Corporate Mar13 Iyr Ppt Notes

8/13/2019 Corporate Mar13 Iyr Ppt Notes

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Class 2, MBL

Aditya Kamath BA. LLM.


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Person competent to contract- need not bebeneficiary- eg. Trustee, agent etc.

Partnerships/HUF cannot- will be deemed

individual members. A person becomes a subscriber by signing the

memorandum as a subscriber, at the placeintended for that purpose.

Arthanari Transport Pvt. Ltd. v. K.P. SamiGowaden [35 Comp.cases 930]

Signature on all pages.


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Pre- Incorporation Contracts

Do not bind the company as it has not come into existence as yet,hence how can one represent that which does not exist?

A new contract must be entered after company is incorporated. Even so, the law of restitution , being one of equity would apply.

Promoters will be held personally liable.

Kelner v Baxter,

Seth Sobhagmal Lodha,v. Edward Mills Co. Ltdheld company

not liable. Newborne v Sensolid (Great Britain) Ltd.

According to Sec.19(e) of the Specific Relief Act, specificperformance can be enforced against a company where itspromoters have before its incorporation entered into a contract forthe purpose of the company and such contract is warranted byterms of incorporation.

Normally included in Articles so as to make valid.


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Step 1: Name and Approval 4 names- end with Private Limitedor Limited based on the type- ROC will reply in 7 days as toavailability

3-4 weeks to incorporate thereafter- MOA, AOA to be filled with

other required docs and registration fee which is based on Sharecapital stated in MOA.

Certificate of incorporation issued thereafter- conclusive proof offormalities of Act being fulfilled.

Mossa Gulam Arif v. Ibrahim Gulam Arif (ILF40 Cal.1)- two

minors subscribed to memorandum- inc challenged- could notreopen.

Pvt. Ltd may commence business immediately.

Public Ltd. may now issue prospectus to ROC or statement in lieuif not inviting public investment- certificate of commencement

will be issued.


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Private Limited Company: What they are and their

nature:(a) restricts the right to transfer its shares;

(b) limits the number of members (exclusive of personswho are or have been in the employment of the

company) to fifty; and(c) prohibits any invitation to the public to subscribe for

any shares or debentures of the company.

(d) prohibits any invitation or acceptance of deposits from

persons other than its members, directors or their 32relatives. In case of Private Company inviting oraccepting deposits from public, it will become a PublicCompany.

Section 43 and a deemed Public Limited Company.


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Public Companies: Anything that is notprivate is public.

Differences between Public and Private: ShareCapital, Members, Prospectus, directors,meetings,

Statutory and Registered Companies- LIC.

Limited Liability Companies:i) Companies Limited by Shares.

ii) Companies Limited by Guarantee.

iii) Companies Limited by Guarantee with ShareCapital.

Associations not for Profit. Section 25 of theAct- Can be registered- limit liability but useprofits for other purposes- Trusts included.


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Government company means any company inwhich not less than fifty-one percent of thepaid-up share capital is held by the CentralGovernment, or by any State Government orGovernments or partly by one or more StateGovernments and includes a company which is

the subsidiary of a company thus defined A public company which is wholly owned &

controlled by the State is known as a publiccorporation. Som Prakash Rekhi v. Union of

India [(1981) 1 SCC 449].- Becomes the state ifits functions are such.


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Section 2(28) defines the memorandum thus: Memorandum

means the memorandum of association of a company asoriginally framed or as altered from time to time

Sections 13 to 15 explain the details of the form and contents of theMOA

. The clauses of the memorandum

1. The name clause.The various contents of the memorandumare essentially called 'clauses'. Every memorandum must statethe name of the company with which it is to be registered. Thename must exactly be the same name as has been made availableby the Registrar, with the word 'Limited' as the last word in the

case of a public limited company and the words 'Private Limited'as the last words in the case of a private limited company.

ALTERATION- May be ordered by the Central Govt, may be doneSuo moto by Company after approval of the Central Govt.


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2. The objects clause.According to this section, the objects as stated in thememorandum, should be divided into three groups under three distinctheadings, namely:

A. Main objects (to be pursued by the company on its incorporation);

B. Objects incidental or ancillary to the attainment of the main objects;

C. Other objects.

Cotman V. Brougham [(1918) A.C. 514], :gives protection to subscriberswho learn from it the purposes to which their money can be applied. Inthe second place it gives protection to persons who deal with thecompany and who can infer from it the extent of the companys powers

Attorney General v. G.E. Rly.Co.[1980]S.A.C. 473 that a company may doanything which is incidental to and consequential upon the objectsspecified and such act will not be held ultra vires.

Doctrine of Ultra Vires:Ashbury Rly. Carriage & iron Companyv.Riche[1875] LR 7 HL 653.- Mechanical Engineers and GeneralContractors- contract for financing building of Railway.

Lakshmanaswami Mudaliar v. L.I.C AIR 1963 SC 1185: LIC took overcompany, no more had any business of its own, hence donation ultravires.

Belhouse Ltd v. City Wall Properties Ltd [(1966)36 Comp. Cases 779] Inthis case, the object clause included the power to carry on any other trade

or business whatsoever, which can, in the opinion of Board of Directors,be advantageously carried on by the Company.


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1. The ultra vires transactions are null and void ab initio

2. Any member can get an order of Injunction from the court in casehe finds that the company is about to undertake an ultra vires act.

3. It is the duty of the director to ensure that the corporate capital is

used only for the legitimate business of the company, In case ofsuch capital being diverted, the directors are personally liable toreplace it. The directors and other officers are personallyaccountable to third parties in case of ultra vires transactions.

4. Where a companys money has been used ultra vires to acquire

some property, the companys right over such property is heldsecured.

Can Share Holders Ratify an Ultra Vires Act? -Ashbury RailwayCarriage & Iron Co. Ltd v Riche (1875) LR 7 HL 653.- NO


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Alteration of Objects Clause

Section 17(1) has laid down seven grounds which may be

invoked by a company to amend its object clause. The

grounds are:

1. to carry on its business more economically or more efficiently;2. to attain its main purposes by new or improved means;

3. to enlarge or change the area of its operations;

4. to carry on some business which under existing circumstances mayconveniently or advantageously be combined with the business ofthe company;

5. to restrict or abandon any of the objects specified in thememorandum;

6. to sell or dispose of the whole, or any part of the undertaking or any

of the undertakings of the company;7. To amalgamate with any other company or body of persons.


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3. The Registered office Clause: -- Every Company must have aregistered office which establishes its domicile. The notice of theexact address of the registered office must be given to the ROC inForm No. 18 within 30 days from the date of incorporation.

4. The liability clause.The memorandum of a company, shouldstate that the liability of the members of the company is limited. Inaddition, the memorandum of a company limited by guaranteeshould also state that each member would undertake to contributeto the assets of the company in the event of its being wound up,while he is a member or within one year after he ceases to be a

member.

5. The capital clause.The memorandum of a company having ashare capital (including a guarantee company having a sharecapital but excluding an unlimited company) should state the totalamount of the share capital with which the company is to be

registered and its division in different classes or kinds of capitalthe number of shares of each kind and the face value of eachshare.


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6. The association and subscription clause.The memorandum ofevery company should declare the intention of the subscribers tothe memorandum for associating themselves with the companyand agreeing to take up the shares in the company, in the number

stated against the respective promoter's name, not being less thanone. The total number of shares agreed to be taken up by all thesubscribers should also be stated.


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They prescribe the rules and regulations for a company forgoverning its day-to-day administration; they are the rules for the

internal management of the company. Mandatory for Private Limited and Unlimited companies to

register with MOA.

The status of the articles was aptly described by Lord Cairns LC inAshbury Railway Carriage & Iron Co. Ltd. v Riche2 thus: "The

memorandum is, as it were, the area beyond which the actions ofthe company cannot go; inside that area the shareholders maymake such regulations for their own government as they think fit".The articles cannot, thus, override the memorandum and neitherthe memorandum nor the articles shall override the Act.

Re New British Iron Co, Exp Beckwith (1898) 1 Ch 324; Borland'sTrustee v Steel Brothers & Co Ltd (1901) 1 Ch 279. Article are acontract between the company and its members.

They also govern th relation between members inter se.

S f MOA d AOA


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Status of MOA and AOA:

Now it is settled law that they are contractual terms between thecompany and its members in respect of maters relating toMembership Rights only.

InEley v. Positive Life Assurance Co. Ltd. [(1876)1 EX.D 88] thearticles of a company provided that one Eshould be the solicitorof the company. The company refused to appoint him. Held, hecould not claim damages for breach of contract for the followingreasons:

(1) There was no specific contract between the parties, express orimplied.

(2) E could not rely upon the relevant provisions in the articlesbecause those provisions did not affect him in his capacity as amember.

Binding force of MOA and AOA:1. Upon the company and its members: Binding as far as

membership rights go-Hickman v Kent or Romney Marsh SheepBreeders Association [(1915)1 Ch.881],-Arbitration clause- suitfiles- held no jurisdiction.

2. Between members themselves- Binding.

B C d id N ll d


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3. Between Company and outsiders: Normally do not act as acontract unless parties have transacted based on the Articles-Example Salary of MD fixed in Articles.

Alteration of Articles: Section 31- by special resolution as long as notopposed any provision of the ACT and memorandum. Must alsobe bona fide and in the interest of the company.

Alteration may also be retrospective:

Sidebotton v Kershaw Lees & Co. Ltd [(1920)1 Ch. 154- Directors

allowed to buy out shares of members who engaged incompetitive business.

State of Karnataka v. Mysore Coffee Curing Works Ltd. [(1984)55Comp. cas.70].- power to nominate three Directors and another asChairman of the Board.

DOCTORINE OF CONSTRUCTIVE NOTICE: The articles ofassociation of a company are its Magna Carta. Each shareholder isirrefutably attributed with notice of the purport and content of thearticles. Even if disputed, the shareholder is presumed to have

constructive knowledge of the same

A d li i h b k h d h


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A person dealing with a company must be taken to have read theCompanies Act and the articles of the company he is dealing with,and will be deemed to have had constructive notice of theircontents.

Kotla Venkatswamy v.Chinta Ramamurthy [AIR 1934, Mad. 579]all documents to be signed by MD, Working Director andSecretary- only last two signed Mortgage deed, held not validand outsider cannot claim.

Doctrine of Indoor Management (Turquand Rule) :Royal Bank v Turquand [(1856) 119 ER 886].Directors could borrow

subject to resolution at a general meeting- Shareholders claimedno such meeting- court said meeting presumed.

Sri Kishan Rathi v. Mondal Bros & Co Ltd [AIR 1967 Cal 75]- need

not and cannot, and is not obliged, in my view, to look further inthe internal management of the company and embark on aninvestigation.


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EXCEPTIONS TO THE DOCTRINE OF INDOORMANAGEMENT:

1. Knowledge of Irregularity: Howard v. Patent IvoryManufacturing Co [(1888) 38 Ch D 156], the directors issue of

debentures to themselves- assent of general meeting needed, notobtained.

Hely-Hutchinson v. Brayhead Ltd [(1967) 2 All ER 14]-newDirector- Contract for Indemnity with director that company andhimself held out to be authorised to do so though not- company

liable.

2. Suspension of irregularity: Anand Bihari Lal v. Dinshaw & Co[AIR 1942 Oudh 417]- the plaintiff accepted a transfer of thedefendant companys property, from the company accountant

who had no authority to transfer.

3. No knowledge of Articles: Rama Corporation v Proved Tin andGeneral Investment Co.[1952] 1 All.ER 554 Director no power todelegate, borrow- plaintiff did not refer to Artcles at all, held noIM was possible.

F R b G t Fi l C lid t d [(1906) AC 439]


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4. Forgery-Ruben v. Great Fingal Consolidated [(1906) AC 439],Forged Share certificate issued by secretary- with signatures oftwo directors and seal of co.

5. Acts outside apparent authority:Anand Behari Lal v Dinshaw&Co . [AIR 1942 Oudh 417],

Corporate Mar13 Iyr Ppt Notes

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