement made by him. Experts consent to issue of prospectus containing statement by him.

OFFER FOR SALE-DEEMED PROSPECTUS[Sec.64]. The provisions relating to a prospectus are very stringent and the duty of preparing and filing a prospectus in accordance with the law is extremely important.[Pramatha Nath Sanyal Vs. Kali Kumar Dutt (1925)Cal]. These requirements used to be evaded by companies in the past by allotting the whole of an issue of shares or debentures to an Issuing House at a certain price.The Issuing House then published an advertisement(which obviously is not a prospectus)in the nature of an offer for sale inviting the members of the public to buy the shares or debentures at a higher price.

The provisions of Sec.64 are summed up as under. 1.Prospectus by implication: All documents containing offer of shares or debentures for sale are included within the definition of the term prospectus,and are deemed to be prospectus by implication by law.Any document by which the offer for sale to the public is made by the Issuing House is for all purposes ,deemed to be a prospectus issued by thcompany.[Sec.64(1)].

1.Liability for damages for misstatement in the prospectus(Section.62).

Every director,promoter and every person who authorizes the issue of the prospectus (no matter whether he has seen it or not) is liable to pay compensation to the aggrieved party(who subscribes for any shares or debentures on the faith of the prospectus) for loss or damage he may have incurred by reason of any untrue statement in the in the prospectus.

Section 64 continues. 2.Intention to offer shares or debentures to the public:Normally,an allotment of,or an agreement toallot,any shares in or debentures to an Issuing House is deemed to have been made with a view to the shares or debentures being offered for sale.

3.Additional Information:a]Worth of shares or debentures which are offered b]Issuing House to be deemed director. c]Signing of prospectus by at least two directors.

Mis-statements in prospectus and their consequences. The Golden Rule for framing of prospectus. A prospectus is a document which holds out to the public as to what a company is ,what it proposes to do and what its prospects are. It invites deposits deposits from the public or invites offers from the public to subscribe to the share capital and debentures of the company.It is therefore but reasonable that there must be full,frank and honest disclosure of all material facts with scrupulous accuracy in a prospectus and no material fact should be mis-stated or with held.

Continued. Mis-statements and non-disclosure of material facts in a prospectus are fatal to the contract for the purchase of shares and debentures.As such the greatest care is necessary in its preparation.The obligations imposed on those responsible for the issue of a prospectus are not only to state accurately all the relevant facts,but also not to omit any fact which may be relevant.This is the golden rule as to framing of prospectus which was laid down in New Brunswick & Canada Rly &Land Co.Vs.Muggerbridge,(1860).

Liability for Mis-statements in Prospectus: If there is any misstatement of material fact in a prospectus or if the prospectus omits any material fact , there may arise:I. Civil Liability. II.Criminal Liability.

I.Civil Liability:Any person who has been induced tosubscribe for shares on the faith of the statement in a prospectus that is untrue has has remedies against the company ,and its directors,promoters and experts.

I. Remedies against the company If there is a misstatement of material information in a prospectus,and if it has induced any shareholder to purchase shares he can (1)rescind the contract[rescission],and (2)claim damages from the company whether the statement is fraudulent or an innocent one.

(1) Rescission of the contract. Any person ,who takes shares on the faith of statements of fact contained in a prospectus, can apply to the Court for the rescission of the contract if those statements are false or fraudulent or if some material information has been withheld . He must, however, apply for the rescission within a reasonable time and before company goes in to liquidation.[Shiromani Sugar Mills Vs.Debi Parasad, (1950)]. But he will have to surrender the shares allotted to him to the company .He gets back the money paid by him along with the interest and his name will be deleted from the register of members.

A contract can be rescinded if the following conditions are satisfied: 1. Statements must be material misrepresentation of fact.2. It must have induced the shareholder to take shares. 3. It must be untrue(in the form & context]. . [Rex Vs.Lord Kylsant(1932)]. 4. The shareholder must have relied on the statement in the prospectus, while applying for shares and he is not bound to verify the statement before relying on it [Peek Vs.Gurney(1872)] 5.The omission of material fact must be misleading before the rescission is granted.[Coles Vs.White City Greyhound Association Ltd.(1929) 6.The proceeding for rescission must be started as soon as the allot tee comes to know of a misleading statement in the prospectus.

(2).Damages for the deceit. Any person induced by fraudulent statement in a prospectus to take shares is entitled to sue the company for damages.He must prove the same matters in claiming damages for deceit as in claiming rescission of the contract.He cannot both retain the shares and get damages against the company.He must show that he has repudiated the shares and has not acted as a shareholder after discovering the misrepresentation.

II.Remedies against theDirectors,Promoters and Experts. The persons who are liable to pay compensation for any loss or damage to subscribers for any shares or debentures on the faith of a prospectus containing untrue statements are the--(a)directors at the time of the issue of the prospectus; (b)persons who have authorized themselves to be named as directors in the prospectus; (c) promoters; and (d)persons who have authorized the issue of the prospectus.

(1)Liability for damages for the misstatement in the prospectus[Sec.62] Every director ,promoter and every person who authorizes the issue of the prospectus (no matter whether he has seen or not)is liable to pay compensation to the aggrieved party(who subscribes for any shares or debentures on the faith of the prospectus) for loss or damage he may have incurred by reason of any untrue statements in the prospectus.

Defences of directors,promoters,etc[Sec.62(2)]. Section 62(2) provides that a director,promoter or any other person who authorizes the issue of the prospectus which contains untrue statements is not liable to pay compensation to the aggrieved party[allotee] provided---

[Contd]..Defences of directors,promoters, etc. (a) he withdrew his consent before of the prospectus and that it was issued without his authority or consent; (b)the prospectus was issued without his knowledge or consent and that on becoming aware of its issue,hence forth with gave reasonable public notice that it was issued without his knowledge or consent;

Contd(c)after the issue of prospectus and before allotment there under ,he, on becoming aware of any untrue statement therein, withdrew his consent to the prospectus and gave reasonable public notice of the withdrawal and of the reason thereof; (d) he had reasonable ground to believe that the statement was true and he, in fact , believed it to true;

II.Criminal LiabilityWhere a prospectus contains any untrue statement,every person who authorized the issue of the prospectus is punishable with imprisonment, which may extend to 2 years or with a fine which may extend to Rs 50,000/- or with both. The punishment for issuing an application for shares or debentures that is not accompanied with the with the prospectus is a fine which may extend to Rs 50,000/-. PENALTY for fraudulently inducing persons to invest money (Sec.68) is that he[director/promoter etc] shall be punishable with imprisonment up to 5 years or with a fine which may extend up to Rs 1,00,000/-.

Issue and allotment of shares in a fictitious name(Sec.68-A) Any person who(a) makes in a fictitious name an application to a company for acquiring/subscribing for shares therein, or (b)otherwise Induces company to allot,or register any transfer of shares there in to him, shall be punishable with imprisonment up to 5 years.

Statement in lieu of prospectus(Sec.70). Where a public company does not invite public to subscribe for its shares but arranges to get money from private sources(Issuing Houses), it need not issue a prospectus to the public.In such a case the promoters are required to prepare a draft prospectus known as, statement in lieu of prospectus

Contd. A company having share capital,which does not issue a prospectus ,can allot any of its shares or debentures only when at least three(3)days before the allotment of shares or debentures there has been delivered to the Registrar for registration a statement in lieu of prospectus.

Allotment only when minimum subscription received. No allotment of any shares can be made unless the amount stated in the prospectus as minimum subscription has been subscribed ,and the payable on application for the amount so stated has been paid to and received by the company. A company making any rights or public issue of shares,debentures etc. must receive minimum of 90% subscription against the entire issue before making any allotment of shares or debentures to the public.If this minimum amount of 90 % is not received,the entire amount collected with application has to be refunded to the applicants at the end of 120 days from the opening of the subscription list.If there is a delay in refund of such amount by more than 10 days,the company will pay interest at the rate of 15 per cent per annum for the delayed period.

Commencement of business[sec.149]. All kinds of companies ,whether limited by shares,limited by guarantee or unlimited companies can commence business immediately after their incorporation,whereas a public company can do so only after it obtains a a certificate of commencement of business.

MEMBERSHIP IN A COMPANY Who can become a member of a company ? Any one who is competent to contract(Sec.11 of Indian Contract Act,1872).

How to become a member of a company ?1.MEMBERSHIP BY SUBSCRIPTION 2.MEMBERSHIP BY APPLICATION AND ALLOTMENT. a) By application and allotment b) By transfer c) By succession 3.MEMBERSHIP BY QUALIFICATION SHARES

Cessation of membership A person may cease to be a member of a company1.By an act of the parties. 2.By operation of law.

1.Cessation of membership by the act member of a companyA person may cease to be a of the parties:1]If he transfers his shares to another person. 2]If his shares are forfeited. 3]If the company sells its shares under some provision in its Articles.[e.g., to enforce a lien]. 4]If he rescinds the contract to take shares on the ground of misrepresentation in the prospectus or on the ground of irregular allotment. 5]If redeemable preference shares are redeemed. 6]If he surrenders his shares,where surrender is permitted. 7]If share warrants are issued to him in exchange of fully paid shares.

2.Cessation of membership by operation of law. This covers the following cases: 1.Insolvency:The shares of an insolvent vest in the Official Receiver or Assignee.When the Official Receiver or Assignee transfers his shares to another person,the insolvent ceases to be member on the registration of the transferee as a member.But the insolvent remains a member as long as his name appears on the register of members of a company 2.Death:The deceased members estate ,however ,remains liable until the shares are registered in the name of his legal representative. 3.Sale of shares in execution of a decree of Court. 4.Winding up of the company: During the winding up of the company a member continues to be liable as a contributory and is also entitled to share in the surplus assets,if any.

RIGHTS AND LIABILITIES OF MEMBERSRIGHTS OF MEMBERS:

1.Statutory Rights. 2.Documentary Rights. 3.Legal Rights. 4.Proprietary Rights. 5.Remedial Rights.

RIGHTS AND LIABILITIES OF MEMBERSLiabilities of members: The liability of the members depend upon the nature of company. a]Company with unlimited liability. b]Company Limited by shares. c]Company Limited by guarantee. d]Liability in the event of winding up of a company.

1.Statutory Rights: These are the rights which are conferred on the members by the Companies Act.These rights cannot be taken away or modified by any provision in the Memorandum and Articles.

Some of the Statutory Rights of a member are, for example,to..

a]Have shares offered in priority in case of increase of capital [sec.81]. b]transfer of shares [sec.82] c]receive a share certificate [sec.113] d]inspect the register of members, register of debenture-holders and copies of annual returns[sec.163] e]apply to Company Law Board for calling an annual general meeting when the Board of Directors [BODs] of the company fails to call such a meeting [sec.167] f]receive notice to attend and vote at meetings[sec172]. g]apply to the Company Law Board for calling an extra ordinary meeting of the company where it is impracticable to call such a meeting [sec.186].

Contd.. h] receive copies of annual accounts of the company [210 and 219]. i] participate in appointments of directors and auditors in the annual general meetings. [sec.224&225]. j] make an application to the Company Law Board for ordering an investigation in to the affairs of the company[sec.235]. k]present a petition to the Company Law Board for relief in case of oppression and mismanagement [sec.399] l] petition to the High Court for the winding up of the company [sec.439]..

2.Documentary Rights. These are the rights given to members by the Articles and Memorandum of Association.

3.Legal Rights.

These are the rights which are given to the members by the general law,e.g., in case of any misstatement or concealment of a material fact in a prospectus and has been allotted shares or debentures ,can avoid the contract claim damages under general law.

4.Proprietary Rights.1.The right to participate ratably in dividend distribution when ordered in the discretion of directors ; 2.The right to participate in the distribution of assets when the company goes in to liquidation; 3.The right to equality and honesty in the treatment by the directors and majority shareholders in corporate transactions affecting his interests ,such as new issue of shares;

CONTD

[4.Proprietary Rights]

4.The right to be registered as a share holder in the companys books, subject only to valid and authorized transfer of shares;and 5.The privilege of immunity from from personal liability of companys debts.

Right of shareholders to share in the assets of a co. An incorporated companys assets are the property of the company and not of its shareholders. No shareholder,therefore,has any right to any item of property owned by the company for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.

5.The Remedial Rights. These include: 1 .The right to information and inspection of companys record; 2.The right to sue the company to prevent or remedy mismanagement or unauthorized acts and to compel the company to enforce its rights.

Right of shareholder to share in the assets of the company An incorporated companys assets are the property of the company and that of its shareholders. shareholder, therefore, has any right to any item of property owned by the company for he has no legal or equitable interest therein. He is entitled to share in the profits while the company continues to carry on business and share in the distribution of surplus assets when the company is wound up.

Liability of members. The liability of members of a company depends on the nature of a company. 1.Company with unlimited liability: Each member is liable in full for all the debts contracted by the company during the period he was a member.

Contd..[Liability of members] 2.Company Limited by Shares: Each member is liable to pay the full nominal value of the shares held by him.If he has already paid a part of the amount on the shares,his liability is limited to the unpaid amount on the shares in respect of which he is a member.

Contd..[Liability of members]

3.Company Limited by Guarantee: Each member is liable to contribute the amount guaranteed by him to be paid in the event of winding up of the company.

Register of Members: Every company shall keep a register of its members and enter therein the following particulars:

Register of Members

[Sec.150]

The Register of members contains the following particulars; [a] Name and address,and the occupation of each member. [b] If the company has a share capital,the shares held by each member and the amount paid,or agreed to be paid, on those shares.Each share shall be distinguished by its member.

Contd...[Register of Members.]

[c]The date at which each person was entered in the register as member. [d]The date at which any person ceased to be a member. If the company has converted any of its shares in to stock and given a notice of the conversion to the Registrar,the register shall show the amount of stock held by each member instead of shares.

Maintaining the Register of...

If any default is made in maintaining the register in the above manner, the company and every officer of the ,who is in default, shall be punishable with a fine which may extend up to Rs. 500/for every day during which the default continues.

INDEX OF MEMBERS [Sec.151] Every company with more than 50 members shall keep an index of members along with the register of members.The register itself maybe kept in such a way as to constitute an index. The index may also be in the form of a card index.Any alteration in the register of members shall be noted in the index within 14 days of the alteration.Every officer of co. indefault shall be punishable with Rs.500/-.

Place of keeping,& inspection of Register of members [S.163]. The register and index of members shall be kept at the registered office of the company.These may,however, be kept at any other place within the city,town or village in which the registered office of the company is situated provided Special resolution copy to be filed with the Registrar approving such a place where Register and Index can be kept.

Contd. A companys register of members is a public document and open to public for inspection during business hours for at least 2 hours each day,except when the register is closed.A member can inspect it without paying any fee.But an outsider can inspect it on payment of Rs.10 with effect from 15 th July,1988.

Power to close Register [Sec.154]. A company may close the register of members for a total period of 45 days in a year and not exceeding 30 days at any one time.The company shall give at least 7 days previous notice of the disclosure of the register by advertisement in some newspaper circulating in the district in which the registered office is situate.

Register to be original evidence Register to be prima facie evidence[Sec.164] of matters contained in it. Thus where a persons name is entered in the register of members of a company to his knowledge ,he is deemed to be a member and such an entry throws onus on him of proving that he is not a member.

Rectification of register of members [Sec.111]. If (a)the name of any person (i) is without the sufficient cause, entered in the register of members of a company,or (ii) after having been entered in the register,is,without sufficient cause,or

[Contd]..Rectification

of Register of

Members. (b)default is made ,or unnecessary delay takes place ,in entering the register the fact of any person having become, or ceased to be, a member(including a refusal to register a transfer of shares). The person aggrieved, or any member of the company, or the company, may apply to the Company Law Board for rectification of the register.The Company Law Board may ,after hearing the parties, either reject the application or direct rectification of the register and also direct the company to pay damages,if any,sustained by any party aggrieved.

Contd.. The above provisions shall apply in relation to the rectification of the register of debenture-holders as they apply in relation to the rectification of the register of members. If default is made in giving effect to the orders of the company Law Board under Section. 111, the company and every officer of the company,who is in default, shall be punishable with fine which may extend to Rs 1000/and with further fine which may extend to Rs 100/- for every day after the first day after which the default continues.

ANNUAL RETURN Every company shall file with the Registrar an annual return containing certain particulars.This enables the Registrar to make in his records the necessary changes that occurred in the constitution of the company during the year.

Annual Return of the Company having Share capital.(Sec.159) Every company having share capital ,shall,within 60 days from the date of the annual general meeting ,file every year with the Registrar a return known as the Annual Return.The return shall contain the following particulars regarding (1) The Registered office address of the company. (2)If any part of the register of its members and debenture holders is kept in a foreign country, the name of the country and the address of the place where it is kept.

Contd 3.The shares and debentures,giving a summary ,distinguish wherever possible between shares issued for cash,bonus shares, and shares other than bonus shares issued as fully or partly paid otherwise than in cash. 4.Particulars of the indebtedness of the company in respect of all shares(including mortgages) which are required to be registered with the Registrar.

Contd. 5.A list containing the names,addresses, descriptions and occupations,if any, of members and debenture holders, past and present, and stating the number of shares or debentures held by each. 6.Particulars with respect to directors, managing directors, managers, and secretaries,past and present.

Contd If any of the five preceding returns has given full particulars required as to past and present members and the shares held and transferred by them and the shares held by them. The copy of the annual return filed with the Registrar shall be signed by director and by the manager or secretary ,if any ,or by 2 directors.

Contd.. The return shall be accompanied with a certificate signed like wise stating, that the return states facts as they stood on the day of the annual general meeting. The fact that no annual general meeting was held is no justification for not complying with the requirements of Sec.159

Annual Returnof a company not having share capital: It shall state the following particulars: 1. The Registered Office Address Of Co. 2.The names of members and respective dates on which they became members and the names of persons who ceased to be members since the date of the last AGM and the dates on which they ceased to be members.

Contd. 3. All such particulars with respect to the persons who,at the date of the return,were the directors,its manager and its secretary; 4. A statement containing the particulars of the total amount of indebtedness of the company in respect of charges which are to be registered with the registrar.

Contd.. The copy of the Annual Return filed with the Registrar shall be signed by a director and by the manager or secretary , if any,or by two directors. The return shall be accompanied with a certificate signed likewise stating, that the return states facts as they stood on the day of annual general meeting.

SHARE CAPITAL Share capital means the capital raised by a company by issue of shares.The word Capital in connection with a company may be used in the following senses:

1. Authorized,Nominal or Registered capital.This is the nominal value of the shares which a company is authorized to issue by its Memorandum of Association. This is the maximum capital which the company will have during its life time unless it is increased.

CONTD.. 2.Issued and Subscribed Capital: Issued capital is the nominal value of shares which are offered to the public for subscription. A company does not normally issue all its shares at once, so that issued capital in such a case is less than the nominal capital.The issued capital can never exceed the nominal capital. Some times all shares offered to the public are not taken up.In such a case that part of issued capital which is taken up by the public is called the subscribed capital.

Contd. 3.Called up capital: This is that part of the issued capital which has been called on the shares. 4.Paid up Capital: This is that part of the issued capital which has been paid up by the shareholders or which is credited as paid up on the shares.

Contd.. 5.Uncalled Capital: This is the reminder of the issued capital which has not been called.The company may call this amount any time,but this is subject to the terms of issue of shares and the provisions of the Articles.

Contd. 6.Reserve Capital: That part of uncalled capital which can be called only at the time of and for the purposes of winding up of the company is known as reserve capital. It is available only for the creditors on the winding up of the company.

Kinds of Share Capital1.Preference Share Capital 2.Equity Share Capital 1.Preference Share Capital:Preference share capitalmeans in case of a company limited by shares, that part of the capital of the company which carries a preferential rights as to [a] payment of dividend during the life time of the company; and [b] return of capital on winding up [Sec.85(1)].

Contd. 2.Equity Share Capital: Equity share capital means, with reference to a company limited by shares, all share capital which is not preference capital.[Sec.85(2)].

ALTERATION OF CAPITAL [Sec.94]A limited company having a share capital may, if so authorized by its Articles, alter its share capital as follows , that is to say ,it may-

a]increase its authorized share capital by issuing new shares; b]consolidate and divide all or any part of its share capital in to shares of smaller amount : c]Convert fully paid shares in to stock. d]Cancel shares which have not been taken up.

Reduction of Capital The law regards the capital of a company something sacred and permits its reduction only when all the formalities as required by Sections.100 to 103 of the companies are complied with. Reduction of Capital with the consent of the court: Under Section 100, a company limited by shares or a company limited by guarantee and having a share capital may, if so authorized by its Articles, by a special resolution , reduce its share capital .This is however subject to confirmation by the Court.

Contd. The company may reduce its share capital in any of the following ways: (a) It may extinguish or reduce the liability on any of its shares in respect of share capital not paid up[Sec.100(1)(a)]. E.g., A Limited, a company limited by guarantee and having a share capital, has a share capital of Rs 10,00,000/- consisting of 1,00,000 shares of Rs 10/- each,Rs 6/- per share being paid up.The directors feel the company would not require the uncalled amount of Rs 4/- per share.The company may, after complying with legal formalities, extinguish the remaining liability of uncalled share capital at the rate of Rs 4/- per share.

Contd.. (b)It may,either with or without extinguishing, or reducing liability on any of its shares cancel any paid up share capital which is lost ,or is un-represented by available assets [Sec.100(1)(b)].

E.g., Due to heavy trading losses,B Limited,a company limited by shares, reduces its equity shares of Rs 10 each, fully paid up ,to Rs 2 per share. If the company extinguishes liability on these shares , Rs. 10 per shares, will become shares of Rs 2 each fully paid up.If the company does not extinguish liability on these shares ,the Rs 10 shares will continue to be shares of Rs 10 each,Rs.2 per share paid up.

Contd.. (c) It may,either with or without extinguishing or reducing liability on any of its shares, pay off any paid up share capital which is in excess of the requirements of the company[Sec.100(1)(c)]. E.g., C Limited, a company limited by shares, has equity share capital consisting of Rs 10 shares,fully paid up.The capital is in excess of the requirements of the company.The company, after complying with the legal formalities, returns Rs 4 per share .If the company extinguishes liability on these shares ,Rs 10 shares will become shares of Rs 6 each fully paid up.If the company does not extinguish liability on these shares ,the Rs 10 shares will continue to be shares of Rs 10 each, Rs 6 per share paid up.

Procedure for Reduction of Share Capital 1.Special Resolution: A c