COMPANY LAW

Legal Persons. Law regulates the rights and obligations of persons, and divides them into two classes (i) natural persons, or (ii) artificial persons. Natural persons are human beings of different degrees of capacity with whom we have been dealing so far. Artificial persons are such as are created and devised by human laws for the purposes of society and government, which are called Corporations or Companies. We shall, in the present hapter, deal with this legal person the orporation or ompany. orporation is an artificial person, with a distinctive name, a

Corporation. A

common seal, and created by law for the purpose of preserving in perpetual succession rights which would fail if vested in a natural person. "ole# or ! orporations Aggregate.# Company and its Meaning. $n the ordinary common parlance, a company means a group of persons associated to achieve some common ob%ective. &ur ob%ect is to deal with a company which is formed for carrying on some business and providing for limited liability of its members. 'eeping this type in mind we may define a company as a voluntary association for profit with capital divisible into transferable shares with limited liability, having a corporate body and common seal. (he company is an artificial legal person created by law and endowed with certain powers. $t e)ists in the eyes or contemplation of law as thought it were a natural person, separate and distinct from the persons who are its members. As the company is created by law and is not itself a human being and so has no physical e)istence, it is called artificial* and since it is clothed with many or the rights of a real person, it is called a person. $t is accordingly an artificial, legal person. (his concept of the company as being a separate, legal person is fundamental in understanding the rights and duties that arise in connection with companies. $t means that property of the company is not owned by the members who own shares but by the company. +ebts of the company are debts of this artificial legal person and not of the people running orporations are either ! orporations

the company or owning shares in it. (he company has a right to sue and can be sued, can own property and have ban,ing account in its own name, own money and be a creditor but you cannot sha,e it by the hand, or ,noc, it down in a fit of temper. $n conse-uence of the company being an entity separate and distinct from its shareholders, the life a company is not measured by the life of any member. Accordingly, a company has independent life in the sense that it continues to e)ist without regard to the death of the individuals involved in its corporate affairs or the transfer by them of their interests in the company* even the death of all its members does not end the company. &n account of this separateness between the company and its members, a shareholder can be its creditor, too. Also, a shareholder cannot be held liable for the acts of the company, even though he holds virtually the entire share capital, as may happen in what is ,nown as a !&ne.man ompany.# "imilarly, the shareholders cannot bind the company by their acts*

they are not its agents. (hese points are brought out by the /ouse of Lords in the celebrated case of "alomon v. "alomon 0 ompany Limited (1223) A. . 44. $n this case, one "aloman, who carried on a prosperous leather business, sold it in solvent condition for the sum of 567,777 to a company which he formed consisting of himself, his wife and a daughter and his four sons as shareholders. /is wife, daughter and four sons too, one 51 share each. "alomon too, 47,777 51 shares and debentures of the amount of 517,777 secured by a floating charge on the company8s assets as the price of the business transferred to the company. (he company ran into difficulties and had to be wound up. (he total assets amounted 59,7:7* its liabilities were the 517,777 secured debentures and 52,777 owing to unsecured creditors who claimed the entire assets of 59,7:7, on the ground that the company and "alomon were one and the same person and that the company was mere !alias# or agent for "aloman, and hence they should be paid in priority to "alomon. (he /ouse of Lords re%ected this contention of the creditor and held that as soon as the company was duly incorporated, it became in the eyes of the law a separate and

distinct, as well as independent person from "alomon and was not his agent or trustee for him. "alomon, though holding almost all the shares in the company, was also a secured creditor, and so must be paid his debt out of the assets of the company in priority to unsecured creditors. (he legal personality and limited liability are the two important features of a company. A person by buying shares, becomes entitled to participate in the profits when the company decides to divide them, and is at liberty to dispose of them whenever he li,es* and it anything goes wrong with the company, his liability is limited by the nominal amount of the shares held by him. As a natural conse-uence of incorporation and transferability of shares, the company has perpetual succession. (his means the life of the company is independent of the lives of its members, giving immortality to the company. /ence members may come and members may go, but the company goes on (until dissolved). (o sum up, the principal characteristics of a company may be stated as follows; 1. constitute it. 4. $n conse-uence of incorporation, it is an artificial legal person, en%oying A company has a separate and distinct personality from its members which

similar rights and owing similar obligations as a natural person. 6. As a corporate person the company is entitled to own and hold property as

distinct from its members. <. :. As a %uristic person distinct from its members it has perpetual succession. (he shares in the share capital of the company are generally freely

transferable. (his ma,es the life of the company independent of the lives of its members. 9. held by them. 3. A company, though a person having nationality and a domicile is not a citi=en. (he liability of its shareholders is limited to the unpaid value of the shares

$t cannot therefore e)ercise the right of franchise, nor can it be punished, in its own person,

by imprisonment for criminal offences, although it can be fined for the contravention of the provisions of the ompanies Act. 2. As the company is not a citi=en and can act only through natural persons, it

has no fundamental rights under the onstitution. Lifting or Piercing the Corporate Veil. (he advantages of incorporation, as e)plained in the previous section, particularly the concept of separate and distinct entity, are allowed to be en%oyed only by those who do not ma,e a fraudulent and dishonest use of the company.the artificial legal person. >or instance, the ourt may not recognise the separate

e)istence of a company where the only purpose for which it appears to have been formed is the evasion of ta)es. (he ourt may also find it %ust to brea, through the corporate shell and apply the

principle of what is ,nown as lifting or piercing the corporate veil, where it may become necessary in public interest to e)amine the character of persons in real control of the corporate affairs. $n Daimler Co. Ltd. !. Continent "yre #u$$er CO. (1?19) 4 A. .

673, the company was registered in @ngland, but on the declaration of war between @ngland and Aermany, the persons in control of the company and resident in Aermany became alien enemies. (he ourt disregarded the corporate fiction of separate entity of the company and

declared it an enemy company. $f the number of members falls below the statutory minimum, and the company carries on business for money an 9 months, while the number is so reduced, every shareholder who is aware of these facts shall be directly and severally liable to the creditors for the debts of the company contracted during that time, the creditors being permitted to loo, behind the company to the owners of the shares for their satisfaction. (hus, the privilege of limited liability is lost by the shareholder. which are created by harter granted by the 'ing or Bueen in e)ercise of an ancient

prerogative vested in the rown.

"ypes of Companies% 1. Chartered Company . A chartered company is regulated by its charter and the ompany Act does not apply to it. "uch companies have no place in $ndia since $ndependence. 4. &tatutory Companies' li,e the Ceserve Dan, of $ndia or the "tate Dan, of $ndia, which are created by "pecial Acts of Earliament or "tate Legislature. A statutory company is governed by the provisions of the special Act creating it. (he to such companies. 6. #egistered Companies' which are incorporated under the ompanies Act, 1?:9 ompanies Act does not apply

or were registered under the previous ompanies Acts therein consolidated and recognised. A registered company may be an unlimited company, in which case the liability of its members would be unlimited so that they can be called upon to pay to the full e)tent of their fortunes in order to meet the obligations of the company. "uch companies are now almost e)tinct, as a vast ma%ority of them have registered themselves as limited companies. Another class of a registered company is a (uarantee Company, with its capital limited by guarantee so that each member underta,es to be liable to pay the debts, of the company up to a certain amount in case of winding up. lubs, trade associations and

societies for promoting social ob%ects are e)amples of this type* and in the case of these companies there is no intention to ma,e profit. (he largest in number and most important in function are Limited Liability ompanies

registered with a share capital divided into shares held by shareholders whose liability is limited to the face value of the shares held by them. (his class of company will be almost e)clusively dealt with by us. >unctionally, a registered company with limited liability may be either Erivate or Eublic, or an Association not for Erofit.

Erivate

ompany A private company is defined as a company which by its articles

of association, (i) restricts the right to transfer its shares, (ii) limits the number of its members (e)cluding employees who are members or e).employees who were and continue to be members) to :7, and (iii) prohibits any invitation to the public to subscribe for any of its shares and debentures. $f two or more persons hold one or more shares %ointly, they shall be treated as a single member. (he name of every private company must end with the words !Erivate Limited#. "ince the membership of private company is confined more or less to friends and relatives, it en%oys certain special privileges and e)emptions. Pri!ileges of Pri!ate Company. A private company en%oys the following privileges and e)emptions;. 1. &nly two signatories to the memorandum are sufficient to form a private company. 4. $t can commence allotment of shares before the minimum subscription is subscribed or paid. 6. $t is not re-uired to file a statement in lieu of prospectus as it is not allowed to issue a prospectus to the public. <. $t need not offer further shares first to the e)isting shareholders . :. A private company may commence business immediately after incorporation. 9. $t is not re-uired to hold the statutory meeting and file the statutory report. 3. $t may issue any ,inds of shares and allow disproportionate voting right. 2. A private company need have only 4 directors. ?. $ts director can vote on a contract in which he is interested. 17. Erovisions relating to loans made to directors, duration of appointment, etc., of managing agents in a public company etc., do not apply to a private company. Loss of Pri!ileges. A private company will lose its privileges and will be treated as a public company, if it fails to comply with the essential re-uirements of a private company, vi=., restrictions on transfer of shares* limitation of its members to fifty* and prohibition of invitation to the public to buy its shares or debentures .

Pu$lic Company A public company is one which is not a private company, and whose membership is open to the public under the provisions of its articles. (he minimum number re-uired to form such a company is seven, but there is no limitation to the ma)imum number of members. $t can offer shares and debentures to the public by advertising such offer in a prospectus. Almost all the provisions of the Act apply to it. Distinction $et)een Pu$lic and Pri!ate Company (he two types of companies differ in the following respect ; 1. (he minimum number with which a public company can be formed is seven and in the case of a private company it is only two. 4. (here is no limitation to the ma)imum number of members in a public company. $n the case of a private company, the number of members must not e)ceed fifty. 6. A public company is re-uired to have at least three directors, but a private company may have only two directors. <. (he directors of a public company have to file with the Cegistrar consent to act as directors, but those of a private company need not do so. :. A public company may, and usually does, invite by the issue of prospectus the general public to subscribe to its share capital or but its debentures, but a private company cannot do so* it must ma,e private arrangement to raise capital. 9. (he shares in a public company, as a rule, are freely transferable. $n a private company, the transfer of shares can be made sub%ect to certain restrictions as provided in its articles. 3. (otal managerial remuneration in a public company cannot e)ceed 11 per cent of the net profits, but a private company which is not a subsidiary of a public company may pay any remuneration. 2. A public company can issue only two ,inds of shares preference and e-uity, but a private company may issue any ,inds of shares and even with disproportionate voting rights.

<.*oreign Companies A company incorporated in a country outside $ndia and under the law of that other country is a foreign company. @very foreign company having a place of business in $ndia is re-uired to file which the Cegistrar at New +elhi and also the Cegistrar of the "tate in which such place of business is situated a certified copy of its charter, statute or memorandum and articles defining the constitution of the company in @nglish language, the full address of the registered or principal office of the company and a list of its directors and its secretary, as well as the address of the principal place of business in $ndia. @very foreign company must conspicuously e)hibit on the outside of every office or place of business in $ndia the name of the company, indicating whether Erivate Limited or Eublic Limited or unlimited, and where incorporated. (he provisions regarding boo,s of accounts are the same as per the $ndian companies, as also regarding registration of charges. (he provisions regarding prospectus are also almost the same as for an $ndian company. A foreign company, which has been carrying on business in $ndia and stops its business here, may be wound up as an unregistered company, even if it has been dissolved or has ceased to e)ist under the laws of country in which it was incorporated. :. (o!ernment Company . A Aovernment company means any company in which not less than :1 per cent of the paid up share capital is held by the by any "tate Aovernment or Aovernments, or partly by the entral Aovernment or

entral Aovernment and partly

by one or more "tate Aovernments and includes a company which is a subsidiary of a Aovernment company. Aovernment companies are also sub%ect to the provisions of the ompanies Act as any other company, e)cept if the entral Aovernment by notification

e)empts any Aovernment company from the application of any of the provisions of the Act. $t provides for a special procedure for audit of Aovernment companies and lays down that the auditor of a Aovernment company shall be appointed or re.appointed by the Aovernment on the advice of the omptroller and Auditor Aeneral of $ndia. (he entral

. 0 A. A.

can direct the manner in which the accounts are to be audited, and may even conduct a

supplementary audit. /is report, if any, must be placed before the annual general meeting along with the auditor8s report. $n addition to the annual report on the wor,ing of the company, the entral Aovernment must place before both /ouses of Earliament an annual

report on the wor,ing and affairs of each Aovernment company, together with the audit report and any comments of >&CFA($&N &> &FEANG (he promoters (persons wishing to form a company) must file with the Cegistrar of the "tate in which the registered office of the company is to be situate 1. (he Femorandum of Association* 4. (he Articles of Association* 6. A statement of nominal capital, <. (he agreement, if any, which the company proposes to enter into with the proposed managing agent* :. A statutory declaration by an advocate or an attorney or a chartered accountant, engaged in the formation of the company, that all re-uirements of the Act and Cules thereunder in respect of registration have been complied with. (he above documents are all that a private company has to file. A public company, having share capital, must file, in addition to the above, the following documents ;. 9. A list of persons who have consented to be directors of the company* 3. A written consent duly signed to act as directors* 2. An underta,ing in writing signed by each such director to ta,e and pay for their -ualification shares, if any. &rdinarily, both the private and public companies will file the notice of their addresses of the Cegistered office* When the necessary stamp duty and the registration fee have been paid and the Cegistrar is satisfied that everything is in order, he will enter the name of the company in the register of companies maintained by him and issue a Certificate of +ncorporation with . 0 A. A. of $ndia.

gives the company a legal e)istence from the date given on it. (his certificate is a conclusive evidence that everything is in order as regards registration and that the company has come into being with rights and obligations of a natural person, competent to enter into contracts. P#OMO",# (he !promotion# of a company is a comprehensive term denoting that process by which a company is !incorporated# or brought into e)istence as a corporate body, and Hfloated8, or established financially as a going concern, by the issue of a prospectus. Anyone who assumes primary responsibility with regard to matters relating to promotion, or any of them, may be held to be a !promoter#. !(he term Hpromoter,8 ! said Doden L. I. !is a term not of law but of business, usually summing up in a single word a number of business operations familiar to the commercial world by which a company is generally brought into e)istence.# (he word promoter is used in common parlance to denote any individual, syndicate, association, partnership, or company, which ta,es all necessary steps to create and mould a company and set it going. A promoter stands in a fiduciary relation to the company it promotes and to those persons whom he induces to become shareholders in it. Although a promoter is not an agent or trustee of the company before its formation, yet the responsibility of an agent and trustee is placed upon him to account for all moneys secretly obtained by him. onse-uently, a

promoter must act honestly, and must not ma,e, directly or indirectly, any profit at the e)pense of the company he is promoting, although he may receive some remuneration for his wor,. (he usual ways of receiving remuneration by the promoter are; (1) by selling to the company at a profit some property purchased by the promoter before he became one* (4) by ta,ing a commission on the shares sold* (6) by ta,ing a grant of some shares of the company* (<) by ta,ing a grant of a lump sum of money from the company. M,MO#AND-M O* A&&OC+A"+ON (he Femorandum of Association of a company is of supreme importance in determining its powers and, in this respect, it is the charter of the company, which contains

the fundamental conditions upon which alone the company can be incorporated. $t defines as well as confines, the powers of the company, so that it not only shows the ob%ect of its formation, but also the utmost scope of its operation beyond which its action cannot go. $t, in a way, regulates the e)ternal affairs of the company in relation to outsiders. $ts purpose is to enable shareholders, creditors and all those who deal with the company to ,now what its powers are and what is the range of its activities or enterprise. (he Femorandum must be printed, divided into paragraphs numbered consecutively and signed by seven subscribers (two in the case of a private company), in the presence of a witness who shall attest the signature of each subscriber. @ach subscriber must add his address, description and occupation, and the number of shares ta,en. Contents of Memorandum (he memorandum of a company limited by shares must state the following ;. (1) (he name of the company, with !limited# or !private limited# as the last words* (4) (he "tate in which the registered office of the company is to be situate* (6) (he ob%ects of the company. (<) (he fact that the liability of the members is limited* (:) (he proposed amount of the capital, and its division into shares of a fi)ed amount* and (9) (he declaration of associations. 1.Name of the Company "ection 47(1) provides that no company must be registered by a name which, in the opinion of the entral Aovernment, is undersirable. (his

enables the Aovernment to re%ect a name without giving any reason. (he Cegistrar will continue, as before, to refuse names identical with, or too closely resembling names already on the register as undesirable names. (he company must not give an impression that the company is carrying on the business of some other well established company. Jnder the @mblem and Names (Erevention of $mproper Jse) Act, 1?:7, the Aovernment may declare what names and emblems are not to be used by companies in trade mar,s and patents. (he

use of the following has been prohibited under the above Act, vi=. name and emblem of the J.N.&. and the W./.&., the $ndian National >lag, the &fficial "eal and @mblems of the entral and "tate Aovernments. "ub%ect to the above restrictions a company may adopt any name it li,es. $f by inadvertence a name is selected which is similar to that of an e)isting company, it must be changed. &nce the name is registered, it must be painted or affi)ed on the outside of every office or place of business, in a conspicuous position in letters easily legible in the language in general use in the locality. $t must be engraved on the seal, and mentioned in all notices, advertisements, other official publications, negotiable instruments and orders for money or goods ("ection 1<3). 4. #egistered Office. @very company must have a registered office as from the date on which it commences business or the 67 th day after incorporation date whichever is earlier, to which notices and all other communications can be sent. 6. O$.ects Clause (he ob%ects clause indicates the e)tent of company powers and sphere of its activities. $t defines and confines the scope of company8s powers, and once registered, it can only be altered as provided by the Act. (he purpose of the memorandum is two fold; &ne, to inform the members in what ,ind of business their capital may be used* secondly, to inform persons dealing with the company what its powers, are. A company cannot do anything beyond its powers, and any act beyond such powers is ultra vires and void and cannot be ratified even by the assent of the whole body of shareholders. (he ob%ects should, therefore, be clearly set forth in the memorandum. Ambiguous and general provision will not be of any use. Although e)press powers are necessary a company may do anything which is incidental to and conse-uential upon the powers specified, and the act will not be ultra vires. (hus a trading company has an implied power to borrow, draw and accept bills in the ordinary form, but a railway company cannot issue bills, although it may borrow money.

As the procedure laid down in "ection 13 of the alteration of the ob%ects clause when some new venture is contemplated is rather cumbersome and the sanction of the ourt is

essential, the promoters companies have been ma,ing the ob%ects and purposes as wide as possible. (his practice often enabled directors to participate in activities which were neither the main activities nor were they ancillary thereto, but were remote in character and far removed from the main purpose. Kery often, the members of the company ,new nothing or where they did ,now, they could not do anything. $n order to enable the shareholders to have a say in the matter, and also to let the doctrine of ultra vires have some play, "ection 16 of the Act was amended on 1?9: so as to ma,e it compulsory in future for the promoters to specify in clear terms the Fain and "ubsidiary ob%ects of the company. "ection 16, as amended, provides in clauses (c) and (d) as follows ;. (c) in the case of a company in e)istence immediately before &ctober 1:, 1?9:, the memorandum shall state the ob%ects of the company* (d) in the case of a company formed after &ctober 1<, 1?9:, the memorandum must state (i) the main ob%ects of the company to be pursued by the company on its incorporation and ob%ects incidental and ancillary to the attainment of the main ob%ects* (ii) other ob%ects of the company not included in subclause (i). An amendment to "ection 1<? prohibits a company from commencing any new business (as stated under other ob%ects) without obtaining the prior approval of the shareholders by a special resolution passed in a general meeting. $n some special cases the entral Aovernment may allow new business to be commenced even if it is approved by an ordinary resolution. <.L+M+"A"+ON O* L+A/+L+"Y A declaration that the liability of the members of the company is limited to the amounts unpaid on their shares, must be made in the memorandum. $f a shareholder has paid Cs.:7 on a Cs.177 share, he be called upon to pay the balance of Cs.:7, and if another

has paid Cs.177, he holds a full.paid share and cannot be called upon to pay anything. Dut there is one e)ception to this rule, vi=., that if a company continues to carry on business for more than 9 months after the membership has fallen below 3 in the case of public company, and 4 in the case of a private company, then all members aware of the fact are fully and severally liable for all debts contracted after the 9 months, i.e., their liability becomes unlimited. : Capital Clause ;. (he capital clause in the memorandum of a company, having a

share capital, states the amount of capital with which it is registered, divided into shares of a certain amount. (his capital is called the !registered#, !nominal# or !authorised# capital. (he effect of this caluse is that the company cannot issue more shares than are authorised by the memorandum for the time being. A public company can issue only two ,inds of shares Ereference and @-uity and the shares must not give disproportionate voting rights. A private company may however, issue any ,inds of shares and with disproportional voting rights ("ections 2:, 22, ?7). 9 Declaration of Association or the Association Clause At the end of the

memorandum of every company there is a declaration of association or an association clause which reads something li,e this; !We, the several persons whose names and addresses and occupations are subscribed, are desirous of being formed into a company in pursuance of this memorandum of association and respectively agree to ta,e the number of shares in the capital of the company set opposite our respective names#. (hen follow the names, addresses, occupations, the number of shares of each person has ta,en and his signature attested by a witness. At least 3 subscribers must sign the memorandum in the case of a public company although 4 are sufficient in the case of private company. AL",#A"+ON O* M,MO#AND-M >or the purposes of alteration, the provisions contained in the memorandum are classified into two heads. onditions and other provisions. (he !conditions# are those

provisions which are compulsory clauses, namely, the name, the place of registered office

(situation) ob%ects, limited liability and share capital. (he conditions can be altered only as e)pressly provided by "ections 13, 41, ?<, ??, 177 and 179. (he other provisions, such as the terms of appointment of managing director or manager contained in the memorandum can be altered by a special resolution with the approval of the entral Aovernment, or a clause in the memorandum fi)ing limit of dividends

to be paid on a particular class of shares can be altered by a special resolution. AL",#A"+ON O* COND+"+ON& 1 Change of name (he name of the company can be changed any time by a special entral Aovernment. $f the change merely

resolution and with the written approval of the

involves the addition or deletion of the word !Erivate# on the conversion of a public company into a private company or vice versa, no approval of the entral Aovernment is necessary.

(he change must be communicated to the Cegistrar by filing a printed or type written copy of the special resolution within 67 days of the passing thereof. (he Cegistrar will then issue a fresh certificate of incorporation, and the change of name will be effective only there after. (he changed name should be noted in each copy of the memorandum and articles. 4 Change in #egistered Office (he registered office may be changed any time from

one place to another within the local limits of the city, town or village where it is situated and a notice of the change be given to the Cegistrar within 67 days of such change. $f the office is to be removed from one city, town or village to another city, town or village within the same "tate, a special resolution should be passed, and a printed or type written copy thereof filed within 67 days. (he within 67 days of the removal of the office, a notice to the Cegistrar should be given of the location of the new office. 6. Change of #egistered Office from one &tate to another or change of o$.ects

(he Cegistered office from one "tate to another "tate, or the ob%ects of the company, can be changed by special resolution, confirmed by the necessary (a) to carry on its business more economically or more efficiently* ourt, if the alteration is rendered

(b) to attain its main purpose by new or improved means* (c) to enlarge or change the location of its operations* (d) to carry on some business which under e)isting circumstances my be conveniently or advantageously combined with the business of the company* (e) to restrict or abandon any of the ob%ects specified in the memorandum* (f) to sell or dispose of the whole, or any part, of the underta,ing* or (g) to amalgamate with any other company or body of persons. (he ourt being satisfied that the notice of the resolution was given to all persons

whose interests are li,ely to be affected by the alteration, including the Cegistrar, and having heard him and the creditors8 ob%ections, if any, may confirm the alteration wholly or in part. A certified copy of the ourt8s order together with a printed copy of the altered memorandum

must be filed within 6 months of the date of the order with the Cegistrar, who will register them and issue a certificate which will be conclusive evidence that everything has been done properly ("ection 13.1?). (he alteration of the ob%ects clause must leave the business of the company substantially what it was before with only such changes in the mode of conducting it as would enable it to be carried on more economically or more efficiently. Where the alteration involves a transfer of the registered office from one "tate to another, the certified copy of the ourt8s order confirming the change must be filed with the

Cegistrars of both the "tates who will register the same. All the records of the company will then be transferred to the Cegistrar of the "tate to which the registered office of the company has been transferred. <. Alteration of Capital "ection ?< provides that a limited company having a share

capital may, if so authorised by its articles, alter the conditions of its memorandum relating to capital by ordinary resolution in general meeting.

Articles of Association% ompanies Act defines Articles of Association of a Association as !Articles means the Articles of

ompany as originally framed or as altered from time to time in pursuance

of any previous companies law or of this Act. Articles of Association lay down the rules and the regulations of the ompany. A public

company may frame its own articles or may adopt (able A of the "chedule $ of the Act or it may adopt partly its own regulations and partly from (able A. Articles of Association of the the internal affairs of the ompany are the rules and regulations for the management of

ompany. (hey lay down the rules by which the ob%ects of the

ompany are to be carried out. (hey regulate the conduct of the shareholders, the officers and the creditors of the ompany. Articles of Association must be signed and registered by the subscribers to the

memorandum of association. Articles of Association of the ompany bind the ompany and the shareholders as if they

had been signed by each one of them. (hey bind them e)isting and the future shareholders of the ompany. Articles of Association must be printed and signed by each subscriber to the Femorandum of Association. (he signatures must be attested by at least one witness. Cotents of Articles of Association% (he Articles of Association should be paragraphed ,consecutively numbered and lay down the following rules. 1L Adoption of preliminary contracts, if any 4L Nature and value of shares and different classes of shares 6L Cegarding appointment, remuneration, powers, duties etc. &f the directors and officers of the ompany <L Cegarding rights of different classes of shareholders, :L (he rules regarding the transfer and transmission of shares,

9L Fa,ing of calls, allotment of shares, 3L >orfeiture of shares, Ceorgani=ation of share capital, 2L Cegarding the notices of the meeting, voting rights, -uorum, pro)y etc., ?L Cegarding the borrowing powers of the ompany and the mode of the borrowing, 17L Cegarding the winding up of the ompany, 11L Cegarding ,eeping of the Cegisters, 14L Cules regarding alteration of the capital etc,etc. Doctrine of +ndoor Management% (he ob%ects with which a ompany is established and the rules and regulations by which

these ob%ects are carried out are stated in the memorandum and articles of association of the ompany not only for the benefit of the members to ,now the powers of the ompany

and the limitations placed on them but also for the information to the outsiders who may deal with the ompany. (hese documents are registered with the Cegistrar of the ompanies.

(hey are public documents and hence outsider can get a copy of these documents from the office of the Cegistrar by paying a certain fee and thus is e)pected to ,now the powers of the ompany as stated in Femorandum of Association. (hus it will be observed that any person dealing with the powers and limitations of the ompany is supposed to ,now the ompany goes beyond

ompany and its officers. /ence if a

them powers conferred on it by the memorandum of association and an outsider enters into contract or the act is beyond the powers of the director, he has no right to sue the ompany. (his rule was laid down inn the case of #oyal /ritish /an0 !s. "ur1uand M1269L. $n this case the directors of the Dan, gave a bond to (ur-uand which they had power to do under articles of association provided a resolution authori=ing them to do so had been passed. $n fact no resolution authori=ing the directors to issue the bond to (ur-uand had been passed. (ur-uand sued the Dan, on the bond. $t was argued by the Dan, that since no resolution authori=ing the directors to issue the bond as re-uired by the articles had been passed by it, the suit by (ur-uand was not maintainable. $t was held by the ourt that

(ur-uand could sue the Dan, notwithstanding the fact that no such resolution had been passed by the Dan,. (he ourt further observed that an outsider was e)pected to ,now the

powers of the Dan, and not to see whether all the formalities ( in this case passing of the resolution by the Dan,)had been gone through or not. "uch formalities are matters of internal management which a stranger is bound to in-uire. $f a stranger were e)pected to ma,e such en-uiries , it would be difficult to conduct business. (he stranger should ,now whether the act committed by the person on behalf of the perform such act and whether the act is not ultra vires the ompany is normally e)pected to ompany. $f the answer is yes, it

would be -uite safe to enter into such a contract. /e need not in-uire whether a few formalities which are necessary to be gone through before the director etc. enter into contract had been gone through or not. (his rule is ,nown as +octrine of $ndoor Fanagement. Doctrine of ultra !ires% $t means !beyond the powers#. (he powers of the ompany beyond which it can not act are ompany goes

laid down in the ob%ect clause of the memorandum of association. $f the

beyond the powers conferred on it the contract or the act will be void and neither the ompany nor the outsiders will be entitled to enforce such a contract. (hus those who deal with a ompany are deemed to have constructive notice of the ompany8s powers. $f they

do not do so it is their fault. $f even after ,nowing that the act is not within the powers of the ompany, they enter into a contract with the ompany, they must suffer the conse-uences.

"uch a contract or act is not binding on the ompany. $t may be stated here that an ultra vires act committed by a ompany can not be ratified

even if all the shareholders pass a resolution to that effect. (he ob%ect of the doctrine of ultra vires is to assure the shareholders as well as creditors of the the assets of the ompany that the funds and

ompany will not be utili=ed for any purpose e)cept those stated in the ompany formed for the purpose of trading in electric goods

memorandum. >or e)ample, a

cannot manufacture electric appliances because that act will be ultra vires the ompany.

Doctrine of Constructi!e Notice% Femorandum and Articles of Association must be registered with the Cegistrar of ompanies. A ompany is registered on the basis of these documents. $t is only then that it

can be formed. After the registration of these documents ,they become public documents because any member of the public can inspect them at the office of the Cegistrar of ompanies after paying nominal fees. Any person, therefore, dealing with the ompany is

supposed to have seen them or to have notice of their contents. /e is deemed to ,now the powers of the ompany or the directors. >or e)ample, if the Articles provide that a bill of

e)change must be signed by two directors whereas the bill was signed by only one director, the holder can not claim the payment under such a bill. /e can not plead that he did not ,now the powers the directors. /e is deemed by law to have a constructive notice of the powers conferred on the directors by the Articles of the ompany. Prospectus% $t means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting offers from them public for the subscription or purchase of any shares in or debentures of any body corporate. (hus it is important that prospectus must invite offers from the members of the public to purchase its shares. $f a promoter issues the prospectus to a few friends or relatives, it is not conferred as an invitation to the members of public. Defore it is issued to the public, it must be filed with the Cegistrar. (he ob%ect of issuing the prospectus is to let the public ,now of the establishment of the ompany, its ob%ects, its prospects etc. to induce the members of the public to purchase its shares or debentures. $t is a ,ind of invitation to the public to ma,e an offer to the ompany

for the purchase of its shares and debentures. $f the invitation to purchase its shares has been sent to the e)isting shareholders, it will not amount to a prospectus. (he invitation to purchase its shares or debentures to the public or any class of public is called a prospectus.

@very public

ompany must issue prospectus though a private

ompany should not do so.$t

must be signed by all directors. A public ompany issues the prospectus so that its shares may be sold and minimum

subscription may be applied for. $f the minimum subscription is not applied for, the application money has to be returned to the applicants. $f it is not returned, the directors are personally liable to refund the application money and pay interest on the money so refundable. Contents of the Prospectus% 1L main ob%ects of the ompany 4L names, occupations and addresses of the promoters and no. shares ta,en by them 6L main classes of shares into which the share capital is divided, and the no. of shares <L -ualification shares of the directors :L date of opening of subscription list 9L date of closing of subscription list 3L amount payable as application money on allotment and on calls 2L profit and loss account for previous three years ?L rate of dividends paid for previous three years 17L statement of assets and liabilities previous three years etc.etc. (here are many points, which must be stated in the prospectus. Misleading Prospectus% $n order to sale the shares of the ompany and to collect minimum subscription the

promoter may issue a very attractive prospectus to induce the public to purchase the shares of the ompany. $t is possible that in their enthusiasm they may ma,e untrue statements in

the prospectus in which case it will be called a misleading or false prospectus. A prospectus is the basis on which the contract for sale and purchase of the shares is entered into between the ompany and the shareholders. $f there is any misrepresentation

in the prospectus a share holder has a right to legal action against the company and the

promoters. /ence it must seen that there is no untrue statements in it or no material fact has been omitted. $t is said that prospectus must tell the truth , the whole truth and nothing but truth. (he liability of the promoter or director who has authori=ed the issue of a misleading prospectus is two.fold, i,e.civil and criminal. Jnder civil liability, a person who has purchased the shares on the basis of misleading prospectus can sue to rescind the contract and return the share to the ompany and get bac, the money together with interest paid for the ompany. Jnder criminal liability, promoter or director are

purchase the shares from the

liable to imprisonment and fine or both. $t may be stated here that the original purchaser only who has the right to rescind the contract provided he had purchased the share<s on the faith of misleading prospectus. A person who has purchased the shares in the open mar,et or the subscriber to the memorandum of association have no such right. &hare Capital of the Company%