Unit II: Incorporation

BY

DR. NIKHILA SHANKAR TIGADI

ASSISTANT PROFESSOR

RAMAIAH COLLEGE OF LAW

BANGALORE
Procedure for Incorporation

Procedure for
Incorporation

Pre-
Incorporation
incorporation
Procedure
formalities
Pre-incorporation formalities

 Type of Company
 Preparation of documents
a) MOA & AOA
b) Declaration by professionals
c) Affidavit

d) Address for communication

e) Information of every subscriber & directors
 Acquiring Director Identification Number
 Acquiring Digital Signature Certificate
Procedure for Incorporation
Before 2016
Different forms were filed to
incorporate the company
such as :
- INC 1 (Reservation of name)
- INC 7 (Application for
registration for companies
other than OPC),
- INC 2 Application for
registration of OPC
In 2016 Since 2020
- MCA launched
SPICe(Simplified Performa for
Incorporation of Company
Electronically), a single uniform - MCA launched SPICe plus, a
operating system new web form since Feb 2020.
- Uniform Applications can be - SPICe plus is divided into two
made under SPICe before forms: Part A (Reservation of
registrar by filling INC 32 (it Name) & Part B (Incorporation
omitted INC 7 & 2) of Company)
- e-MOA & e-AOA under INC 33
& 34 were to be filled along
with other documents
- ROC will issue COI & CIN
 Incorporation of
Company
Procedure for
incorporation Step 1: File INC 1
Before 2016 Step 6: Issue of
and Reserve the
Certificate of
name and file e-
incorporation & CIN
forms with in 20days

Step 5: Approval of
Step 2: file other
application for
forms: INC 7 & INC 2
incorporation

Step 3: filing of
Step 4: Payment of documents viz.,
registration fees MOA, AOA, INC 8, 9,
10, 22, DIN 12
 Incorporation of
Company
Procedure for
incorporation in Step 1: Through RUN
2016 Step 6: Issue of
application
Certificate of
company Reserve
incorporation & CIN
the name

Step 2: file INC 32

Step 5: Approval of
along with INC 33 &
application for
INC 34 through
incorporation
SPICe

Step 4: Payment of Step 3: filing of other

registration fees documents
 Incorporation of
Company
Step 7: Issue of
Certificate of Step 1: verify
Procedure for incorporation & whether the
incorporation CIN company has
since 2020 reserved the
Step 6:once he name before
proceeds further 23rd Feb, 2020.
other linked form
requiring eMOA,
eAOA and other Step 2:If reserved
documents has to be before 23rd Feb,
filed then such company
shall continue the
Step 6:SPICe+ portal process in their
will than display two logged in portal.
options New
Application &
Existing application
Step 3: If not
reserved, than
Step 5: so a person they can make
willing to form a application in
company can file an Step 4:SPICe+ web SPICe+
application has two form are divided into
option either to file two parts: Part A
application to reserve (Reservation of
name only or apply for Name) & Part B
both simultaneously
(Incorporation of
Company)
Recent Changes in the Web forms for
Incorporation of Company
2018
• Simplified Performa for
Incorporating the Company
Electronically (SPICE)
• A single application could
provide three services viz.,
Name reservation,
Incorporation of Company,
Allotment of DIN
2020
• SPICE+, Upgraded version of
SPICE
• This portal provides 10
services such as name
reservation, incorporation,
DIN allotment, mandatory
issue of PAN, TAN, EPFO, ESIC,
Opening of bank account,
GSTIN
Certificate of Incorporation & its Effect

 Certificate of Incorporation of the birth certificate of the Company.

 Company becomes the legal person, once the Certificate of Incorporation is issued.
 Section 9 Companies Act, 2013
“From the date of incorporation mentioned in the certificate of incorporation, such
subscribers to the memorandum and all other persons, as may, from time to time,
become members of the company, shall be a body corporate by the name contained
in the memorandum, capable of exercising all the functions of an incorporated
company under this Act and having perpetual succession and a common seal with
power to acquire, hold and dispose of property, both movable and immovable,
tangible and intangible, to contract and to sue and be sued, by the said name”.
Conclusiveness of Certificate of
Incorporation (COI)

- issue of COI is not a conclusive evidence of everything done prior to the

incorporation of the company.
- Punishment for such false statement (Imprisonment of six moths which can be
extended to up to 10 years and with the fine which shall include the amount
involved in the fraud and extendable up to there times the amount involved in
the fraud)
- Besides, the Tribunal may also if situation warrants:
i. Direct the removal of the name of the company from the register of the
companies
ii. Direct the liability of members is unlimited
iii. Pass an order for winding up of the company etc.
Commencement of Business

 The company cannot commence the business on its incorporation

 It has to acquire the certificate of commencement of business in form INC 20A -
(Companies (Amendment) Act, 2019)
 Section 10A requires the director of the company to make the declaration with in 180
days of incorporation of the company to the effect that the
a) all the subscriber to the MOA have paid the agreed value of shares
b)The registered office is verified.
 Non- compliance: the registrar can strike the name of the company.
 Also, under Section 12 (9) registrar can physically verify the registered office of the
company.
 Alteration of MOA

 Section 2(56) of the Companies Act 2013 includes the altered articles.
 Section 13 of the Companies Act, 2013 provides the detailed procedure for the amendment of the MOA.
1. Alternation of Name Clause:
Requirements:
 Pass a special resolution at a general meeting of company
 Approval of Central Government. However, if the alteration is only of word ‘Pvt Ltd’ or ‘Ltd’, no such approval of
central government is required.
Procedure:
 Company shall file an application for availability of name through RUN feature of MCA portal.
 On confirmation of name, the company, if listed, shall seek the approval of Stock Exchanges by submitting the
certificate from CA.
 The company shall then file with the registrar
a) The special resolution passed by the company.
b) The approval of the central government.
 Issue of COI by Registrar.
Change of Name on a direction of the Central Government
 If the central Government is of opinion that the name of the company is identical or resembling too nearly to the
already existing company. Or
 If a registered proprietor of a trade mark files an application before the central government within 3 years of
incorporation of company, stating that the name is identical or resembling too nearly to their trade mark
 cGMP Pharmaplan (P) Ltd v Regional Director, Ministry of Corporate Affairs (2011)
Effect of Change of Name :
1. Not affect the any right/ obligations of the company
2. If any new proceedings are initiated against the company in its old name post the change of the company,
it will then be considered as a curable defect and plaint can be amended to that extent.
3. Constitution of company does not change.
2. Change of Registered Office
Change of RO from one
premises to another
premises in the same city,
town or village
1. Pass a resolution of the
board of directors
2. Inform the registrar
about the change of
name within 15 days of
such change
Change of RO from
one city, town or village
to another in the same
state
1. Pass a special resolution at
the general meeting of
shareholders.
2. Confirmation of Regional
Director
3. File the copy of the same with
the registrar within in 60days of
such order, who shall register the
same within next 30 days of filing
of such confirmation.
Change of RO from one
state to another state
1. Pass Special resolution
2. Settlement of list of creditors
including debenture holders
3. Obtain the consent of the
creditors
4. Obtain confirmation from the
central government
5. Notice to the registrar of states
within 30 days of the change.
 Confirmation of Regional Director: Application shall be filed in INC 23 along with the payment of fee & by
submitting certain documents such as:
a) Board Resolution
b) Special resolution of the members of the company
c) A declaration by KMP or any two directors authorised by the board stating that the company has not defaulted
in payment of dues to its workman and has also the consent of creditors for shifting the Registered office.
d) Declaration stating that it will not seek a change in the jurisdiction of the court where cases for prosecution are
pending.
e) A company shall also intimate the Chief secretary of the state that shifting of RO will not affect the interest of
employees.
- Once these documents are filed along with the e-form, the Regional Director shall communicate the
confirmation within a 30 days from the date of the receipt of application.
- Default: company & every officer will be punished with the fine of 1000Rs each day till default continues not
exceeding 1 lakh, whichever is lower.
 Change of Name from one State to
another State
Obtaining the confirmation for the central government (Rule 3, The Companies (Incorporation)Rules, 2014
r/w MCA Notification, 2017)
1. Application shall be filled in INC 23 before the central Government along with the prescribed fees and
accompanied by certain documents:
a) Copy of MOA with the proposed changes
b) Copy of the Minutes of the general meeting at which resolution was passed.
c) Copy of board resolution
d) copy of the list of creditors and debenture holders along with their details
e)Declaration by the Company Secretary & atleast two directors of which one shall be a Managing director
stating that:
i. They have made full enquiry into the affairs of the company & list of the creditors and the debts mentioned
therein are correct and there are no other debts/ claims against the company.
ii. No employee is retrenched in the process and the same is informed to the chief secretary of the government.
iii. A duly authenticated copy of the list of creditors is maintained at the Registered office of the company for
inspection
iv. The company has issued the advertisement before one month of filing of such application before the central
government in the prescribed form.
v. Objections, if any, received and response given are recorded and are duly attached with the application.
2. The central government on receiving the applications finds any objections can hold the hearing:
i. if consensus are reached, would direct the company to file the affidavit to record the same, and
thereupon pass the order approving the change of RO within 60 days of filing an application.
ii. If the consensus are not reached, the company will be directed to give the affidavit reserving the rights
of the objector to pursue legal remedy even after the office is shifted and thereupon the CG can pass
necessary order.
3. If no objections are received, the CG may pass order within the 15 days of filing such application.
3. Alteration of Object Clause

Alteration of Objects by a company which has not issued the prospectus

• A company can pass a special resolution and change its object clause

Alteration of Objects by a company which has not issued the prospectus

• Pass a special resolution

• Notice of resolution altering the objects shall contain the details such as total money
received, total money utilized for the objects stated etc.
• Advertisement of the resolution in newspaper and also on the website
• The dissenting shareholder shall be given the object to exit
• file an application before the registrar, who shall certify the same within 30 days of
filing of the special resolution
 4. Alteration of Liability Clause

 No legal provision to amend the liability clause

 The members can increase their liability by subscribing for their liability.
 In case of unlimited liability, the liability clause can be amended to limit the liability of the member.
5. Change of Capital Clause (Section 61)
A Company can pass a resolution in general meeting to:
1. Increase the authorised capital
2. Consolidation & sub-division of shares
Ex: 10 Shares of face value of 10Rs is issued, the company can consolidate the shares into one share worth
of 100Rs
3. Conversion of Shares into stock & Vice versa
4. Diminution of Share Capital.
Memorandum of Association

Meaning & Definition of MOA

 “Memorandum” means the memorandum of association of a company as originally framed or as altered
from time to time in pursuance of any previous company law or of this Act- Section 2(56) of Companies
Act, 2013.
 According to Palmer, “the memorandum of association is a document of great importance in relation to
the proposed company. It contains the object for which the company is formed and identifies the possible
scope of its operations beyond which its actions cannot go. It defines as well as confines the powers of the
company. If anything is done beyond these powers, that will be ultra vires the company and so void ”.
 Lord Cairns in Ashbury Railway Carriage & Iron Co. Ltd. V. Riche (1875) observed that : “The MOA of
a company defines the limitation on the powers of the company... It contains in it both that which is
affirmative and that which is negative. It states affirmatively the ambit and extent of vitality and power
which by law are given to the corporation and it states, if it is necessary to state, negatively, that nothing
shall be done beyond that ambit...”
 MOA is a primary document also sometimes called the Charter or
Constitution of company.
 Purpose of MOA:
•To enable the shareholders,
creditors etc. to know what
are the permitted range of
activities of the company

•Inform the shareholders the

purpose for which their
money is likely to be used.
Form of MOA

 Section 4(6) r/w schedule I of the Companies Act, 2013 prescribes the specific form for MOA

Form Type of Company

Table A MOA of a Company Limited by Share Capital
Table B MOA of a Company Limited by Guarantee
Table C MOA of a Company Limited by Guarantee &
having Share Capital
Table D MOA of an Unlimited Company not having Share
Capital
Table E MOA of an Unlimited Company not having Share
Capital
Contents of MOA (Section 4)

 The MOA of the Company shall contain six clauses in case of companies other than
OPC and seven in case of OPC.
Name Clause [Section 4(1)(a)]

The Registered Office Clause [Section 4(1)(b)]

The Object Clause [Section 4(1)(c)]

The Liability Clause[Section 4(1)(d)]

The Capital Clause [Section 4(1)(e)]

Association Clause [Section 4(1)(e)]

Nominee Clause [Section 4(1)(f)]

1. Name Clause (Section 4(1)(a))

 This clause contains the name of the company.

 This clause intends to establish the separate identity amongst the companies.
 Selection of name of the company
a) Use of words ‘Ltd’ or ‘Pvt. Ltd’ at the end of the name of the company.
b) The name shall not be identical or resembling too nearly to the already existing
name of an company;
c) Use of names which will constitute an offence under any law or considered
undesirable in the opinion of central government;
d) The name used shall not give the impression that the company is connected with
the Government.
Identical or Resembling names

 Words like private, Pvt. Ltd, (P), OPC Pvt. Ltd etc. are the only difference found in the
name of the proposed company. For Ex: Tata Steel Pvt Ltd as Tata Steel (P).
 Use of Plural or Singular form of words for ex: Green Technology Ltd as Green
Technologies Ltd.
 Difference is only in respect of type & case of letters, spacing between letters,
punctuation marks and special character For ex: GMR Pvt Ltd as G.M.R. Pvt Ltd.
 Use of different Phonetic spelling etc., for ex: Bee Kay Ltd as B K Ltd.
 Use of host names such as ‘www’ or a domain extension such as ‘.net’, ‘org’ for ex:
Ultra Solutions Ltd as Ultra Solutions.com Ltd.
 The order of words in the names are the only difference For ex: Ravi Builders &
Contractors Ltd as Ravi Contractors & Builders Ltd.
Name used constitute an offence or
considered undesirable in the opinion
 Undesirable name in the opinion of the Central Government:
i. Use of name constitute an offence. For example: use of name which is offensive to a
particular community.
ii. The name use violates section 3 of the Emblems & Names (Prevention & Improper
Use) Act 1950. i.e use of Registered Trade Mark without the consent.
 Case laws:
i. Ewing V. Buttercup Margarine Co. Ltd. (1917)
Buttercup Margarine Co. Ltd. used as Butter cup Diary Co.
ii. Executive Board of Methodist Church in India V. UOI (1985)
‘Methodist Church in Northern India Trust Association (P) Ltd’ as ‘Methodist Church in
India Trust Association’
 Publication of Name

 Section 12(3) provides that the company shall publish the name of the company in
following manner:
a)Paint or affix its name & address of its registered office.
b)The company shall also have its name engraved on its seal
c)Print the name in all the business letter, bill heads etc.
d)Print the names on the negotiable instruments such as bill of exchange, cheque etc.
e)Publish its name and other details on the website of the company.
 Penalty: Company & every officer who is default shall be punished with the penalty of Rs.
1000/- for every day till the defaults continues but not exceeding 1 lakh rupees.
 Further, every officer who signs the Bill, cheque without the name of the company shall
be made personally liable to the holder of such bill, cheque etc.
 2. The Registered Office Clause
(Sec. 4(1)(b)

 This clause contains the state in which the registered office of the company is situated.
 It is at this place the Statutory documents of the company are kept and all the necessary
communications will be made.
 It should have the registered office with in 30 days of incorporation and the same shall also
be verified within stipulated time by filling certain document such as the tittle deeds of the
company, rent agreement, authorization from owner, proof of evidence of utility services
such as electricity bill, telephone bill etc. - section 12(2) of Companies Act, 2013
 Recent Changes: mandatory to fill ACTIVE e-form, failing which invokes the punishment
under section 12(9) of Companies Act, 2013.
3. The Object Clause (Sec 4(1)(c))

 This clause defines the object of the company and indicates the sphere of its
activities.
 Prohibits any activity beyond the objects. However, permits the activities which are
incidental activities.
DOCTRINE OF ULTRA VIRES
 The company incorporated cannot go beyond the powers expressly or impliedly
conferred by the statute of MOM. Any act done would be ultra vires and void.
 This rule was first laid down in Ashbury Rly. Carriage & Iron Co. V. Riche (1875)
 Lakshmanswami Mudalaiar V. LIC (1963)
Effect of Ultra Vires

i. Void ab initio
ii. Injunction
iii. Personal Liability of Directors
iv. Acquisition of Property that is ultra vires
v. Directors personally liable to third parties.
4. Liability Clause (Section 4(1)(d))

 This clause States the liability of the members.

Company with limited Liability Unlimited liability

1.Company limited by shares

2.Company limited with the
State that the liability of the
guarantee
members is unlimited
3. Company with limited by
shares & Guarantee
5. Capital Clause (Section 4 (1)(e))

 This clause shall indicate the amount of the capital with which the company is
registered.
 Also known as authorised capital, nominal capital or registered capital.
 If a company is registered with the share capital, than it shall state the amount of the
share capital and the division thereof into the shares . For ex., if the authorised capital is
1000/- than it shall state the division of 1000 into shares as 10 (value of shares) X 100
(shares)
 In case of public company, it shall specify the nominal value of both the shares :
preference shares and equity shares. For ex: company may specify the nominal value of
preference share is 100 Rs. and equity share is 10 Rs.
6. Association or Subscription clause
(Section 4(1)(e))

 The MOA, at the end shall contain the declaration of each subscriber to the extent that
that what is the number of shares subscribed by each subscriber against their respective
names.
 OPC: it shall make the declaration that the sole member takes all the shares of the
company.
 Statutory requirements for subscribing MOA
a)Signing of the MOA
b)Each subscriber shall take atleast one share
c)Each subscriber shall state the no. of shares he takes against his name.
7. Nominee Clause (Section 4 (1)(f))

 This clause shall state the name of the person who will become the member of the
company, in the event of death of the sole member.
 Articles of Association

 Articles of Association contains the bye-laws or rules and regulation that governs the
internal management of the company.
 Articles means, ‘the Articles of Association of a company originally framed or as altered
from time to time in pursuance of any previous company law or of the present company
law’- Section 2(5)Companies Act, 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 & the members &
between the members inter se. This contract governs the ordinary rights & obligations
incidental to membership in the company.- Naresh Chandra Sanyal V. Calcutta Stock
Exchange (1971)
Relationship B/W MOA & AOA

 MOA defines the company’s object and confers various powers on the company & the
AOA determines how those objects shall be achieved and those powers shall be
exercised.
 Articles of a company are subordinate & controlled by MOA which is the dominant
instrument & contains the general constitution of the company. The MOA is the
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. Care
has to be taken to see that the regulations provided for in the articles do not exceed
the power of the company as laid down by its memorandum. – Ashbury V. Watson
(1885)
 Articles going beyond the MOA are ultra vires. – Shyam Chand V Calcutta Stock
Exchange (1947)
 Subject to the rule that the MOA prevails in the event of a conflict, the MOA & AOA are
contemporaneous documents, must be read together, and ambiguity or uncertainty in
the one may be removed by reference to the other.- Re, South Durham Brewery
Company (1885)
 “The articles play a part subsidiary to a memorandum of association. They accept the
MOA 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
were… 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.”-
Ashbury Carriage & Iron Co. Ltd. V Riche (1875)
Distinction between MOA & AOA

 MOA contains the conditions for the benefit of the creditors, shareholders and outsiders.
While, the AOA are the internal regulations of the company.
 MOA lays down the area beyond which activities of the company cannot go. AOA
provides the regulations inside that area. Therefore, MOA lays down the parameters for
the articles.
 MOA can be altered under certain circumstances and in the manner provided in the
Act i.e. by passing ordinary resolution or special resolution. AOA can be altered by the
members by passing a special resolution only.
 Acts beyond MOA are void and cannot be ratified. While, the acts beyond articles can
be ratified provided the provision so made is within the ambit of MOA.
Model of AOA

 Sec 5 r/w Schedule I of Companies Act, 2013 prescribes the following form for AOA:
Table F : Company Ltd by shares
Table G : Company Ltd by Guarantee & having a share capital
Table H : Company Ltd by Guarantee & not having a share capital
Table I : an Unlimited company & having a share capital
Table J : an Unlimited company & not having a share capital
 Contents of AOA

 Rules and regulations for the internal management of the company such as:
a) Shares and their value and their division into equity and preference shares.
b) Rights of each class of shareholders
c) Procedure relating to the allotment of shares, making of calls and forfeiture of shares.
d) Increase, alteration or reduction in share capital.
e) Rules relating to transfer or transmission of shares and the procedure to be followed for the
same.
f) Appointment, remuneration, powers, duties etc., of the directors and officers of the company.
g) lien of the company on shares allotted to the members
h) Constitution and composition of Audit committee, remuneration committee, CSR committee.
i) Procedure for conversion of shares into stock and vice versa. etc.,
Additional matters

 Provisions for entrenchment i.e. AOA may provide that certain provisions of the AOA will
not be altered by passing a Special resolution they will require a more elaborate
procedure to be followed.
 In case of Unlimited Company & Company Ltd by Guaranties, the regulation of AOA
require the company, to mention the number of member with which the company is
proposed to be registered.
 AOA of a Private Company shall contain three restrictions. Restriction on the right to
transfer shares, limitation on the number of members and prohibition on public issue.
Signature on AOA – Rule 13 of the Companies (Incorpoartion) Rules, 2014
- Each subscriber shall sign AOA in the presence of the witness, who shall also attest his
signature later.
 Alteration of AOA (Section14)

 A company can alter its articles of association by passing a special resolution.

Procedure for alteration of AOA:
a) The proposal has to be approved by the BOD. Thereupon, the Board will fix the date and time of
the general meeting. It also approve the draft notice for the meeting and authorize the secretary
to convene the general meeting.
b) The authorised secretary will convene the meeting on the scheduled date, as fixed by the BOD, in
which the special resolution will be passed to amend the AOA of company.
c) A copy of resolution shall be filed with the registrar within 30days of passing the resolution- Sec 117
of the Companies Act, 2013.
d) If the alteration of the company has the effect of converting of public company into private
company, the company shall seek the approval of tribunal.
e) Within 15days of obtaining the approval of the tribunal, printed copy of altered articles shall be
filed with Registrar.
 If the public company is a listed company, then six copies of amended articles shall be
sent to the concerned stock exchange, on which the shares of the company are listed.
 Alteration should be noted in every copy of the AOA and the articles issued after the
date of the alteration should be in accordance with the altered articles.
 Default- company and every officer of the company in default shall be punished with
the fine of Rs. 1000 for each copy so issued.
Limitation on power to alter Articles
a) The alteration must not exceed the powers given by the MOA or be in conflict with any
provisions of the MOA.
b) The alteration must not be inconsistent with any provisions of the Companies Act, 2013 or
any other statute. For example: Section 67, company cannot purchase its own shares.
c) Alteration should not be inconsistent with any alteration made by the tribunal. For ex: under
section 242 of C.A. 2013, Tribunal has the power to make an order with respect to any
alterations in the MOA of the company.
d) The altered articles must not include anything which is illegal or opposed to public policy or
unlawful.
e) The alteration must be bona fide for the benefit of the company as a whole and if made will
not be bad in law, although it causes hardship to an individual shareholder Allen v Gold
Reefs of West Africa Limited (1900)
f) The alteration must not constitute a fraud on the minority by a majority. Brown British Abrasive
wheel Co. (1919)
g) An alteration of articles to effect a conversion of a public company into a private company
cannot be made without the approval of the tribunal. – Section 14, Companies Act 2013
h) A company cannot justify breach of contract with the third parties or avoid a contractual
liability by altering articles. – British Syndicate Ltd. V Alperton Rubber Co. (1915)
j) The amended regulation in the articles of association cannot operate retrospectively, but
only from the date of amendment.
Effect of Altered articles

 Alteration binds the articles in the same way as original articles.

 Section 10 provides that the articles binds the company and members in the same
way as if they agreement is signed by the company and members, as they do sign in
the originally framed articles.
Binding effect of MOA & AOA

 Section 10 provides that the MOA and AOA, when registered, binds the company and its
members as if they have signed the personal agreements between themselves to
observe all the provisions of the MOA and AOA.
 The company will be bound to the members; the members will be bound to the
company; and the members are bound to the other members to whatever stated in the
MOA & AOA.
 The legal effect of the MOA & AOA can be studied under following heads:
1. Members bound to the company
2. Company bound to the members
3. Members bound to the members
4. Company and the outsiders
1. Members bound to the Company
 Each member is bound by the provisions of articles and memorandum of the company. For ex:
right of lien on members share or right to forfeit the shares on non payment of calls.
a) Malleson V. National Insurance & Gurantee coprn., (1894)
b) Borland’s Trustee V. Steel Bros. co. Ltd (1901)
c) V. B. Rangaraj V V. B. Gopalakrishnan (1992)
2. Company bound to Members
 A company is bound not only to the ‘members as a body’ but also to each individual members.
 Each individual member has a right to restrain the company from entering any ultra vires
transaction. He can also require the company to fulfill all the obligations stipulated under the
MOA& AOA such as right to receive the notice or right to vote in the meeting etc.
a) Wood v. Odessa Waterworks (1889)
3. Members bound to members
 The AOA of a company binds the members inter se i.e., one member can bind another
members with respect to the rights and duties arising out of the articles. For ex: obligation
to offer the shares to the directors and directors were under the obligation to purchase the
share at a fair value.- Rayfield V Hand (1960)
 It impliedly binds the members because there will be no express provision to that extent in
the AOA of a company. However, if the member violates the right of another member, it is
a company which files the suit against the offender and protects the interest of the
aggrieved member.
4. Company & outsiders
 i.e. whether the company or members are bound to the outsiders?
 No, AOA do not confer any power on the outsider to enforce the contract against the
company or members, even though his name is mentioned in the articles.
 The outsider being the non-member cannot bind the company for whatever stated in
the articles.
a) Major- general Shanta Shamsher Jung Bahadur Rana V Kamani Bros. (P.) Ltd.
b) Eley v. Positive Govt. Security Life Assurance Co. (1876)
Doctrine of Constructive notice

 Section 399 provides that MOA and AOA once registered becomes the public documents
and they can be inspected by any one by electronic means on payment of the prescribed
fee.
 Company shall also send the copy of MOA, AOA etc., on payment of prescribed fees within
seven days of the request being made by the member. – section 17 r/w rule 34 of the
companies (Incorporation) Rules, 2014.
 Default: failure to supply the same will make the company and every officer in default liable
to fine of Rs.1000 per day till default continues or 1 lakh rupees, whichever is less.
 In view of these provisions, there is a presumption under the law which contemplates that
any person who enters the 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 the power is
delegated to the directors. This is known as doctrine of ‘constructive notice’.
Doctrine of Indoor Management

 The doctrine of constructive notice caused inconvenience in business transactions

especially where the directors or other officers of the company were empowered
under the articles to exercise certain powers with the prior approval of shareholders.
 The investors, vendors or outsiders would dare ask the directors whether directors have
actually obtained the shareholders approval or ask them to produce the copy of
approval. Doing so would make them loose a business transactions.
 Since there was no means to ascertain whether the necessary approval has been
obtained, the new rule of doctrine of indoor management was evolved which
provides that, if a director is entering any contract which requires prior approval then
the person entering contract can presume that the director has obtained the same
and thus stands valid contract, even though the director has not obtained the
required approval.
 This rule was first laid down in the case of Royal British Bank V. Turquand (1856)

Royal British Bank • AOA of the company authorised the directors of the company to
V. Turquand (1856) borrow money from time to time by issuing bonds but only by
passing a resolution in the general meeting. The directors issued a
bond to Turquand without passing the resolutions in the general
meeting.
• The question then arose whether the bond so issued was valid and
company can be made liable for the same? The Court held that
the company was liable.
Official Liquidator, The lenders to a company should acquaint themselves with MOA &
Manasube & Co. AOA, but they cannot be expected to embark upon an investigation
(P.) Ltd V as to legality, propriety and regularity of acts of directors.
Commissioner of
Police (1968)
Exceptions to the Doctrine of Indoor
Management

 In short, under the doctrine of Indoor management, outsider who believes that the
officer of the company who is dealing as per the articles is protected. However, under
certain circumstances the outsider is not entitled to claim this relief under this doctrine.
They are as follows:
a) Where the outsider had knowledge of irregularity
Howard v. Patent Ivory Co.
b) No knowledge of articles
Rama Corporations V. Proved Tin & General Investment Co (1952)
c) Forgery
Ruben V Great Fingal Consolidated (1906)
d) Negligence
B. Anand Behari Lal V. Dinsaw & Co. (Bankers) Ltd (1942)
e) Oppression

Dr. Nikhila Shankar Tigadi

 Prospectus

Private
Public
Company-
Company-
Private
Prospectus
placement
 Definition of Prospectus

 Prospectus is a document which invites the subscription from the public.

 Section 2(70) of Companies Act, 2013 defines prospectus as:
"prospectus" means any document described or issued as a prospectus and includes a red
herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any
notice, circular, advertisement or other document inviting offers from the public for the subscription
or purchase of any securities of a body corporate;
Condition for Public Offer: when a company makes an
1) offer to allot or invites subscription or
2) Allots or enters into an agreement to allot securities to 200 or more person in a financial year
- Whether the payment is received or not
- Whether the company intends to list the securities or not
- Offer will be deemed to public offer.
 Sahara India Real Estate Corporation Ltd V SEBI (2012)
In this case, Sahara company had issued Optionally fully converted debentures (OFCD)
to more than 49 members (now 200 members) without complying the public issue norms.
Court held: It was a public issue and company was asked to refund the money collected
to the public.
 Nath Sanyal V Kali Kumar Dutt (1925)
A company issued an advertisement in the newspaper stating that ‘some shares are still
available for sale according to the terms of the prospectus of the company which can be
obtained on application’.
Issue Raised: whether the advertisement is a prospectus?
Court held: it was an offer made to the public to purchase share.
Offer is not a Public offer

 Where an offer is available for subscription or purchase by a person other than those
receiving the invitation.
 Offering of shares to kith & kin of a director is not an invitation to public- Nash v Lynde
(1929) In this case, a document containing a particulars of the company where marked
strictly confidential. The same was sent by MD to Co-director, who in turn sent to his
relatives.
 An offer to shareholders of an existing company in a new company, in exchange for
their shares held by them in existing company is not an offer to public. (Govt. Stock
Securities Investment Co. Ltd V. Christopher, 1956) In this case, Company ‘A’ was
formed new company called ‘B’. An offer was made through the new company ‘B’ to
the shareholders of ‘A’ company to purchase shares in new company, inexchange of
their shares in the company ‘A’.
 Contents of Prospectus (Section 26)

General
Section 26 r/w Information
SEBI
(ICDR)Regulations
2018 inclusive of Financial
Prospectus
its latest Information
amendment in
2020
Statutory
Information
1. General Information

• Name & • Statement • Main object • Risk

address of of BOD of existing • Management
RO/CFO,CS, • Consent business Perception &
Auditor, • Main object trading plan
underwriters • Authority
and of new • Progress
• Date of O/C of business • Deadline
issue resolution
and • Pending Litigation
• Pricing & location against the
Quantum promoters,
• Procedure & directors etc., in
time schedule the last 5 years.
• of issue and
allotment
2. Financial Information

 Auditor report on Profit and Loss account of company for last 5 years
 Profit & Loss of 5 years of Subsidiary company
 Auditor report on Assets and Liabilities of company for last five years
 Reports about the business transaction to which the proceeds of securities
are used directly or indirectly.
 Such other matters
3. Statutory Information

 A declaration regarding compliance of the provisions as per:

a) Companies Act 2013
b) SCRA
c) SEBI
d) Rules and Regulations
Exemptions: (Section 26(2))
1. Rights issue (issue to existing shareholders)
2. Prospectus uniform with previous
Legal Requirements in relation to
Prospectus

1) Dating of prospectus (Section 26(3)))

2) Expert Statement : (CA, CS, Engineer, Valuer, Cost Account any other persons) (Section
26(5)))
3) State that copy has been sent to ROC in prospectus (Section 26(6)))
4) Filing of prospectus (Section 26(4))
5) Time limit –within 90 days from the date of filing of copy of prospectus with registrar the
prospectus must be issued to public for subscription. (Section 26(8))
Penalty: Imprisonment up to 3 years and with fine of Rs. 50,000 to 3 lakh Rs. (Section 26(9))
Variation in terms of contract or objects
in prospectus (Section 27)
 If the company wants to vary the terms of contract referred to in the prospectus or objects for
which the prospectus was issued, it can do so by way of passing special resolution.
 The notice of the special resolution so passed shall be published in the newspapers in the city
where the registered office f the company is situated.
 The company shall thereafter cannot use the any amount so raised by issuing prospectus.
 Exit option: the shareholder who do not agree to the variation so made, shall be given the
option to exit. Such shareholder shall also be paid exit price in the manner fixed by the SEBI
Offer of sale of shares by certain members of the company (Section 28)
 If certain members of the company, in consultation with the board, propose to offer whole or
part of their shares to the public, then they can collectively authorize the company to take all
such shares and offer them for sale on their behalf.
 Types of Prospectus

Prospectus

Red Hearing Abridged Deemed

Shelf Prospectus Prospectus (IM) Prospectus Prospectus
Sec.31 Sec.33 Sec.25
Sec.32
 Shelf Prospectus (Sec.31)

• Shelf prospectus are the prospectus which have the validity of one year from the date of
opening of the first offers of securities.
• Companies intends to issue more than once in a particular year, without the further issue
• With approval of SEBI
• Such companies shall also file Information Memorandum (IM) with registrar before making
second/subsequent issue under the Shelf Prospectus
• IM shall contain the details of new charge created, change in financial position b/w first
offer and second offer and such other changes as may be prescribed.
• In case if the company or any other person has received the applications for allotment of
securities along with advance payment of subscription before making of change, the
company shall then inform the changes to such applicants. If the applicants wants to
withdraw their application, the company shall refund all monies received within 15days.
• Shelf Prospectus & IM, together are deemed as a prospectus.
 Red Herring Prospectus (Sec.32)

• This prospectus is issued prior to the issue of prospectus

• This prospectus does not include complete particulars of the ‘Quantum’ and ‘Price’ of
securities
• Company shall file RHP with the Registrar atleast 3 days prior to the opening of the
subscription list and offer
• This prospectus are generally used in book building issue.
• Once the offer of securities is closed, the prospectus of the company shall state the total
capital raised, closing price of the securities and any other details as are not included in
the RHP
Abridged Prospectus (Sec.33)

 Abridged Prospectus is a summary of prospectus

 A company cannot issue application form for the purchase of any of the securities of a
company without the Abridged prospectus.
 Request for prospectus before the closing of the offer, company shall provide copy of
the same.
 Exception: 1. Underwriting agreement
2. No public offer
 Penalty: if a company makes any default in complying with the provisions of this section,
it shall be liable to a penalty of 50,000 rupees for each day default.
Deemed Prospectus (Sec.25)

 Shares were at one point of time was allotted through the medium of issue house
 Company entered an agreement with the Issue House with the terms that the Issue
House will invite the subscription from the public through their (I H) offer document and
company thereby avoided the compliance of the provisions relating to prospectus
under Companies Act & SEBI
 Raise the funds from public without issuing an prospectus
 To avoid that, section 25 deems the offer document issued by the issue house as a
prospectus- (deemed prospectus) & requires the issue house to comply with the
provisions of section 26 and SEBI regulations.
Conditions: 1. Issuing house within six months of entering the agreement if makes the public
issue or
2. At the date when the offer was made, the whole consideration had not
been received by the company
Mis-statement in prospectus

 Golden Rule of Prospectus- New Brunswick & Canada Rly & Land Co. V. Muggeridge
(1860)
 Section 34, a statement included the prospectus is deemed to a misstatement/Untrue:
a) if the statement is misleading in the form or context in which it is included
b) any inclusion/omission in the prospectus is likely to mislead
 Case laws:
1. M. K Sreenivasan In re., (1944)
2. Sundaram Finance services & Ltd. V. Grandtrust Finance Ltd. (2003)
3. Rex V. Kylsant (1932)
 Remedies for mis-statement in a
prospectus

 Who can claim remedy?

- a person who has applied and got the shares allotted from a primary market can
claim remedy. A person who has purchased the shares from open market is can not
claim remedy. Peek V. Gruney
 Criminal Liability (Sec 34
r/w sec 447)

Civil Liability (Sec 35)

Remedy for mis-

statement in Liability u/ sec 36 & sec 37
prospectus

Liability u/ sec 38

Liability u/ sec 30
 Sections Punishment Defences
(Sec 34 r/w  Every person who authorize the issue of prospectus • Such statement or omission
447) involving an amount of 10 lakh or 1% of the turnover was immaterial
untrue/ of the company, whichever is lower shall be • Had a reasonable grounds to
misleading punished with believe that the statement was
statement/ • imprisonment – 6months to 10 years & fine will include true
omission of the amount involved in fraud. • The inclusion or omission was
any material • Public interest is involved – 3 years- 10 years. necessary
fact,  an amount involved is less than 10 lakh or 1% of the
intentionally turnover of the company, whichever is lower shall be
punished with imprisonment up to 5 years or fine up
to 20 lakh or both
(Sec 35)- any  every person who is a director/ who has authorised • Withdrew the consent to be a
person who himself as a director/ promoter/ has authorised the director before the issue of
subscribes issue of prospectus/ expert shall be : Prospectus
based on the • Made liable to pay compensation • Without his consent or authority
mis-statement • Punished u/ sec 36. • Without his knowledge and he
in prospectus  If it is proved that the prospectus was issued with the forthwith gave the public
and incurs loss intent to defraud the applicants, every person who so notice of the same
or damage, issued, will be made liable personally, without liability • Expert statement made was
for all losses or damages so suffered by them fair and correct and believed
the same at the time of issue
 Sections Punishment
(Sec 36: punishment for fraudulently inducing the  Imprisonment: 6 months -10 years
persons to invest money) a person who either  Fine: amount involved in the fraud – 3 times the
knowingly or recklessly makes any misleading amount involved in the fraud.
statement etc., or deliberately conceals material
fact
(Sec 37: Class Action Suit) a suit under section 34, N/A
35 7 36 can be filed by any person or
group/association of a persons affected by any
misleading statement or inclusion or omission of
any matter in the prospectus
(Sec 38: Allotment of shares in fictitious names  Imprisonment: 6 months -10 years
prohibited) if any persons abets or makes an  Fine: amount involved in the fraud – 3 times the
application in a fictitious name to the company amount involved in the fraud.
or multiple applications to a company in different  The court may also disgorgement of gain, seize
names or in different combination or induces a and disposal the securities
company to allot or register any securities in  The amount so received will be credited in the
fictitious name Investor education and protection fund.
(Sec 30: announcement regarding proposed u/ sec 34 & 35
issue of capital) Advertisement shall contain the
object as stated in MOA, liability of member,
the authorised capital, names and signatories
of MOA and the no. of shares held by, them
and capital structure

Dr. Nikhila Shankar Tigadi