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End Term Examination

Answer Sheet

Submission towards the completion of the end term examinations for the semester (August –
December 2020)

Submitted By:

Roll Number (Numerals) 1625

Name Naman Jain
Semester V Semester
Subject Company Law I
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ANSWERS

ANSWER 1

Facts of the present case

The relevant facts that are to be emphasised upon are that
1. As the question says, Mr. Walter is the founder of the company.
2. Duffenschimt was reliant upon suggestions of Mr. Walter in various facets of working of
the company.
3. The area in which Duffenschimt was working was the same as that of Scorpion

Firstly, in order to arrive at the conclusion we need to discuss the concept of corporate veil and
what is the implication of lifting of the corporate veil.
Natural person creates a legal buffer zone, which is created due to doctrine of separate legal
existence [corporate veil], for carrying out different actions. As being a “separate legal entity”, it
will be held liable for the actions of its members.
Now after making a legal buffer zone, the scope of this entire buffer is wide, therefore, act as a
veil, protective cover, protecting the natural person from personal liability [as he is acting on behalf
of the company] as there is Principle-Agent relationship [natural person is agent of company].
For legal purposes, a necessity arises at times to destroy this bifurcation tasks of the company
[that is separate legal existence] and determine liability of the individual. To determine whether
the actions of natural person are in ordinary course of business. This is called lifting of corporate
veil.
Piercing the corporate veil means disregarding the corporate personality and looking for the real
person who is in the control of the company. In other words, where the shareholders take the
corporate personality of the company as a means to commit fraudulent or illegal acts, then the
court will break through the corporate shell and apply the principle of lifting or piercing through
the corporate veil.
Conditions when the corporate veil can be lifted
As per Cotton corporation of India ltd., v. GC Odusumath, Corporate veil can be lifted in 2
conditions:
1. Statutory Provisions
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2. If there is a compelling reason (This is decided on case to case basis)

As stated in Rajasthan v. Gotan Limestone, A person cannot do illegal work under the protection
of corporate veil. If you work in illegal manner, individual liability is definitely attracted.

Now if we see the trends where the courts have been lifting the corporate veil, we would analyse
two cases:
1. Delhi Development Authority v. Skipper Construction Company
2. State of UP vs Renusagar Power Corporation

In Delhi Development Authority case, the corporate veil was lifted and the different companies
were considered as the same company because they had common assets (which were divided into
4 different companies), and they were working in the same arena of business. Different companies
were formed in order to help the Skipper Construction (parent company) in its operations.

Similarly, in Renusagar case, Renusagar was legally considered as different entity, yet it was
considered as a subsidiary of HINDALCO because of the economic connection. All the assets
were given by HINDALCO, the power-purchase agreement was tailor-made as per the needs of
HINDALCO, and also the transactions were not being conducted at the arm’s length distance. This
being the case, they were considered as a similar legal entity.

Critical Analysis and Factual Analysis

Though there is no tangible property shared by Mr. Walter and Duffenschimt, However, there was
intangible property in the form of intellectual property, which was shared by Mr. Walter
and Duffenschimt. That is, the knowledge about the coding and software development. The arena
in which the two companies in the case are operating is such that this intellectual property holds
weightage and can be considered to be a very important asset. Therefore we can say that Mr. Walter
can be liable since he is also connected to the company Duffenschimt and therefore he has been
involved in a competing business which is against the “No compete agreement”

Another way how we can establish that Mr. Walter is connected to Duffenschimt is Control Test.
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CONTROL TEST
According to SEBI, In Shubhkam Ventures case, when you’re talking about control, it is related
to effective decision making.
There are 2 types of controls,
1. Positive Control – Power to make a decision or to initiate a resolution.
2. Negative control – This is merely a reactionary power in the form of Veto or to negate a
decision or prevent a decision from happening.
Positive control is considered as an influence or an actual control on a company while negative
control is not.
Application of the control test in facts
Though in terms of Quantitative aspect, Mr. Walter doesn’t hold any shares in Duffenschimt,
however, in terms of Qualitative aspect, Mr. Walter do have a significant influence on the
company’s decision making. As the question itself mentions, the company Duffenschimt relies on
Mr. Walter for most of the decisions. Therefore they can be said to be connected and hence
Duffenschimt is merely a facade or a buffer created by Mr. Walter to protect himself from legal
liabilities.
Some of the instances where control is visible are as follows:
1. Mr. Walter established the company Duffenschimt.
2. the directors of the company were of his choice, therefore, some control on the decision
making.
3. His opinions were given due weight, and many decisions were based on his opinion only.
4. it was the expertise of Mr. Walter only that the company was becoming successful.
5. 38% shares (Owens and Quins) plus the indirect control of the company was there in
favour of Mr. Walter.

CONCLUSION
Therefore, from the cumulative facts above, it can be said that Mr. Walter exercised control over
the company ( as per Definite Control).
Hence, The court would go for lifting of Corporate Veil and Mr. Walter would be held liable for
contradicting the No – Compete Agreement with Scorpion.
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ANSWER 2

Part (i)
MEMORANDUM OF ASSOCIATION:
According to Palmer, “Memorandum of a company contains the object for which the company is
formed and additionally the scope for the operation for a company, beyond which a transaction is
not allowed.” The ‘object’ here is a positive right of the company, and ‘scope’ is the negative right
as it limits the object of the company. It is one of the compulsory document for incorporation.
In Ashbury Railway Carriage & Iron Co. Ltd., v. Riche, [1875] it was held that “the memorandum
of association of a company defines the limitation on the powers of a company- both positive as
well as negative nature [object and scope respectively].”
It affirmatively states the extent of the legal rights endowed upon a corporation by law. Negatively,
it limits/prohibits the action of a company beyond the prescribed limit.
MoA of the company has mainly 5 clauses namely:
1. Name Clause
2. Registered Office Clause
3. Object Clause
4. Liability Clause
5. Capital Clause

ARTICLES OF ASSOCIATION
The articles of association of a company are its bye-laws or rules and regulations that govern the
management of its internal affairs and the conduct of its business. According to Section 2(5) of
the Act ‘articles’ means the articles of association of a company as originally framed or as altered
from time to time in pursuance of any previous company laws or of the present Act, i.e., the Act
of 2013.
The articles regulate the internal management of the company. They define the powers of its
officers. They also establish a contract between the company and the members and between the
members inter se. This contract governs the ordinary rights and obligations incidental to
membership in the company.
Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd.: in this case court said that,
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Articles focus on basically three things: 1) Powers of its officers, 2) establish a contract between
the company and members & between the members, 3) regulates the rights and obligations
incidental to the membership of a company.

RELATION BETWEEN MOA AND AOA

1. The articles regulate the manner in which the company’s affairs will be managed. The
memorandum defines the company’s objects and various powers it possesses, while the
articles determine how those objects shall be achieved and those powers exercised.
2. The articles of a company are subordinate and controlled by the memorandum of
association which is the dominant instrument and contains the general constitution of the
company. The memorandum is fundamental and can be altered only under certain
circumstances provided by the Act. But the articles are only internal regulations, over
which the members of the company have full control and may alter them according to what
they think fit.
3. Articles give the framework for internal management of the company, to work in
furtherance of the objects laid down in the memorandum.
4. The memorandum and articles can be read together only to remove an ambiguity or
uncertainty. If the Memorandum is perfectly clear, a doubt as to its meaning cannot be
raised by reference to the Articles; in such a case the Articles are simply inconsistent with
the Memorandum and are disregarded. [Duncan Gilmour & Co. Ltd., Re].
5. The relationship between memorandum and articles has been aptly summed up by Lord
Cairns, L.C. in Ashbury Railway Carriage & Iron Co. Ltd. v. Riche as follows: “The
articles play a part subsidiary to a memorandum of association. They accept the
memorandum of association as a charter of incorporation of the company, and so accepting
it, the articles proceed to define the duties, rights and powers of governing body as between
themselves and the company at large, and the mode and form in which business of the
company is to be carried on, and the mode and form in which changes in the internal
regulations of the company may from time to time be made. The memorandum is as it is,
the area beyond which the actions of the company cannot go; inside that area, the
shareholders may make such regulations for their own government as they think fit.”
6. The memorandum contains the fundamental conditions upon which alone the company is
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allowed to be incorporated. These conditions are introduced for the benefit of the creditors,
and the outside public, as well as the shareholders. The articles of association are the
internal regulations of the company; they only regulate the relationship between company
and the members and members inter se (i.e., amongst members themselves).
7. Memorandum lays down the area beyond which the activities of the company cannot go.
Articles provide for regulations inside that area. Thus, memorandum lays down the
parameters for the articles.
8. Memorandum of association can be altered only under certain circumstances and in the
manner provided in the Act. In most of the cases permission of the Central
Government/Tribunal is required, besides the approval of the shareholders in a general
body meeting either by way of an ordinary resolution or special resolution. Generally,
articles can be altered by the members by passing a special resolution only.
9. Memorandum of association cannot include any clause contrary to the provisions of the
Companies Act. The articles of association are subsidiary both to the Companies Act and
the memorandum of association.
10. Acts done by a company beyond the scope of the memorandum are ultra vires and, thus,
absolutely void. They cannot be ratified even by unanimous vote by all the shareholders.
But the acts beyond the articles can be ratified by the shareholders provided the relevant
provisions are not beyond the memorandum.
MoA is the end and AoA is the means to achieve it.

Doctrine of Ultra vires:

In literal terms Ultra vires means ‘beyond powers’. This concept usually comes in the matter of
administrative actions which can be administrative orders or delegated legislature. The extent of
exercising powers by the administration is determined by the Parent Act, which is allowing the
particular delegation or use of power.
Similarly, in affairs of company, the object clause of the MoA can be considered as parent
legislation. MoA provide for 2 things: Power and Limitations. Power to do achieve the objectives
of the company, and limitations with respect to how and in what manner these powers can be used.
As soon as you breach the limitations and exercise those powers beyond the limitations, the acts
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become ultra vires and becomes null and void. The powers of a company are essentially derived
from the statute constituting it and the MoA.

INTERPRETATION OF DOCTRINE OF ULTRA VIRES

In simpler terms this doctrine means that a company cannot go beyond the objects listed in its
object clause, and upon doing so, this doctrine would be attracted and the actions would be void
ab initio. These days, wide object clauses are drafted. There is a wide problem that there is a lot
of object clause alteration, and how far a company will come towards going ultra vires to their
objects clause.

 If the directors have done something ultra vires their power, the company can:
1. ratify the act and even if the director has gone beyond his power, the company can choose
to continue with the Act. For an act ultra vires the directors power, the Companies Act
doesn’t say how many votes are reqd to ratify it, it is a matter of internal management of
the company
2. the co might restrict the sphere of activity. Then the votes of the shareholders may be
required, based on majority

ASHBURY RAILWAYS V RICHE

The memorandum of association of the company thus defined its objects: "The objects for which
the company is established are to make and sell, or lend on hire, railway carriages and wagons and
all kinds of railway plants, etc.,...; to carry on the business of mechanical engineers, and general
contractors.” The company entered into a contract with Riche, a firm of railway contractors, to
finance the construction of a railway line in Belgium. The company, however, repudiated the
contract as one ultra vires. And Riche brought an action for damages for breach of contract. His
contentions were that the contract in question came well within the meaning of the words "general
contractors" and, was, therefore, within the powers of the company, and, secondly, that the contract
was ratified by a majority of the shareholders.
Verdict of the Court
the House of Lords held that the contract was ultra vires and, therefore, null and void. In substance
the judgment of Lord Cairns LC was that The subscribers are to state the objects for which the
proposed company is to be established and then the company comes into existence for those objects
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and those only. Such a statement of objects has a two-fold operation. It states affirmatively the
ambit and extent of powers of the company and it states negatively that nothing shall be done
beyond that ambit, and that no attempt shall be made to use the corporate life for any other purpose
than that which is so specified.
Factual Analysis
The terms 'general contractors' must be taken to indicate the making generally of such contracts as
are connected with the business of mechanical engineers. If the term 'general contractors' is not so
interpreted, it would authorise the making of contracts of any and every description, such as, for
instance, of fire and marine insurance and the memorandum in place of specifying the particular
kind of business, would virtually point to the carrying on of the business of any kind whatsoever
and would, therefore, be altogether unmeaning. Hence the contract was entirely beyond the objects
in the memorandum of association. If so, it was thereby placed beyond the powers of the company
to make the contract.

Attorney-General v Great Eastern Railway

In this case, the House of Lords observed that the doctrine of ultra vires, as it was explained in the
Ashbury case, should be maintained. But it ought to be reasonably and not unreasonably
understood and applied and that whatever may be fairly regarded as incidental to the objects
authorised ought not to be held as ultra vires, unless it is expressly prohibited.
Thus, a company may do an act which is (a) necessary for, or (b) incidental to, the attainment of
its objects, or (c) which is otherwise authorised by the Act.

Part (ii)
1. What is personality
The personality is the legal status which accorded on any person. It can be of varied forms in which
personality is accorded.
In 1900s the ‘Person’ was only connoted as something which would mean an individual or a
natural person/human beings. In 1868, a case came Salomon v. Salomon, (A corporation should
have two aspects, the separate entity and the mental element of its will/interests) it is about
lifting the corporate veil. A landmark case wrt to directors, the legal status of both indv and
corporations. It shook the entire legal structure of that time because till then we only know of
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natural being.
There is vertical relationship in law, one is commanding and one is following. But what about
corporations, how to ascertain their status. Therefore, the concept of legal personality arose.
‘A Corp. has a separate legal position, separate from the individuals or shareholders.’ Debate
started. Which resulted in classification of persons as natural and legal
persons/Artificial/juridical persons.
One aspect is, definition of person in legal sense, according to Francisco Carrolutti, to define
person we need three parts [triangular approach], first economic element and another is legal
element. Economic element has personal interests and the legal element has substantive rights.
Substantive rights refer to as what are his rights with respect to another person. A’s right would
form obligations for B. They are seen from the perspective of another person. In contract, if there
is a breach, your personal interest would be the fulfilment of contract, the legal element in this
would be your substantive right. As soon as you don’t have the legal recourse the economic
element is not complete.
A person becomes a legal entity when he has both the personal interest/economic and legal
element/substantive rights.
Second aspect here is that of ability to enter into a legal capacity or have a legal capacity. When
he/she has ability of exercising legal rights wrt a legal document, you can enter into a legal
document. Who can execute a will, a contract etc.
DIFFERENCE BETWEEN LEGAL PERSONALITY AND CORPORATE LEGAL PERSONALITY
This was thought that both legal and corporate personalities are similar and can be used inter-
changeably. But, there is difference between legal and corporate personality.
Earlier no such distinction existed . Difference aroused when decision of Solomon v Solomon
came. There doubt arose whether they are same or not? As it was thought that company can be
formed only by legal persons, and indv. It requires, physical state and the mental state to become
a personality. In case of company, physical matter was there, but lacking a mental faculty because
run by people inside it and don’t have mind of its own. Legal personality talked of a juridical
person can be a legal person, but now we faced a dilemma that can it be a separate personality.
Therefore, turned towards a separate personality of corporate personality. Now if we say that a
company has a separate personality of its own, not only personality but also separate existence
altogether from the persons within it. Entity signifies the physical presence only, while personality
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signifies physical with legal existence. This is the difference between separate personality and
separate entity. Without legal personality you can’t have separate legal entity.

‘A Corporation has a separate legal position, separate from the individuals or shareholders.’ The
debate resulted in classification of persons as natural and legal persons/Artificial/juridical persons.
The distribution of power between sovereign and distribution is vertical distribution, which refers
to the relationship of ‘power influence’ exerting between two parties when both parties are at
different level. It is wrt to natural persons, which is easy. But how to regulate a company, as its
just an abstract term, it can be just a building, how to make sure they follow the rules and how to
impose sanctions.
ALL corporate personalities are legal personalities, BUT NOT ALL legal personalities can be
corporate personalities.
Juridical personalities are the Genus and the corporate personalities is species. Even if the
corporate entity is separate, its base will remain same as that of legal personality.

2. Difference between Purpose theory and Bracket theory

Purpose Theory is based on the fundamental principle that corporations can be treated as persons
for certain specific purposes. It runs on the assumption that only living persons can be the subject-
matter of rights and duties, and since corporations are non-living entities, they do not have any
rights and duties. To tackle this, the theory believes that it became necessary to attribute personality
to corporation for the purpose of being capable of having rights and duties.

The Bracket theory, also called as Symbolist theory, on the other hand is associated with
the well-known German jurist Ihring. According to this theory legal personality is a symbol
to facilitate the working of the corporate bodies. According to this theory, the members of
a corporation have certain rights and duties which are given to the corporation for the sake
of carrying business transaction in a smooth manner. It is not always practicable or
convenient to refer to all the innumerable members of a corporation. A bracket is placed
around them to which a name is given. That bracket is the corporation. Only the members
of the corporation i.e. human beings are persons in real sense and thus a bracket is put
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around them to indicate that they are to be treated as one single unit when they form
themselves into a corporation.

For example, like a synonymous word is put within brackets to give an equivalent meaning,
a collective form of a group of different individuals is expressed through a corporation and
their separate identities are given a unified form. Thus incorporation is done merely for the
sake of convenience.

Similar to the fiction and concession theories, the purpose theory declares that only human beings
can be a person and have rights Entities other than human is regarded as an artificial person and
merely function as a legal device for protecting or giving effect to some real purpose As
corporations are not human, they can merely be regarded as juristic or artificial person. Under this
theory, juristic person is no person at all but merely as a “subject less” property destined for a
particular purpose and that there is ownership but no owner. The juristic person is not constructed
round a group of person but based on the object and purpose. This theory rationalized the existence
of many charitable corporations or organizations, such as trade unions, which have been
recognized as legal persons for certain purposes and have continuing fund.

The origin of purpose theory is to be traced back to Stiftung of German Law, i.e. the foundations
or the edifice upon which the structure of the juristic person can be built. Another noted jurist
called Duguit interpreted purpose theory in a different way. In his opinion, the endeavour of law
in its widest sense is to achieve social solidarity. If a given group is pursuing a purpose which
conforms to social solidarity, then all its activities falling within the purpose need to the protected
by law by conferring it legal personality

The American jurist Hohfeld has advocated the bracket theory in a different form. In his
view, corporate personality is the creation of arbitrary legal rules designed to facilitate
proceedings by and against an incorporated body in law court. Hohfeld has supported this
theory on the ground that only human beings are persons and juristic personality is mere
creation of arbitrary rules of procedure. The corporate person is only a procedural form of
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a large number of individuals which is recognised to determine legal relations among them.
According to Hohfeld, corporate personality is only a means of taking account of mass
individual relationships. He implied that unity of a corporation is a convenient way of
deciding cases by the courts of law.

Under the bracket theory, rights are not inherent attributes of the human will and that an
individual is not a subject of right by reason that he possesses a will. On the contrary, the
will is at the service of law and it is the interest of man which the law protects The Bracket
theory is often acknowledged for its availability to justify corporate personality from non-
legal facts but it has been repeatedly rejected by the courts in common law jurisdictions
because it denies the law by deducing that the only legal relation which is fixed and certain
can be discovered by removing the ‘brackets’ of the corporation and analyzing the relations
of the human beings involved.

Part (iii)
Doctrine of Constructive Notice:
Section 399 provides that the Memorandum and Articles when registered with Registrar of
Companies ‘become public documents’ and then they can be inspected by any one by electronic
means on payment of the prescribed fee.
Again, Section 17 read along with Rule 34 of the Company (Incorporation) Rules, 2014 provides
that a company shall on payment of the prescribed fee send a copy of each of the following
documents to a member within seven days of the request being made by him
1. the memorandum;
2. the articles, if any;
3. every agreement and every resolution referred to in sub-section (1) of section 117, if and so far
as they have not been embodied in the memorandum and articles.
Therefore, any person who contemplates entering into a contract with the company has the
means of ascertaining and is thus presumed to know the powers of the company and the extent
to which they have been delegated to the directors. In other words, every person dealing with
the company is presumed to have read these documents and understood them in their true
perspective. This is known as “doctrine of constructive notice”.
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This is not actual notice. By virtue of S.399, the documents such as the AoA and MoA are public,
and anyone can access the same upon payment of a nominal fee. Since it is in public domain,
everyone is presumed to have read them. This doctrine casts a burden on the outsiders to know the
actions of the company, and to know whether the company can engage in the activity. It is an
extension of ignorantia juris non excusat.
Even if the party dealing with the company does not have actual notice of the contents of these
documents it is presumed that he has an implied (constructive) notice of them. So, caveat emptor
doctrine forms the basis of this doctrine.
Example: One of the articles of a company provides that a bill of exchange to be effective must
be signed by two directors. A bill of exchange is signed only by one of the directors. The payee
will not have a right to claim under the bill.
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ANSWER 3

One of the most important features of a company is that its shares are transferable. Section 44 of
the Companies Act, 2013 deals with ‘transfer of shares’. The said provision empowers every
shareholder to transfer his shares in the manner laid down in the Articles and in accordance with
the various provisions of law. But there is a difference between transfer and transmission

DIFFERENCE BETWEEN TRANSFER OF SHARES AND TRANSMISSION OF SHARES

Transfer of shares is a voluntary act that takes place by way of contract between transferor and
transferee.
Transmission of shares means the transfer of title to shares by the operation of law.
-------
Transfer deed is executed in Transfer of shares.
No transfer deed is involved in Transmission of shares.
---------
Transfer of shares refers to the transfer of title to shares, voluntarily, by one party to another.
Transmission of shares is initiated by legal heir or receiver on the death of
the shareholder or on the account of insolvency of shareholder or liquidation
of the company.
----------
Adequate consideration is involved under Transfer of shares contract.
No adequate consideration is involved under Transmission of shares contract.
-------
In transfer of shares Liabilities of transferor cease on the completion of transfer.
In transmission of shares Original liability of shares continues to exist.
-------
Stamp duty is involved under transfer of shares and payable on the market value of shares.
No stamp duty is payable in the transmission of shares.
-------
Transfer of shares is initiated by the transferor or the transferee
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Transmission of Shares is initiated by the legal heirs or the receiver.

----------

CASE LAWS
Where a company gives reason for its refusal to register Transfer of shares, that reason alone will
have to be examined as good or bad [Karnataka Theatres Ltd. v. S. Venkatesan].
In case of Transmission of shares, a company has no powers to refuse registration
of Transmission of shares once the legal heir produces a proper legal
representation to the estate by way of will/probate/succession certificate, etc., if the
same is required in terms of the Articles, unless there is an injunction against acting
in terms of the legal representation - Anil R. Chhabria v. Finolex Industries Ltd.

Transfer of Shares
Right of a shareholder to transfer his share is always subject to provisions in Articles of Association
- Mathrubhumi Printing and Publishing Co. Ltd. v. Vardhaman Publishers Ltd.
An already existing restriction on right to Transfer of shares continues to exist even after Court
sale and a Court sale does not stand on a higher pedestal than a private sale in this regard - S.A.
Padmanabha Rao v. Union Theatres (P.) Ltd.
Merely an agreement to sell shares does not extinguish the rights of the shareholder - Martin
Castelino v. Alpha Omega Shipmanagement (P.) Ltd.
Where under a loan agreement, plaintiff transferred certain shares in favour of first defendant and
first defendant without disbursing loan to plaintiff, transferred said shares to other defendants, it
was held that merely because the consideration failed, it could not be said that the Transfer of
shares in favour of the first defendant was not a transfer and that sale by the first defendant of the
shares was sale by a person who was not an owner thereof - Jay Investments Private Limited v.
Deccan Leafine Services Ltd.
A director present at meeting approving transfers cannot seek injunction to restrain transferee’s
rights [J.K. Puri v. H.P. State Industrial Development Corpn.
Merely because, with registration of Transfer of shares, total holdings of transferee would
become dangerously close to 25 per cent, company cannot refuse to transfer [Bajaj Auto Ltd. v.
CLB].

Transmission of shares
Succession certificate is to be insisted upon by public companies for registering Transmission of
shares - Ms. Vidya Primlani v. ITC Ltd.
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Succession certificate covering shares held by a deceased member on the date of his death, would
cover subsequent issue of bonus shares and no fresh succession certificate would be required in
respect of subsequently issued shares—Arjun Kumar Israni v. Cipla Ltd.
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ANSWER 4

Both the resolutions are legal. At the outset the reasoning is that even though special resolution is
required for alteration of Articles or Memorandum of Association, however, reduction of share
capital by cancellation is treated as an exception under Section 61 and can be done by ordinary
resolution also.

SECTION 61

Change in Share Capital clause:

Section 61 provides that, if the articles authorize, a company limited by share capital may, by an
ordinary resolution [no special resolution needed] passed in general meeting, alter the conditions
of its memorandum in regard to capital [there cannot be alteration in the voting weightage of the
shareholders] so as—
1. to increase its authorized share capital by such amount as it thinks expedient by issuing fresh
shares;
2. to consolidate and divide all or any of its share capital into shares of larger amount than its
existing shares;
3. to convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully
paid-up shares of any denomination;
4. to sub-divide its shares, or any of them, into shares of smaller amount than fixed by the
memorandum, but the proportion of paid and unpaid on each share must remain the same;
5. to cancel shares which, at the date of the passing of the resolution in that behalf, have not been
taken or agreed to be taken by any person and thus diminish the amount of its share capital by the
amount of the shares so cancelled.

THE PROCEDURE OF REDUCTION OF SHARE CAPITAL (Compliance Check List)

1. The general rule laid down under the provision for alteration of articles states that of the
change in MOA shall require a special majority as defined under Section 114 of the act.
2. However, Section 61 along with Section 13(6) carves out an exception under Section 64,
which states that the alteration of share capital shall not require special resolution until the
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share capital is reduced or the change in share capital is causing change in voting
percentage.
3. If voting percentage is changing Section 66 will be applicable.
4. In case of the reduction of share capital of shareholders there is a need of judicial
intervention as there might be implication of natural justice or any law which need
interpretation.

FACTUAL ANALYSIS (CHECKING THE COMPLIANCE CORRESPONDING TO THE CHECK LIST SUPRA)

In the present case, Board of Directors passed the resolution to alter the share capital. Further the
shareholder passed the ordinary resolution with 70% votes.

1. Even though it was an alteration of MoA, it does not require the special resolution since it
is an exception carved out under Section 61 r/w Section 64.
2. In this case, the reduction of share capital was because of the refusal of Ishrat to take the
allotted shares. This scenario falls under section 61(e) which states that to cancel shares
which, at the date of the passing of the resolution in that behalf, have not been taken or
agreed to be taken by any person and thus diminish the amount of its share capital by the
amount of the shares so cancelled; there is no need of special resolution. Hence it only
required a general resolution.
3. In this case, the voting percentage is not changing, because there is no mention of voting
right in the question. Also, even if we presume there were voting rights, the shares of others
are kept in the same proportion therefore, the percentage would not change. Hence, Section
66 is not applicable here.
4. In the present case, the tribunal was indeed involved in the entire process. Therefore this
compliance is also fulfilled.

CONCLUSION
Since all the compliances are fulfilled, there is no case by which the legality of the two resolutions
could be questioned. Both the resolutions are valid and Ishrat would lose the shares allotted to him.
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ANSWER 6

Part (i)
MEANING OF SHARE
The capital of a company is divided into a number of indivisible units of a fixed amount. These
units are known as ‘shares’. According to section 2(84) of the Companies Act, 2013, a share is a
share in the share capital of a company, and includes stock. The Supreme Court of India in CITv.
Standard Vacuum Oil Co.[1966] Comp. LJ 187 observed “By a share in a company is meant not
any sum of money but an interest measured by a sum of money and made up of diverse rights
conferred on its holders by the articles of the Company which constitute a contract between him
and the Company”.
In another case Supreme Court defined a share as “a right to participate in the profits made by a
company, while it is a going concern and declares a dividend, and in the assets of the company
when it is wound up [Bucha F. Guzdar v. Commissioner of Income-tax, Bombay LR 617 (SC)].
In short, a ‘share’ does not merely represent an interest of a shareholder in a company, it carries
with it certain rights and liabilities while the company is a going concern or while the company is
being wound up. It thus represents a ‘bundle of rights and obligations’.

TYPES OF SHARES
As per the Companies Act, 2013, only two kinds of shares can be issued by a company. Section
43 of the Act provides that the share capital of a company limited by shares shall be of two kinds
only, namely :
(a) equity share capital—
(i) with voting rights, or
(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules
and subject to such conditions as may be prescribed ;
(b) preference share capital.

Equity Shares
The equity shares are those shares which are not preference shares. In other words, shares which
do not enjoy any preferential right in the matter of payment of dividend or repayment of capital,
are known as equity shares. After satisfying the rights of preference shares, the equity shares shall
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be entitled to share in the remaining amount of distributable profits of the company. The dividend
on equity shares is not fixed and may vary from year to year depending upon the amount of profits
available. The rate of dividend is recommended by the Board of directors of the company and
declared by shareholders in the annual general meeting.
Every member of a company limited by shares and holding equity share capital therein, shall have:
(a) a right to vote on every resolution placed before the company; and
(b) his voting rights, on a poll, shall be in proportion to his share in the paid-up equity share
capital of the company. As compared to this, the holders of preference shares can vote only
on such resolutions which directly affect the rights attached to the preference shares and,
any resolution for the winding up of the company or for the repayment or reduction of its
equity or preference share capital. However, if the preference dividend is not paid for two
years or more, the preference shareholders shall also get voting right on every resolution
placed before the company (Section 47).
Voting rights of a preference shareholder, on a poll, shall be in proportion to his share in the paid-
up preference share capital of the company.

Equity shares with differential voting rights

Differential voting rights ("DVR") refer to equity shares holding differential rights as to dividend
and/or voting. In India, section 43 (a) (ii) of the Companies Act, 2013 ("Companies Act") allows
a company limited by shares to issue DVRs as part of its share capital. It gives every shareholder
of a company the right to vote on every resolution presented before the company, in proportion to
his/her share of the paid-up equity share capital. However, section 47 of the Companies Act is
subject to section 43 of the Companies Act which means that companies can issue shares with
differential voting rights, notwithstanding the implicit 'one-share-one-vote' requirement under
section 47 of the Companies Act.
Equity shares with differential rights generally companies give because they want to improve the
capital base but they do not want to lose the control or management of the affairs of the company.
By issuing shares with differential voting rights, the share capital will increase but the control and
management is still remains in the hand of promoters. Hence the management of the company will
not be diluted by issuing shares with differential rights thereby helping the minority shareholders.
That is these minority shareholders do not want the change in management but still wants to
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increase the capital base. In such cases, the issue of shares with differential rights is the correct
answer.
In case the company issues shares with differential voting rights that means, generally one share
carry one voting power. But in the case of differential voting rights, one share carries more than
one voting right or carries with lesser than one voting rights.

Preference Shares
Preference shares, more commonly referred to as preferred stock, are shares of a company's stock
with dividends that are paid out to shareholders before common stock dividends are issued. If the
company enters bankruptcy, preferred stockholders are entitled to be paid from company assets
before common stockholders.
These shares come with a fixed rate of dividend and a preferential right to avail profits and claim
assets during liquidation. In fact, these shares are ranked between debt and equity in terms of
priority and repayment of capital. Like equity shares, preference shareholders are also partial
owners of a company. However, they are not entitled to voting rights and hence do not really
possess the power to control or influence company-oriented decisions. Also, shareholders do not
have a claim over the bonus shares and are a prominent preference shares and equity shares
difference.

Procedure for issue of shares

If we are talking about the process of Issue of new shares in general, then the company must follow
the following steps:
1. Register the company with the registrar.
2. Issue of Prospectus or an offer document.
‘Offer document’ is a document which contains all the relevant information about the company,
promoters, projects, financial details, objects of raising the money, terms of the issue, etc and is
used for inviting subscription to the issue being made by the issuer. ‘Offer Document’ is called
“Prospectus” in case of a public issue and “Letter of Offer” in case of a rights issue.
The prospectus is like an invitation to the public to subscribe to shares of the company. A
prospectus contains all the information of the company, its financial structure, previous year
balance sheets and profit and Loss statements etc. It also states the manner in which the capital
collected will be spent. When inviting deposits from the public at large it is compulsory for a
company to issue a prospectus or a document in lieu of a prospectus. The prospectus must be
submitted to the registrar (SEBI) before publishing. Also, providing false statements in a
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prospectus is a criminal offence. The prospectus should have the required information about the
company like:
1) Name of the Directors
2) Terms of issue
3) Minimum subscription
4) Previous years performance
5) Opening and closing dates
6) Application form and requisite fees
7) Allotment
8) Bank details for deposit.
3. Receiving Applications
When the prospectus is issued, prospective investors can now apply for shares. They must fill out
an application and deposit the requisite application money in the schedule bank mentioned in the
prospectus. The application process can stay open a maximum of 120 days. If in these 120 days
minimum subscription has not been reached, then this issue of shares will be cancelled. The
application money must be refunded to the investors within 130 days since issuing of the
prospectus.
4. Allotment of Shares
Once the minimum subscription has been reached, the shares can be allotted. Generally, there is
always oversubscription of shares, so the allotment is done on pro-rata basis. Letters of Allotment
are sent to those who have been allotted their shares. This results in a valid contract between the
company and the applicant, who will now be a part owner of the company.
If any applications were rejected, letters of regret are sent to the applicants. After the allotment,
the company can collect the share capital as it wishes, in one go or in instalments.

Part (ii)

INCORPORATION OF A COMPANY
Incorporation of a company involves the following steps
1. Promotion
2. Registration
3. Making of Memorandum and Articles of Association
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PROMOTION & REGISTRATION

Incorporation of a comapny is process by which a company is brought into existence. The persons
who conceive the company and invest the initial funds are known as the promoters of the company.
The promoters enter into preliminary contracts with vendors and make arrangements for the
preparation, advertisement and the circulation of prospectus and placement of capital.

The Process of Promotion, registration and incorporation involves following steps

1. Obtain DSC (Digital Signature) Digital signatures are required to file the forms for company
formation. The registration process is online and the forms require a digital signature. DSC is
mandatory for all subscribers and witnesses in the memorandum and articles of association
2. Apply for DIN (Director Identification Number) DIN is an identification number for a
director. It has to be obtained by anyone who wants to be a director in a company. One DIN is
enough to be a director in any number of companies.
3. Incorporating a Company via RUN (Reserve Unique Name) form: In an attempt to ease
procedures for new as well as existing companies, the Ministry of Corporate Affairs (MCA)
has introduced RUN web service for the incorporation of a company.
4. Fill Form SPICe (INC-32) Ministry of Company Affairs has introduced Form SPICe (INC-
32). It is a simplified proforma for incorporating a company electronically. It serves the
following purposes with the benefit of a single application:
i. Application for allotment of DIN (Director Identification Number)
ii. Reservation of company name
iii. Incorporation of a new company
iv. Application for PAN and TAN

Prior to its introduction, the registration of companies required the filling up of several documents,
such as the DIR–3 for acquiring the DIN (Director Identification Number), INC-1 for name, INC–
7 for getting memorandum and Articles approved, INC–22 for the registered office and finally,
Form DIR-12 for the directors. Now, all of these forms have been merged together.
The digital signature of a professional is required to file Form INC-32. A(Chartered Accountant,
Company Secretary, Cost Accountant or advocate.) professional must certify that all the
information given in the form is correct.
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5. Filing of e MOA and e AOA - e-MoA refers to an electronic Memorandum of Association

and e-AoA is electronic Articles of Association. These forms have been introduced to simplify
the process of company registration in India. Earlier they were supposed to be filed physically
however now they have been made online and merged with SPICE.

6. Issuance of Certificate of Incorporation- Once all the above documents have been filed and
they are found to be in order, the Registrar of Companies will issue Certificate of Incorporation
of the Company. This document is the birth certificate of the company and is proof of the
existence of the company. Once, this certificate is issued, the company cannot cease its
existence unless it is dissolved by order of the Court. It is also the conclusive proof of the
incorporation of the company.

7. Commencement of Business- A private company or a company having no share capital can

commence its business immediately after it has been incorporated. However, other companies
can commence their activities only after they have obtained a Certificate of Commencement
of Business.

MAKING OF ARTICLES OF ASSOCIATION

The Articles of Association (AoA) contain the rules and regulations of the internal management
of the company. The AoA is nothing but a contract between the company and its members and
also between the members themselves that they shall abide by the rules and regulations of internal
management of the company specified in the AoA. It specifies the rights and duties of the members
and directors. The provisions of the AoA must not be in conflict with the provisions of the MoA.
In case such a conflict arises, the MoA will prevail.

Making Memorandum of Association

It is one of the compulsory document for incorporation. Whenever we are making an
artificial/juridical person and when we are then making it liable for all the things.
There are two groups: Owner group and control group. Control group is the one that makes the
decision and the owner group who gets blame and credit of those decisions. Now both the groups
would have conflicting interests. Profit maximization would be the motive of owner group and
control group might want to expand the business.
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So, the shareholders/owner group would want a safe passage, wealth maximization. This creates a
conflict between these two groups, as the control group is making decisions. If no restriction is
made on the control group, then they may act in whimsical manner contradictory to owners’
interest.
So, the need was felt of restricting them and creating the bracket [a specific idea or motive for
which the company is estb]. So, the purpose of the company is limited by this bracket. We are
creating a charter laying down the basis and objectives for which the company is estb and these
objects should not be breached in any circumstances. This document is to be created at the initial
stage of incorporation.
It is further divided into five clauses. It is defined under Section 2(56) and discussed under Section
4 of the Act.
1. Name Clause - The name clause requires company to state the legal and recognized name
of the company. Company is allowed to register a company name only if it does not bear
any similarities with the name of an existing company
2. Registered Office Clause- The Registered Office of a company determines its nationality
and jurisdiction of courts. It is a place of residence and is used for the purpose of all
communications with the company. Details regarding it and the process regarding its
change id given in Section 12 of the Act.
3. Objects Clause- The Object Clause is the most important clause of Memorandum of
Association. It states the purpose for which the company is formed.It has been mentioned
and defined under Section
4. Liability Clause - The Liability Clause provides legal protection to the shareholders by
protecting them from being held personally liable for the loss of the company. A company
can be limited by shares [Section2(22)] or guarantee [Section 2(21)]
5. Capital Clause - It states the total amount of share capital in the company and how it is
divided into shares. The way the amount of capital is divided into what kind of shares. The
shares can be equity shares or preference shares.

Subscription Clause- The Subscription Clause states who are signing the memorandum. Each
subscriber must state the number of shares he is subscribing to. The subscribers have to sign the
memorandum in the presence of two witnesses. Each subscriber must subscribe to at least one
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share. A private Company must have at least 2 members and a public company must have at least
7 members at the time of incorporation.