INTRODUCTION

A) CHOICE OF FORM ON BUSINESS ENTITY

● Selection of the form of business entity is one of the most important decisions
before starting a business. This decision is required to be revisited periodically as
the business develops.
● The choice amongst the various forms of business entities depends upon many
aspects such as objects of the proposed business, likely number of members,
amount to be invested, scale of operations, state control, legal requirements, tax
implications, advantages of one form of business over another, etc.
B) NATURE, FORM AND TYPES OF BUSINESS ENTERPRISES
● Business enterprises can be broadly divided into two broad categories, namely,
one which is non-corporate in form( or unincorporated bodies) and the other
which has a corporate character (or incorporated bodies).
● Enterprises which fall in the former category are sole proprietorship,
partnership and Hindu Undivided Family. Business organisations which
comprise the latter category are companies and co-operative undertakings.
● The basic difference between the corporate and the non-corporate form of the
organisation is that while a non-corporate form of business may be started
without registration, corporate bodies cannot be set up without registration under
the laws which govern their functioning.
● Non-corporate form of business enterprises
➢ Sole proprietorship
➢ Joint hindu family/ hindu undivided family
➢ partnership
● Corporate form of business enterprises
1) The co-operative organisation
2) Company
3) LLP

1) The co-operative organisation

Co-operative organisation is a voluntary association with unrestricted
membership and collectively owned funds, organised on democratic principles of
equality by persons of moderate means and income, who join together to supply
their needs and wants, in which the motive of production and distribution is
service rather than profit
A co-operative society is required to be registered under Co-operative Societies
Act 1912. The co-operative societies receive a number of special concessions
from the law and the government, in order to encourage healthy development of
o-operatives.
2) Company
A company is an artificial legal person creator by process of law which
makes it an entity separate and district from its members who constitute
it.
 The capital of the company is provided by a group of people called
shareholders who entrust the management of the company in the hands
of persons known as the Boards of Directors
3) Limited Liability Partnership(LLP)
LLP is an incorporated partnership formed and registered under the LLP
ACT 2008
Owning to flexibility in its structure and operation, LLP is useful for small
and medium enterprises, in general, and for the enterprises in services
sector, in particular. LLP is also very suitable for professionals like
company secretaries, chartered accountants, cost accountants,
advocates etc.
History of Company Law
● Company legislation in India owes its origin to the english company law.
● In britain, the earliest business associations during the 11th to 13th centuries were called
the “merchant guilds”. There guilds obtained characters from the crown mainly to
secure for their members, a monopoly in respect of particular trade or commodity.
● In the 14th century, the word “company” was adopted by certain merchants for trading
overseas.
● By the end of the 16th century Royal Charters granted a monopoly of trade to members
of the company over a certain territory. There companies were called regulated
companies.
● East india company was one of such regulated companies established by a charter in
1600. It had monopoly of trade in India; its members could carry on trade individually
and had the option to subscribe to the joint fund or stock of the company
● By the end of the 17th century all these companies or merchant guilds are many
regulated companies which the crown had incorporated.
● At this time the only method of obtaining the incorporation of a company was by Royal
charter or by an act of parliament. These methods of incorporation were quite
expensive and time consuming.
● As a result, 18th century witnessed a flood of speculative and often fraudulent schemes
of company flotations of which the notorious schemes of South Sea Company is the
best known example.
● Consequently, the Bubble Act 1720 was passed. The Act prohibited generally the use
of the form of corporations unless a corporation was authorised to at as such by an Act
of Parliament of Royal charter
● Although the Bubble Act help up the development of capital market for a century, it did
not destroy the unincorporated companies
● In 1825, the Bubble Act was repealed. In 1834, the Trading Companies Act was
passed empowering the crown to confer by Letters Patent any of the privileges of
incorporation except limited liability.
● In 1844, the Joint Stock Companies Act 1844 was passed for the first time. This Act
provided for the registration of companies with more than 25 members or with shares
transferable without the consent of all the members. It also provided for incorporation by
registration.
 ● The Act for the first time created the office of the ‘Registrar of Companies’ and required
particulars of the company’s constitution, changes therein and annual returns to be filled
with the registrar so that there would be full record retained officially.
● Limited liability was still excluded under Joint Stock Company Act, 1844.
● In 1855, the Limited Liability Act 1855 by which any company registered under the
JSC Act 1844 might limit the liability of its members for its debts and obligations
generally to the amount unpaid for their shares
● In fact, the English Companies Act 1856 known in the JSC Act 1856 replaced the earlier
Act 1844 and 1855. Under this act seven or more persons could form themselves into an
incorporated company with or without limited liability by signing a MOA and complying
with the requirements of the Act.
● The JSC Act 1856, was repealed by the Companies Act 1862 which followed the same
pattern but contained a number of improvements.
● In 1908, the whole of the existing statute law was consolidated and after the further
amending statutes, in 1929 and 1948, and enacted new consolidated legislation in 1948.
● The Companies Act 1948, was itself amended and supplemented by the Company Act
1967, 1980,1981 and 1983, the whole of the existing statute law relating exclusively to
companies was consolidated in the Companies Act 1985.
● In 2006, the Companies Act 2006 was passed by UK Parliament. The Act provides a
comprehensive code of company law, and makes changes to almost every facet of the
company law in relation to companies. The key provisions are directors duties,
takeovers, amalgamations, corporate governance, independent directors etc.
History of Company Legislation in India
● The company legislation in india has closely followed the company legislation in england
● The first legislative enactment for registration of Joint Stock Companies was passed in
the year 1850 which was based on the JSCA 1844(Actual first )
● This act recognised companies as district legal entities but did not introduce the concept
of limited liability. The concept of limited liability in india, was recognised for the first time
by the Companies Act 1857 closely following the English Companies Act 1856 in this
regard.
● The Companies Act 1857, kept the liability of the members of banking companies
unlimited. It was only in 1858 that the limited liability concept was extended in banking
companies.
● The Companies Act 1866 was passed for consolidating and amending the law relating to
incorporation, regulation and winding-up of trading companies and other associations.
This Act was based on the English Companies Act 1962
● The Company Act 1866 continues till 1913 when it was replaced by the Companies Act
1913. This Act had been passed following the English Companies Consolidation Act
1908.
● Till 1956, the business companies in India were regulated by this Act of 1913. Certain
amendments were made in the years 1914, 1915, 1920, 1926, 1930 and 1932.
● The Indian Companies Acts closely followed the English Acts and the decisions of the
English Courts under the English Company Law were also closely followed by the Indian
Courts.
 ● Post Independence
● At the end of 1950, the Government of India appointed a Committee under the Chairman
of H.C. Baba to the revision of the Indian Companies Act, with particular reference to its
bearing on the development of Indian trade and industry.
● The H.C. Baba Committee examined and submitted its report in March 1952. Based on
the recommendations, a Bill to enact the legislation, the Companies Act, 1956 was
introduced in the Parliament.
● The Companies Act 1956, largely follow the English Companies Act 1948
● Companies act 1956 - 658 sections

The major features of the Indian Companies Act 1956 are:

1) The promotion and formation of companies
2) Capital structure of companies
3) Company meetings and procedures
4) The presentations of company accounts, their audit, and the powers and duties of
auditors
5) The inspection and investigation of the affiast of the company
6) The constitution of Board of Directors, and the powers and duties of Directors, Managing
Directors and Managers
7) The administration of Company Law

The Companies ACt 1956 has been amended several times since then. The major amendments
were introduced in the years 1960, 62, 63, 64, 65, 66, 67, 69, 74, 77, 84, 88 and 91.

● In the wake of the economic reforms processes initiated from july 1991, the Government
recognised the many provisions of the Companies Act had become redundant and were
not conclusive to the growth of the corporate sector in the changing environment.
● Consequently, an attempt was made to recast the Act, which was reflected in the
Companies bill 1993. The said Bill was subsequently withdrawn. As part of the
continuing reforms process, certain amendments were incorporated by the Companies
(Amendment) Act 1996.
● In 1998, the Companies (Amendment) Act 1999 was passed to surge the capital
market by boosting the morale of national business besides encouraging FIIs as well as
FDI in the country. The main features are buy back of shares, sweat equity shares,
creation of investor education and protection fund, accounting standards etc.
● The Companies (Amendment) Act 2002 provides for producers companies. The Second
Amendment Act 2002 replaces the Company Law Board with the National Company
Law Tribunal (NCTL) and also creates the Appellate Tribunal (NCALT).
● In 2004, the Ministry of Corporate Affairs constituted an Expert Committee under the
Chairmanship of Dr. J.J. Irani to suggest a framework for such a law to replace the
existing Act. The Committee submitted its report in May 2005.
● In 2008, the Companies Bill 2008 seeks to enable the corporate sector in India to
operate that fosters entrepreneurship, investment and growth. Due to the dissolution of
the 14th Lok Sabha, the Companies Bill 2008 lapsed.
● The Government decided to re-introduce the Companies Bill, 2008 as the Companies
Bill 2009, without any change except the year of Bill. The Bill was referred to
Parliamentary Standing Committee on Financial which gave us its report on 31st August
2010.
● In view of numerous amendments to the Companies Bill 2009 arising out of the
recommendations and introduced a fresh bill as the Companies Bill.
● The Companies Bill 2012 to have a modern legislation for growth and regulation of
corporate sector in India.
● The new Companies Act 2013 was finally notified on August 30, 213. The new law, 470
sections spread over 29 chapters and 7 schedules, replaces the six decade old
Companies Act 1956.
● The 2013 Act intends to promote self-regulation and introduces novel concepts including
one-person company, small company and dormant company.
● It also promotes investor protection and transparency by including concepts of insider
trading, class action suits, creation of a National Financial Reporting Authority and
establishment of a Serious Fraud Investigation office for investigation of fraud.
● Further, section 2 containing 94 definitions has been added for better clarity
● Salient features of the Companies Act 2013
1) National company law tribunal
2) Fast track mergers and cross border mergers
3) Class action suits for shareholders
4) Corporate social responsibility
5) Prohibition on forwards dealings and insider trading
6) One person company
7) Submission by electronic mode
8) Indian resident as directors
9) Rotation of auditors
10) Prohibits auditors from performing non-audit services
11) Rehabilitation and liquidation process
● The Companies Amendment Bill 2015 was published in the Official Gazette of India on
26/05/2015 as the Companies Amendment Act 2015. The important highlights are:-
1) No minimum paid-up capital
2) No requirement for commencement of business
3) Common seal is optional
4) Stringent penalty for company inviting or accepting deposit
5) Dividend cannot be declared by Company having losses
● The Companies (Amendment) Act 2017 was came into force on january 3 2018. The
amendments broadly aimed at:
1) Stringent compliance requirements
2) Facilitating ease of doing business
3) Harmonization with the accounting standards, the securities and exchange board
of indian act 1992 and the regulations made thereunder, and the reserve bank of
india act 1934 and the regulations made thereunder
4) Rectifying omissions and inconsistencies in the Act.
● The Companies (Amendment) Act, 2019
On july 31 2019, the MOCA introduced the Companies (Amendment) Act 2019. The
Amendment considers changes brought in by the Companies (Amendment) Ordinance
2018, the Companies (Amendment) Ordinance Act 2019 and the Companies
(Amendment) Second Ordinance ACt 2019 to further amend the Companies Act 2013.
The key changes are:
1) Commencement of business
2) Shifting of powers from the National Company Law Tribunal to the Central
Government
3) Matters to be states in the prospectus
4) Dematerialisation of securities
5) Provisions relating to penalties
6) Registration of charges
7) Prevention of oppression and mismanagement
8) Compounding of offences

● The Companies Act 2013

● The Act was modified in the Official Gazette on 30th august 2013 and different dates
may be appointed for enforcement of different provisions of the Companies Act 2013,
through notifications.
● Section 1 came into force on 30th August 2013, 98 sections came into force on 12th
september 2013, 143 sections were enforced from 1st april 2014 and so on.
● The Companies Act 2013 is an Act to consolidate and amend the law relating to
companies
● Section 1 - states that the extent to the applicability of the Act. It says that the Act shall
extend to the whole of India.
● Section 1 states that the applicability of the Act. The provisions of this Act shall apply to -
1) companies incorporated under this Act or under any previous company law
2) Insurance companies, except inconsistent with the provisions of the Insurance Act
1938 or the IRDA Act 1999
3) Banking companies, except inconsistent with the provisions of the Banking Regulation
Act 1949
4) Companies engaged in the generation of supply of electricity, except inconsistent with
the provisions of the Electricity Act 2003
5) Any other company governed by any special Act, except inconsistent with the
provisions by any Act
6) Such body corporate, incorporated by any Act
7) Food Corporation of India (FCI), National Highway Authority of India (NHAI) etc.

● Company
● The word 'company' is derived from the latin word (com - with or together; panis - bread),
and it originally referred to an association of persons who took their meals together.
● In popular parlance, a company denotes an association of like minded persons formed
for the purpose of carrying on some business.
● In Companies Act 2013, a “company” means a company in incorporated under this
Act or under any previous company law [section 2(20)].
● Lord Justice Lindley has defined a company as “an association of many persons who
contribute money or money’s worth to a common stock and employ it in some trade or
business and who share the profit and loss arising therefrom”.
● Prof. Haney defined “a company is an artificial person created by law, having separate
entity, with a perpetual succession and common seal”
● The above definitions clearly bring out the meaning of a company in terms of its
features. A company to which the Companies Act applies comes into existence only
when it is registered under the Act.

● Characteristic features of a Company:

● Voluntary association: a company is an association of persons. Minimum number
required for the purpose is 7 in the case of a “public company” and 2 in the case of
“private company”. A company may be formed for business or for non-business
purposes.
● Registered under the Companies Act: a company legally comes into existence only
after incorporation under the Companies Act and on filing the documents relevant for
incorporation. On incorporation, the Registrar of Companies shall issue a certificate of
incorporation
● Separate Legal entity and Corporate personality:
1) A company has a legal existence which is quite distinct from that of the members
who constitute it. Thus, a company is an existence which is independent of that
of its members.
2) All the assets of the company and the properties are held in the name of the
company
3) Liabilities are incurred by the company in its own name
4) A company can enter into a contract on its own name
5) The members are not agents of the company and cannot represent the company
on any matter at any forum
6) The members are not liable for the acts of the company including violation of any
economic or labour legislations
7) The company can sue and be sued in its own name
● Salomon vs Solomon & co. Lit. (1897)
● Lee vs Lee’s Air Farming Ltd (1960)
● Macaura Vs. Northern Assurance Company Ltd. (1925)
Macaura, the owner of a Timber depot, formed a company and Transferred the entire
timber to the company and in the run received all shares except one. He also advanced
a substantial amount to be a company. He insured the company’s timber in his own
name. Timber destroyed in a fire accident. He claimed compensation from insurance
company. His claim was rejected for want of insurable interest. The court observed that
“no shareholder has any right to any item of property owned by the company, he ha sno
 legal or equitable interest therein”. “The property of the company is not the property of
the shareholders, it is the property of the company”

● Limited Liability :
● As per the Companies Act, in the event of winding up of the company, the members
shall have liability to contribute only to the extent of shares taken by the,. If the shared
are fully paid up, there shall be no further liability on the part of the members. However,
in case of partly paid-up shares, the member shall be personally liable to pay the un-pain
amount.

● Perpetual Succession :
● Perpetual means continuing forever. The company continues to be a legal person with
the same name, privileges, immunities, assets and liabilities till it is in any way, affects
the Company’s corporate entity till it is wound up or is declared defunct by the Registrar
in accordance with the provisions of the Companies Act.
● In Meat Supplied (guildford) ltd. Re 1996, the court held even where during the war all
the members of a private company, while in general meeting were killed, the company
survived.

● Share Capital :
● The concept of share capital enables the investor to participate in the ownership or
capital of the company. The share capital enables the company to mobilise huge capital
from investors which would not be possible in any other form of business. The share
capital of the company is divided into a certain number of shares each having specified
nominal value.

● Transferability of Shares :
● The shares of the company are movable property and can be transferred from one
person to another in the manner provided in the articles. Though shares are
transferable, it is not a negotiable instrument. Transferability of shares encourages
investment of funds in the shares so that the members can enchash them at any point of
time.

● Separate Property :
● The property of an incorporated company is vested in the name of the company. The
company is capable of holding and enjoying property in its own name. No members can
claim ownership of any asset of the company’s assets.

● Ownership & Management :

● The management of a company is vested with an elected body of shareholders called
the Board of Directors of the company. The shareholders cannot interfere in the day-day
management of the company. The powers of the Board are always subject to the
restrictions provided in the Companies Act 2013 the MOA and the AOA of the company.
● Sharing of Profits :
 ● The members of the company are entitled to share the profits of the company in the form
of dividends.

● Common Seal :
● Every company must have its own common seal with its name engraved on it. Once the
common seal is affixed on any document, it binds the company. Common seal acts or
servers as an official signature of the company. Companies Act 2013 required common
seals to be affixed on certain documents. No common seal shall be affixed unless
approved by the board resolution and two directors of the company should sign as
witnesses. The companies (amendement) act 2015 coming into force the common seal
is no more mandatory and it has been made optional.
● To sum up, “a company is a voluntary association for profit with capital divisible in
transferable shares with limited liability, having a distinct corporate entity and a common
seal with perpetual succession”.
● In Re. Kondoli tea Co. Ltd., (1886) ILR 13 Cal. 43 - the calcutta high court recognised
the principle of separate legal entity even much earlier than the decision in salomon v
salomon & co. ltd. case. Certain persons transferred a Tea Estate to a company and
claimed exemptions from ad valorem duty, it was nothing but a transfer from one name
to another. While rejecting this calcutta high court observed: “the company was a
separate person, a separate body altogether from the shareholders and the transfer was
as much a conveyance, a transfer of the property, as if the shareholders had been
completely different persons”.
● In New Horizons Ltd and another V UOI (1995) - a group of experienced engineers
who retired from DOT formed a new company and this company applied for technical
work. This tender was rejected by the DOT on the ground that the company did not have
the necessary experience. The court held that the company has the experienced
engineers who formed it, therefore the tender must be considered.
● In Union Bank of India V Khader International Construction and Other(2001) -the
question which arose before the court was whether a company is entitled to sue as the
indigent person under order 33, rule 1 of the CPC, 1908. The SC observed that a
company may also file a suit as an indigent person.
● In R.F. Perumal V. H. John Deavin AIR 1960 - the madras high court held that “no
member can claim himself to be the owner of the company’s property during its
existence or in its winding-up”.
● In Mrs. Bacha F. Guzdar V. The Commissioner of Income Tax, Bom. AIR 1955 S.C. -
the SC held that, though the income of a tea company is entitled to be exempted from
income tax, the same income when received by a shareholder in the form of dividend
cannot be regarded as agricultural income for the assessment of income tax.

Disadvantages of incorporation
● Formalities and expenses
● Loss of privacy
● Separation of ownership and management
● Possibility of frauds
● Greater public accountability
● Control by few
● Detailed winding-up procedure

● Is a company a citizen?
● Section 2(f) of citizenship act 1955 expressly excludes a company or association or body
of individuals from citizenship. The company, though a legal person, is not a citizen
under the citizenship act 1955, or the constitution of india
● In State Trading Corporation of India Ltd. V C.T.O. AIR 1963 SC 1811 - the SC held
that a legal person was not a citizen and can act only through natural persons and it
further observed that certain fundamental rights enshrined in the constitution for
protection of “person” , eg, right to equality(article 14) etc are available to a company.
● In R.C. Cooper V UOI AIR 1970 - the Sc entertained the petition under article 32 of the
constitution at the instance of a shareholder of a company and granted relief. It is,
therefore, to be noted that an individual’s right is not lost by reason for the fact that he is
a shareholder of the company
● In Bennet Coleman Co. V. UOI AIR 1973 SC 106 - the Sc stated that “the fundamental
rights of shareholders as citizens are not lost when they associate to form a company.
When their fundamental rights as shareholders are impaired by state action, their rights
as shareholders are protected. The reason is that the shareholders rights are equally
and necessarily affected if the rights of the company are affected”.

● Whether the company has nationality and residence?

● It is established through judicial decisions that a company cannot be a citizen, yet it has
nationality, domicile and residence.
● In Gasque V Inland Revenue commissioners (1940) - it was observed that “a body
corporate has no domicile. It is quite true that a body corporate cannot have a domicile
in the same sense as an individual. But by analogy with a natural person the attributes of
residence, domicile and nationality can be given to a body corporate”
● In Tulika V. Parry and Co. (1903) - it was observed that “ a joint stock company resides
where its place of incorporation for the purpose of the company and exercises the
powers conferred upon it by statute and by the MOA & AOA”.

● Doctrine of lifting of or piercing corporate veil

● The separate personality of a company is a statutory privilege and it must be used for
legitimate business purposes only. Where a fraudulent and dishonest use is made of the
legal entity, the individuals concerned will not be allowed to take shelter behind the
corporate personality.
● The court will break through the corporate shell and apply the principle/doctrine of what
is called “lifting of (or) piercing the corporate veil”.
● Consequences of piercing of corporate veil :
● When the directors of the company are made personally liable for the acts done them on
behalf of the company
● When the liability of the members of a limited company is made unlimited
 ● When the legal entity concept is disregarded removing the reparate existence of the
company from that of its members
● Lifting of corporate veil could be statutory or judicial.

● Judiciary Lifting of Corporate Veil

● Prevention of fraud or improper conduct
● In Jone Vs. Lipman (1962) - A agreed to sell certain land to B. pending completion of
formalities of sale, he transferred the said land to a company formed by him with a view
to avoid any decree of specific performance that they may be awarded by the court
based on the suit brought by B. The court held that A must complete the contract of sale,
disregarding the legal entity of the company
● In Re Gilford Motor Company - a former employee of the company agreed not to solicit
its customers. However , he formed a company and undertook solicitation, which was
restrained by the court.

● Formation of subsidiaries to act as an agent

● In Re R.G. Films Ltd. (1953) - an american company produced a film in india technically
in the name of the British company. 90% of its capital being held by the american
company. The board of trade, refused to register the film as a british film stating that the
english company acted merely as a nominee of american corporation
● In Premiata Bhatia V. UOI (2004) - the premises of a shop were allotted on a licence to
the individual licensee. She set up a wholly owned private company and transferred the
premises to that company without government consent. She could not remove the
illegality by saying that she and her company were virtually the same person.

● Protection of Revenue
● In Re Sir Dinshaw Maneckjee Petit AIR 1927 - the assessee was a millionaire earning
huge income by way of dividend and interest. He formed four private companies and
transferred his investments to each of these companies in exchange for their shares.
Their companies did no business, but was created simply as a legal entity to ostensibly
receive the dividends and interest and to hand them over to the assessee as pretended
loans.
● In Vodafone International Holdings BV V. UOI (2012) - the SC held that determination
of residence of upstream parent company or downstream subsidiary for tax purposes
and key factor would be if one is “puppet” of another i.e. there is no genuine separate
existence of one of them.

● Macaura Vs. Northern Assurance Company Ltd. (1925) (check above)

Classification of Companies
● Classification on the basis of Incorporation
● Charter company - company established by Queen of England
● Statutory companies - controlled by a statute
● Registered Companies
1) Private companies [sec 2(68)]
2) Public companies [sec 2(71)]
3) One person Company [sec 2(62)] - still requires minimum 2 people

● Classification on the basis of Liability

● Companies limited by shares [sec 2(22)]
● Companies limited by guarantee [sec 2(21)]
● Unlimited liability companies [sec 2(92)]

● Classification on the basis of control

● Holding companies [sec 2(46)]
● Subsidiary companies [sec 2(87)]
● Govt. companies [sec 2(45)]
● Foreign companies [sec 2(42)]

● Other companies
● Associations not for profit/ companies with charitable object (sec 8)
● Small company [sec 2(85)]
● Associate company [sec 2(6)]
● Listed company [sec 2(52)]
● Unlisted company
● Dormant company (sec 455)
● Nidhi company (sec 406)
● Public financial institutions [sec 2(72)]
● Producer companies

● Private company : Section 2(68)

● A private company means which by its articles -
1) Restricts the right to transfer its shares
2) Limits the number of its members 200, except in case of one person company; joint
owners should be treated as a single shareholder; employees holding shares are not to
be counted as shareholders
3) Prohibits any invitation to the public to subscribe for any securities of the company
● In case of joint holding of share, they shall be counted as a single member
● Every private company must have its own registered articles about 3 restrictive clauses
must be specified in the articles in private company
● There should be at least 2 subscribers to form a private company it should have at least
2 directors
● The words “private limited” must be added at the end of the name of a private company
● Advantages of Private Company:
1) Only 2 signatory to the MOA are sufficient
2) It need not obtain certificate of commencement
3) Prospectus is not allowed to issue to the public
4) Holding of a statutory meeting or filing of statutory report is not required
5) It needs to have minimum of 2 directors only
6) Directors needs not retire by rotation
7) Limits of managerial remuneration do not apply
8) It may issue any kinds of shares and allow disproportionate voting rights to its members
9) The specific notice of 14 day for the appointment of a new director is not required
10) The directors can not vote on a contract in which they are interested
11) Restrictions on appointment or advertisement of director of the companies not apply to
private company

● Public Company : Section 2(71)

● Public company which is a subsidiary of a public company which is not a private
company shall be deemed to be public company
● Thus by implication, in a public company:
1) There is no limits on the maximum number of members
2) The shares and debentures are freely transferable
3) It can invite the public to subscribe for the shares or debenture or deposits by
issues of prospectus. The shares and debenture can be quoted in a stock
exchange
● A public company should have at least 7 subscribers to the memorandum and at least 3
directors
● The name of a public company shall end with the words “limited”.

● One person company : Section 2(62)

● The Company Act 2013 introduces a new class of companies which can be incorporated
by a single person
● Section 2(62) of the Companies Act 2013 defines one person company (OPC) as a
company which has only one person as a member
● OPC differs from sole proprietary concern in a aspect that OPC is a separate legal entity
with a limited liability of the member whereas in the case of sole proprietorship, the
liability of the owner is not restricted and it extends to the owner’s entire assets
constituting of official and personal property
● According to section 3 (1)(c) of the Company Act 2013 OPC is a private limited company
and has at least one member. Hence the member can be the sole member and director
● The memorandum of OPC shall indicate the name of the other person, who shall, in the
event of the subscriber;s death of his incapacity to contract, become the member of the
company
● The other person whose name is given in the memorandum shall give his prior written
consent in the prescribed form and the same shall be filed with ROC at the time of
incorporation. Such other person may be given the right to withdraw his consent.
● The member of OPC may at any time change the name of such other person by giving
notice to the company and the company shall intimate the same to the ROC
● Only a natural person who is an Indian citizen and resident in India shall be eligible to
incorporate a OPC, or shall be a nominee of a OPC
● No person shall be eligible to incorporate more than one OPC or become nominee in
OPC
● No minor shall become member or nominee of the OPC

● Classification on the basis of Liability: Sec. 3(2)

● A company formed under the Act may be either
1) A company limited by shares
2) A company limited by guarantee
3) an unlimited company

● Companies limited by shares : Section 2(22)

● A company having the liability of its members limited by memorandum to the amount, if
any, unpaid on the shares responsibly held by them
● A member of a company limited by shares cannot be called upon for anything more than
the nominal value of the shares held by him. In the event of liquidation, if the shares are
partly paid-up he shall be liable to the unpaid calls
● The voting rights and dividend in such a company is in proportion to the paid-up value of
the share capital of the company.

● Companies limited by Guarantee : Section 2(21)

● A company having the liability of its members limited by the memorandum to such
amount a the members may respectively undertake to contribute to the assets of the
company in the event of its being wound up
● It should be noted that a special feature of this type of company is that the liability of
members to pay their guaranteed amount arises only when the company has gone into
liquidation.
● As regards the funds, a guarantee company without share capital obtains working capital
from other sources e.g. fees or grants
● A guarantee company having a share capital raises its initial capital from its members
● A memorandum of association of every guarantee company must state that every
member of the company undertakes to contribute to assets of the company in the event
of its being wound up
● The memorandum of a company limited by guarantee must state the amount of
guarantee. It may be of different denominations.
● A guarantee company may or may not have a share capital
● In case of a guarantee company having share capital the shareholders have two-fold
liability
● In voting power of a guarantee company having share capital is determined by the
shareholding and not by the guarantee
● Mr. X has agreed to take 10,000 shares of Rs.10 and gave guarantee of Rs. 50,000. In
the event of liquidation Mr.X’s liability is Rs. 1,50,000 i.e. Rs. 1,00,000 towards share
capital and Rs. 50,000 towards guarantee amount.

● Unlimited Company: Sec 2(92)

● A company not having any limit on the liability of its members
● The liability if the members extend to the entire debts of the company in the event of
liquidation. Thus, the liability of the members is unlimited
● However, the members of an unlimited company are not directly liable to the creditors of
the company unlike in the care of partnership firm
● The liability of the members are only towards the company and arises only in the event
of liquidation of the company
● According to Sec.18, a company registered as an unlimited company may be converted
into a limited company subject to the conditions

● Holding company: Sec 2(46)

● Holding company, in relation to one or more other companies, means a company of
which such companies are subsidiary companies

● Subsidiary company: Sec 2(87)

● Subsidiary company or subsidiary, in relation to any other company (that is to tsay the
holding company), means a company in which the holding company -
1) Controls the composition of the Board of Directors; or
2) Exercises or controls more than one-half of the total share capital either at its
own or together with one or more of its subsidiary companies
● According to Section 2 (27), control shall include the right to appoint majority of the
directors or to control the management or shareholding or management rights or
shareholders agreements or voting agreements or in any other manner
● In case a public company holding at least 51% of the shares of a private company, in
such a case the private company is the subsidiary company but will become a public
company

● Subsidiary not to hold shares in its holding company : Sec 19

● The subsidiary company shall not hold shares in its holding company and no holding
company shall allot or transfer its shares to any of its subsidiary companies and any
such allotment or transfer of shares of a company to its subsidiary shall be void.

● Government Companies: Section 2(45)

● A “government company” as any company in which not less than 51% of the paid-up
share capital is held by the central government, or by any state government or
governments, or partly by the central government and partly by one or more state
governments, and includes a company which is a subsidiary company of such a
government company
● When the government engages itself in trading ventures, particularly as government
companies under the company law, it does not do so as a State but it does so in
essence as a company. A Government company is not a department of the government.
● In A.K Bindal V. UOI (2003), the employees of the government companies are not
government servants, they have no legal right to claim that the government should pay
their salary. It is the responsibility of the company to pay them the salaries
● Section 143 provides that the auditor of government companies will be appointed/re-
appointed by the comptroller and auditors general (CAG). The CAG may conduct
supplementary or test audit, through persons authorised by it.
● Section 394 provides that where the central government is a member of a government
company, an annual report is to be placed before both parliament together with CAG
comments. In case State Government is a member then report to be placed before the
State Legislature.
● The Central Government has power to direct by notification that the certain provisions of
Companies Act shall not apply to Government companies
● Government companies may delete word private from name of company
● Provision relating to appointment/re-appointment of directors not applicable
● Appointment and remuneration of MD and Whole-time Director not applicable
● Commencement of business by wholly owned government companies
● Transfer of unpaid dividend do not apply to wholly owned government companies

● Foreign Companies : Sec 2(42) and Sec 379 10 393

● Foreign company means any company or body corporate incorporated outside India
which -
- Has a place of business in India whether by itself or through an agent, physically
or through electronic mode electronic mode and
- Conducts any business activity in india in any other manner

● Section 380 provides that every foreign company which establishes a place of business
in India must, within 30 days, file with the Registrar of Companies for registration:
- A certified copy of the charter, statutes or MOA and AOA, if the instrument or not
in the English language, a certified translation thereof in the English language
- The full address of the registered office of the company
- A list of the directors and secretary of the company
- The name and address of person/s resident in india authorised to receive any
notices to be served on the company
- The full address of the office of the company in india which is deemed to be ints
principal place of business in India
- Declaration that none of the directors ever been convicted in India or abroad and
- Any other information as may be prescribed

● Every foreign company has to ensure that the name of the company, the country of
incorporation, the fact of limited liability of members is exhibited in the specified places
or documents as required under section 382
● Section 381 requires a foreign company to maintain books of account and file a copy
with ROC. these accounts should be accompanied by list of place of business
established by the foreign company in India
● Section 376 provides that a foreign company ceases to carry on such business in india,
it may be wound up as an unregistered company.
● Companies with Charitable Object: Sec 8
● Sec.8 company may be permitted for incorporation only when it is granted a licence by
the Central Government to be registered as a limited company
● Association not for profit can be formed for the following purposes:
- For the promotion of arts, science, commers, sports, education, research, social
welfare, religion, charity or protection of environment, any other useful object and
- The company should prohibit payment of dividend to its members and should
apply its profits and other income in promotion of its objects

● A licence is granted by the Central Government on certain terms and conditions, which
shall be binding on the company. On the failure to comply with the terms and conditions,
the Central Government may revoke the licence at any time after providing the
opportunity
● An association not for profit need not use th words “limited or private limited” at the end
of its name
● Sec 8 companies cannot alter its provisions of memorandum unless previously approved
by the Central Government
● A partnership firm may become a member of Sec 8 company
● Sec 8 companies enjoy certain exemptions and privileges:
- Not required to appoint a qualified full time company secretary
- Certificate of commencement of business is not required
- General meeting can be called with less than 14 days notice
- Books of account may be preserved only for 4 years
- Election of directors can be made by ballot
- Quorum for the board meeting can be 1/4th of the total strength or 2 directors,
whichever is higher
- It may hold its annual general meeting on any day
- Filing of content to act as a director with the ROC is not applicable

● The Central Government may by order in public interest that the company be wound up
or amalgamated with another company registered under ec 8
● In the event of liquidation the profits/ surplus/ assets of the company shall not be
distributed to the members but shall be donated to another section 8 company
● If a company makes any default is complying with any of the requirements laid down in
section 8 the company is publishable with fine - minimum of Rs. 10 lakh and maximum
of Rs. 1 crore and every officer is punishable upto 3 years imprisonment or fine -
minimum Rs. 25,000/- maximum Rs. 25 lakh or both
● Further, where the affairs of the company were conducted fraudulently, every officer in
default shall be liable for action Sec 447, imprisonment 6 months to 10 years and fine an
amount equal to amount of fraud or 3 times of the amount.

● Small Company: Sec 2 (85)

● Small company is a new form of private company under the companies act 2013. A
classification of a private company into a small company is based on its size i.e. paid up
capital and turnover
● According to section 2(85) “small company” means a company, other than a public
company -
- Paid-up share capital of which does not exceed Rs. 50 lakh or such high
amount as may be prescribed which shall not be more than Rs. 5 crore or
- Turnover of which as per its last profit and loss account does not exceed Rs. 2
crore or such higher amount as may be prescribed which shall not be more than
Rs. 20 crore

● This definition shall not apply to -

- A holding company or a subsidiary company
- A company registered under section 8 or
- A company or body corporate governed by any special Act\

● Privileges of Small Company -

- Financial assistance can be given for purchase of its own shares
- The annual return need not be signed by the company secretary
- Need not prepare a report on annual general meeting
- Small company need not have more than two directors in it board
- Need not appoint independent directors on its board
- A proportion of directors need not to retire every year
- It is required to hold at least one meeting of the BOD in each half of the calendar
year
- The contract of employment with managing or whole-time directors do not apply
to a small company

● The Central Government may grant further privileges/exemptions to small companies

buy issuing a notification

● Associate Company: Sec 2(6)

● To add more governance and transparency in the working of the company, the concept
of associate company has been introduced. It will provide a more rational and objective
framework of associate relationship between the companies
● ‘Associate company’, in relation to another company, means a company in which that
other company has a significant influence, but which is not a subsidiary company of
the company having such influence and includes a joint venture company [sec 2(6)]
● Significant influence means control of at least 25% of total share capital, or of
business decisions under an agreement
● According to section 2(76), related parties include ‘associate company’. Hence, contract
with associate company will require disclosure/approval/entry in statutory register

● Listed Company: Sec 2(52)

● Listed company means a company which has any of its securities listen on any
recognised stock exchange
● A company which intends to get its securities listed must comply with the provisions of
SEBI Act 1992 and the rules and regulations there under
● A listed company may close the register of members for any period not exceeding in the
aggregate 45 days in each year
● The annual return, filed by a listed company, shall be certified by a company secretary
stating that the annual discloses the facts correctly and adequately complied with all the
provisions of the Act.
● Every listed company having not less than 1000 shareholders, shall provide to its
members facility to exercise their right to vote at general meetings by electronic means
● Every listed company shall have an internal auditor, who may be a CA, Cost Accountant
or any other professional.
● Every listed company shall include, in the report by its BOD, a statement indicating the
manner in which formal annual evaluation has been made by the board of its own
performance and that of its committees and individual directors
● Every listed company is required to file a return with ROC with respect to change of 2%
of more in shareholding of promoters and top 10 shareholders of the company within 15
days of such change
● Every listed company shall disclose to the median remuneration of the employees of the
company for the financial year
● A listed company, may upon notice of not less than 1000 small shareholders or 1/10th of
the total number of such shareholders, whichever is lower, have a small shareholders
director elected by the small shareholders.

● Unlisted Company
● An unlisted company means a company whose shares are not listed to stock exchanges
and not available to the general public for trading. An unlisted company can be private
limited company or public limited company
● The main difference between the listed companies and the unlisted company is its
ownership, while unlisted companies are owned by many shareholders, while unlisted
companies are owned by limited investors
● In case of an unlisted company, it is not necessary that such shares be resold to the
promoters or the persons from whom they were acquired. These shares can be sold to
anyone, but it would normally be difficult to find a buyer for unlisted shares

● Dormant Companies
● Where a company is formed and registered under this Act for a future project or to hold
an asset or intellectual property and has no significant accounting transaction, such a
company or an inactive company may make an application to the registrar for obtaining
the status of a dormant company
● Inactive company means a company which has not been carrying on any business or
operation, or has not made any significant accounting transaction during the last 2
 financial years, or has not filed financial statements and annual returns during the last
2 financial years.
● Significant accounting transaction means any transaction other than:-
- Payment of feed by a company to the registrar
- Payments made by it to fulfil the requirements of any other law
- allotment of shares to fulfill the requirements of this Act; and
- Payments for maintenance of its office and records

● The Registrar on consideration of the application shall allow the status of a dormant
company to the applicant and issue a certificate in such form as may be prescribed to
that effect (section 455(2))
● In case of a company which has not filed financial statements or annual returns for 2
financial years consequently and enter the name of such company in the register
maintained for dormant companies (section 455(4))

● Privileges of a Dormant Company

● The financial statement may not include the cash flow statement
● It is required to hold at least one meeting of the BOD in each half of a calendar year

● Nidhi Company: Sec 406

● Nidhi means a company which has been incorporated as Nidhi with the object of
cultivating the habit of thrift and savings amongst its members, receiving deposits
from, and lending to, its members only, for their mutual benefit, and which complies with
such rules as are prescribed by the Central Government
● The Central Government may direct that any of the provisions of this Act shall not apply
to any Nidhi companies
● Nidhi Rules 2014
● A Nidhi to be incorporated should be a Public Company
● Minimum paid up capital should be Rs. 5 Lakhs
● Every Nidhi company shall within a period of 1 year from the date of incorporation,
ensure that it has:
- Not less than 200 members
- Net owned fund of Rs. 10 lakh or more
- Unencumbered term deposits of not less than 10% of the outstanding deposits
- Ratio of Net Owned Funds to deposits of not more than 1:20

● If Nidhi is not complied, Nidhi shall not accept any further deposits from the
commencement of second financial year till it complies with the provisions
● Within 90 days from the closure of financial year, Nidhi shall file a return of Statutory
Compliance with the ROC duly certified by CS/CA/CWA

● Public Financial Institutions: Sec 2(72)

● Public financial institution means-
- The Life Insurance Corporation of India
 - The Infrastructure Development Financial Company Limited
- The Unit Trust of India
- Institutions notified by the Central Government under the Companies Act 1956
- Such other institutions as may be notified by the Central Government in
consultation with the RBI

● However, no institution shall be so notified unless -

- It has been established or constituted by or under any central or state Act
- Not less than 51% of the paid up share capital is held by the central government
or by any State Government/s or partly by the Central Government and partly by
one or more State Governments.

● Producer Companies
● Section 465(1) of the Companies Act 2013 provides that the provisions of the
Companies Act 1956 shall be applicable to a Producer Company in a manner as if the
Companies ACt 1956 has not been repealed until a special Act i enacted for Producer
Companies
● In view of the above provision, Producer Companies are still governed by the
Companies Act 1956
● According to the provisions as prescribed under Section 581A(I) of the Companies ACt
1956, “a producer company is a body corporate having objects or activities specified in
Section 581B and which is registered as such under the provisions of the Act”.
● The membership of producer companies is open to such people who themselves are the
primary producers, which is an activity by which some agricultural produce is produced
by such primary producers.
● A producer company is basically a body corporate registered as Producer Company and
shall carry on or relate to any of following activity classified broadly:
- Production, harvesting, processing, procurement, grading, pooling,handling,
marketing, selling, export or primary produce of the members of import of goods
or services for their benefit
- Rendering technical services, consultancy services, training, education, research
and development and all other activities for the promotion of the interests of its
members
- Generation, transmission and distribution of power, revitalization of land and
water resources, their use, conversion and communications relatable to primary
produce
- Promoting mutual assistance, welfare measures, financial service, insurance or
producers or their primary produce.

● Illegal Association: Sec 464

● In order to prevent the mischief arising from large trading undertakings the law ha put a
ceiling on the number of persons constituting an association or partnership
● An unincorporated company, association or partnership consisting of large number of
persons has been declared illegal
● According to section 464, no association or partnership consisting of more than such
number of persons as may be prescribed shall be formed for the purpose of carrying on
any business that has for its object the acquisition of gain by the association or
partnership or by the individual members thereof, unless it is registered as a company
under this Act or any other law for the time being in force. The number of this act or any
other law for the time being in force. The number of persons which may be prescribed
under this section shall not excess 100
● Rule 10 of Companies (miscellaneous) Rules 2014 prescribes 50 persons in this regard
● Section 464 of the Act does not apply to the case of a HUF members
● The members of an illegal association are individually liable in respect of all acts; they
cannot either individually or collectively, bring an action to enforce any contract so made,
or to recover any debt due to the association [Wilkinson v. Levison (1925) TLR].
● Every member of an illegal association shall be punishable with fine which may extent to
Rs. 1 lakh and shall also be personally liable for all liabilities in such business (section
464(3))
● Since the law does not recognise it, an illegal association -
- Cannot enter into any contract
- Cannot sue any member, or outside, not even if the company is subsequently
registered
- Cannot be sued by a members, or an outside for recovery of any debts
- Cannot be wound up by an order of the court

● However, an illegal association is liable to be taxed [Kumaraswamy Chettiar V. Income

Tax Officer (1957) ITR]

● Promoter
● The term promoter has not been defined under the Companies Act 1956. Whereas Sec
2(69) of the Companies Act 2013 defines the term “promoter”
● Promoter mean a person-
- Who has control over the affairs of the company, directly or indirectly whether as
a shareholder, director or otherwise or
- In accordance with those advice, directions, or instructions, the board of directors
of the company is accustomed to act
- Who has been named as such in prospectus (or) is identified by the company in
the annual return referred to in Sec 92 or
- Provided that nothing in sub-clause (c) shall apply to a person who is acting
merely in a professional capacity

● From the functional point of view a promoter can be defined as a person-

- Who conceives the idea of business
- Originates the scheme for formation of the company
- Takes necessary steps to incorporate the company
- Get-together the subscribers to the memorandum
- Finds the bankers, brokers and legal advisors
 - Settle the term of prelim contracts with vendors
- Make arrangements for the preparation, advertisement and circulation of
prospectus.
- File all the documents connected with the incorporation and get the company
incorporation and
- Ensures, that the memorandum and articles are prepared executed and
registered
Thus, the promoter is one who brings the company into existence

● Legal Position of a Promoter:

● A promoter is not a director or employee or agent or trustee for the proposed company,
since the company itself has not come into existence. Thus, legally a promoter cannot
be an agent or trustee for the proposed company
● However, the law imposes certain duties, functions, responsibilities and liabilities on a
promoter which are like that of an ‘agent or trustee’ for the proposed company
● This position of the promoter like that of an agent or trustee is called the ‘fiduciary
capacity or fiduciary role or fiduciary duties’ of a promoter
● This, in the fiduciary capacity they shall act as agents or trustees of the company and
should not make any secret profit at the expense of the company

● Duties of Promoter
● A promoter cannot make any profit at the expense of the company he promotes either
directly or indirectly without any knowledge and consent of the company
● Similarly he is not allowed to derive any profit from the sale of his own property to
company unless all material facts are disclosed.
- Erlanger V. New Sombrero Phosphate Co.
- Gluekstein V. Barness
- Lady Well Mining Co. Ltd. V. Brooks

● What law prohibits is not the profits made by the promoter but the non-disclosure of the
same. If full disclosure is made the profit is admissible.
● The disclosure should be made to the following persons -
- To board of directors or
- In the articles of association of the company or
- In the prospectus or
- To the existing members of the company directly

● Remedies against the Promoted Available to the Company -

● Where a promoter bought the property with a view to sell it to the company he promotes
and sells the same without disclosure of profit, the company has the following remedies
against such promoter:
 - Rescind the contract and recover the money if any already paid on the
transaction or
- Retain the property, pay the promoter only the cost value and deprive him of the
profit or
- Where the above remedies are inappropriate, the company may sue for
misfeasance i.e. breach of duty to disclose

● The measure of damages will be the difference between the amount paid and the market
value of the contract

● Remuneration of promoter
● A promoter is paid remuneration for the services rendered by him as per the AOA or as
agreed by the BOD
● A promoter can be remunerated in any one of the following basis:
- He may sell his property to the company for cash at overvaluation after full
disclosure
- He may sell his property to the company for fully paid-up shares, at an
overvaluation after full disclosure
- He may take commission on the shares held
- He may be paid lump sum amount by the company
- He may be granted some shares in the company at par
- He may be given an option to buy further shares in the company at par in future.

● Contracts
● A company being an artificial person can contract only through its agents. There are 3
situations in the case of every company in which contracts are made -
- Contracts made on behalf of the company before its incorporation(certificate of
incorporation - preliminary or pre-incorporation contracts - not liable on
company but on the promoters if the situation demands(indian law/ under english
law the promoters are absolutely liable) - contracts entered into for the purpose
of incorporation
- Contracts made after incorporation but filing of the prescribed declaration by a
director with the Registrar under section 11 (which is a mandatory requirement
before the company can commence business) - provisional contracts -
applicable to public companies having share capital
- Contracts made after the company becomes entitled to commence business -
regular contracts.

● Preliminary or Pre-incorporation Contracts:

● Preliminary contracts are those contracts made by the promoters on behalf of the
company before its incorporation
● primitive contracts will not bind the company since the company was not in existence at
the time of contract and therefore the company had no capacity to contract to that time
● Even if the contract was entered on behalf of the company for the purpose of the
company and for the benefit of the company, such contracts will not bind the company
● Even after incorporation of the company the preliminary contract cannot be ratified by
the company
● Thus, the promoters alone shall be personally liable for the preliminary contracts entered
on behalf of the company
● The only alternative available to the company is that it shall enter into a new contract
after incorporation to give effect to the old contract
● In Kelner V. Baxter (1866) L.R. 2 C.P. 174 - three persons A, B and C enter into a
contract as agents on behalf of a company before its incorporation for the purchase of
certain goods from Kelner and signed it as “A, B and C DIrectors”. The company later
obtained the certificate of incorporation. It was held that A, B and C were personally
liable on the agreement and no subsequent ratification by the company would relieve
them from that liability.
● In Howard V. Patent Ivory Co. (1888) 38 Ch.D - a company cannot ratify a pre-
incorporation contract, but it is open to enter into a new contract after its incorporation to
give effect to a contract made before its formation. Since the pre-incorporation contract
is a nullity, even the company cannot sue the vendor of property if he fails to carry out
such a contract
● Under Indian Law, however, under section 15 and 19 of Specific Relief Act 1963, a
preliminary contract shall bind the company subject to the following conditions -
- Such preliminary contracts were warranted by the terms of incorporation of the
company and was specified in the memorandum/articles
- Such contract should be ratified after the incorporation of the company
- Such ratification should be communicated to the other party to the contract

● In Inlec Investment (P) Ltd. V. Dynamic Hydraulics Ltd. (1989) 3 Comp LJ 221, 225
(CLB)- a company cannot acquire shares prior to its incorporation. Where a company
was named as the transferee in the share transfer forms prior to its incorporation, it was
held that such transfers could not be registered.
● Provisional Contracts:
● A private company can commence business immediately after incorporation, but a public
company can commence its business only after obtaining certificate of commencement
of business
● In case of public company, contracts made after incorporation but before grant of
certificate of commencement (submission of declaration), of business are called
provisional contracts
● Provisional contracts will not bind the company until the company is entitled to
commence business. However, on issue of such certificate to commence business such
contracts will automatically bind the company without any ratification, right from the date
of the contract
● In Re. Electrical Manufacturing Co. (1906) 2 Ch. 390, a public company is wound up
before it is entitled to commence business persons who have rendered services or
supplies or materials to the company can have no claim against it.
● Regular Contracts:
● It refers to post incorporation contract in case of private company and contracts entered
after getting the certificate of commencement of business in case of a public company
● All the contracts entered on behalf of the company by the director/officer will bind the
company. However, in order to bind the company, the contracts must be -
- Entered in the name of the company
- The proposed contract should not be beyond the scope of MOA of the company.
If so, they are ultra virus contracts and cannot be ratified by the company in
which case the directors/officers shall be personally responsible
● Commencement of Business
● According to section 11(1), every company having a share capital shall not commence
any business or exercise any borrowing powers unless -
- A declaration is filed by a director in suh form (From No. INC 21) and verified,
with the Registrar, that every subscriber to the memorandum has paid the value
of shares agreed to be taken by them on the date of making this declaration and
- The company has filed with the registrar a verification of its registered office as
provided in section 12(2)

● If any default is made in complying with the requirements of this section, the company
shall be liable to a penalty which may extend to Rs.5000 and every officer who is in
default shall be punishable with fine which may extend to Rs.1000 for every day during
which the defaults continues (section 11(2))
● Where no declaration by a director has been filed with the Registrar under section
11(1)(a) within a period of 180 days of the date of incorporation of the company and
Registrar has reasonable cause to believe that the company is not carrying on any
business or operations, he may, initiate action for the removal of the name of the
company from the register of companies.
● The approval of the Registrar of Companies of the declaration filed by a director and
verification of registered office filed by the company entitles the company to commence
business given in the objects clause of the MOA. No business other than those given in
the “object clause” can be commenced without obtaining prior permission from the
shareholders by way of special resolution.

● Memorandum of Association
● According to section 2(56), “memorandum” means memorandum of association of the
company as originally framed and altered from time to time and registered under the Act.
● In the absence of clear definition of Memorandum under the Companies Act,
memorandum can defined as:
- It is the charter of the company
- It is the constitution of the company
- It gives the fundamental conditions under which a company is incorporated
- It defines the objects of the company
- It specifies the scope of power of the company
● Every company registered under the Act must have a memorandum of association
● Anything done beyond the scope of the memorandum is ultra virus and cannot be
ratified even by the whole body of shareholders
● Purpose of Memorandum
● It enables the investor to know the purpose for which his money will be used by the
company, and the extent of risk he takes while making investments
● Anyone dealing with the company will know without doubt, the contractual powers and
limitations of the company
● Form of Memorandum: [sec.4]
● The memorandum of association should be in the following forms specified in Schedule-
1 depending on the type of the Company
● Table A - for companies limited by shares
● Table B - for companies limited by guarantee and not having share capital
● Table C - For company limited by guarantee and having share capital
● Table D - for unlimited companies and not having share capital
● Table E - for unlimited companies and having share capital
● A company may either adopt the model form as specified or may prepare it on its own
● Contents of Memorandum
● According to Section 4(1), the memorandum of a company must state -
a) Name Clause
b) Situation clause of Registered office clause
c) Objects clause
d) Liability Clause
e) Capital Clause
f) In the case of One person Company, the name of the person who, in the event of
the death of the subscriber, shall become the members of the company
● The above clauses are compulsory and are designated as “conditions” prescribed by the
Act, on the basis of which a company is incorporated
● It is to be noted that the Companies Act 2013 shall override the provisions in the
memorandum of a company, if the latter contains anything contrary to the provisions in
the Act (section 6)
a) Name clause (section 4(1)(a))
● The name of the company shall end with “limited” in case of public company and with the
words “private limited” in case of private company. These words can be dispensed with
in case of section 8 companies
● The names of the company should be one which is not undesirable and should not be
similar or identical with that of an existing company or misleading names
● While designing the name clause, the provisions of the Emblems and Names
(PRevention of Improper Use) Act 1950 and guidelines of MOCA should be complied
with
● The central government prohibited the use of the names and emblems by companies in
trademarks and patents; name and emblems of the international organisations, the
indian national flag, the official seal and emblems of the government, the name and
pictorial representation of national leaders
● Further, as per sect 4(2) any word that gives the impression that the company is
connected with the government, or any local authority, corporation of government, shall
not be used.
b) Situation clause or registered office clause (sec 12)
● It shall give the name of the state in which the registered office of the company is to be
situated. The actual situation of registered office can be filed with the ROC within 30
days of incorporation.
c) Objects Clause:
● It may be divided into the following three categories -
- The main objects of the company to be pursued after its incorporation
- The objects incidental or ancillary to the attainment of the main objects
- Other objects of the company not included in the sub clauses state above

● As per sec 4(1)(c) division of the objects as above not necessary. State the objects for
which the company is proposed to be incorporated and any matter considered
necessary
d) Liability Clause: (section 4(1)(d))
● The memorandum of a company limited by shares or by guarantee shall also state that
the liability of its members is limited. In case of unlimited company the memorandum
shall state the liability of the members shall extent to the entire debts and liabilities of the
company. In case of a company limited by guarantee, mention the amount upto which
each member under takes to contribute in the event of winding up of the company
e) Capital Clause: (section 4(1)(e))
● This clause must state the amount of capital with which is to be registered unless the
company is an unlimited company. The shares into which the capital is divided and the
nominal value of each share should be specified. Also state the number of shares which
the subscribers to the memorandum agree to subscribe which shall not be less than one
share.
● In case of OPC mention the name of the person, who is the event of death of the
subscriber, shall become the member of the company
● Description For Subscription
● The statutory requirements regarding subscription of memorandum are that -
- Each subscriber must take at least one share
- Each subscriber must write opposite his name the name of shares which he
agrees to take (section 4(1)(e))

● Signing of Memorandum (rule 13 companies (incorporation) Rules, 2014)

● The memorandum and AOA shall be signed by each subscriber, who shall add his
name, address, description and occupation, if any, in the presence of at least one
witness
● Where the subscriber to the memorandum is a body corporate, the MOA and AOA shall
be signed by director, officer of the body corporate duly authorised by a resolution of the
BOD
● Where the subscriber is a LLP, it shall be signed by a partner of the LLP, duly authorised
by a resolution approved by all the partners of the Limited Liability Partnership.

● Alteration of Memorandum: (section 13)

● Alteration of name clause:
- Change of name by company voluntarily (sec 13)
- Change of name by order of the registrar (sec 4(5))
- Change of name by order of the tribunal (Sec 7(7)(a))
- Change of name when incorporated with similar or identical name of an existing
company (sec 16)

● Publication of Name: sec 12(3) : where a company has changed its name during the
last two years, it shall affix or print or paint, along with its name, the former name or
names so changed during the last two years

● Change of Situation or Registered Office Clause (sec 12 & 13):

● Shifting from one plate to another place in the same city, town or village
● Shifting to a place outside the city, town or village in the same state
● Shifting from the place under jurisdiction one of ROC to another ROC in the same state
● Shifting of Registered office from one state to another state (sec 12(4 to 7))
● Procedure requirements :
- Board resolution in board meeting
- Special resolution of members in general meeting (sec 13(1))
- Approval by the central government (sec 13(4))

● Restriction on shifting of registered office:

● The shifting of registered office shall not be allowed if any inquiry, inspection of
investigation has been initiated against the company or any prosecution is pending
against the company under the Act
● Filing with Registrar:
● The certified copy of the order of the central government, approving the alteration of the
memorandum for transfer of registered office of the company from one state to another
within 30 days from the date of receipt of certified copy of the order

● Alteration of Objects clause (Sec 13):

● The alteration of objects clause by special resolution of members of the company. The
Act impose restrictions on on the alteration of objects clause of the company, which has
raised money from the public for one or more objects mentioned in the prospectus and
has any unutilized money
● The Act itself specifies that along with obtaining an approval by way of a special
resolution, a company would be required be ensure following if it intends to alter its
objects clause:
 - Publish the notice of the aforesaid resolution stating the justification of variation
in 2 newspapers, one in English and one in vernacular language at the place of
registered office of the company
- Exit option is given to dissenting shareholders by the promoters and
shareholders having control in accordance with the regulations to be specified by
the SEBI

● Alteration of Liability Clause (sec 13(1)):

● A company can change the liability clause of its memorandum of association by passing
a special resolution and the resolution must be filed with Registrar within 30 days

● Alteration of Capital Clause (sec 61):

● A limited company having a share capital may make the following types of alterations in
its memorandum by an ordinary resolution, if so authorised by its articles, at its general
meeting to -
- Increase its authorised share capital by such amount as it thinks expedient;
- Consolidate and divide all or any of its share capital into shares of a larger
amount that its existing shares;
- Convert all or any of the its fully paid-up shares into stock, and reconvert that
stock into fully paid-up shares of any denomination;
- Sub-divide its shares into shares of smaller amount that is fixed by the
memorandum
- Cancel shares which, have not been taken or agreed to be taken by any person
and diminish the amount of its share capital by the amount of the shares so
cancelled

● These alterations are, however required to be notified and a copy of the resolution
should be filed with the registrar within 30 days of the passing of the resolution along
with an altered memorandum (sec 64(1))

● Articles of Association: (section 5,10 and 14)

● According to section 2(5), articles means ‘articles of association of a company as
originally framed or altered from time to time under the Companies Act’
● The articles of association (AOA) 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
● The articles mostly deal with the rights of the members with that of the company and the
rights of members inter-se
● The articles are subordinate to the Companies Act and also the memorandum. Thus, the
memorandum lays down the scope and powers of the company, the articles govern the
method in which the objects are to be achieved.
● The articles must be printed and be divided into paragraphs, consecutively numbered,
stamped and signed by each subscriber of the memorandum duly witnessed and should
be filed along with the memorandum
● In case of a public company limited by shares, it may have its own registered articles or
alternatively adopt Table F of the Schedule I as its registered articles.
● In case of a private company it must have its own registered articles specifying the
restrictive clauses in its articles. Similarly, a company limited by guarantee or an
unlimited company must also have its own registered articles.
● The articles shall be in respective forms specified in tabled F, G, H, I and J in Schedule I.
A company may adopt all or any of the regulations contained in the model articles
applicable to such company.
● Every type of company whether public or private and whether limited by shares or limited
by guarantee having a share capital or not having a share capital or an unlimited liability
company register its articles of association.

● Contents of articles (section 5)

● Matters relations to shares: allotment of shares, calls on shares, lien on shares,
transfer and transmission of shares, forfeiture of shares, alternations of share capital,
share certificate, conversion of shares into stock etc.
● Directors: appointment, disqualification, share qualification, vacation of office, removal,
resignation, etc.
● Powers of directors , managing director and limitations on powers.
● Conduct of meetings: boards and general meeting, notices, quorum, chairman,
proxies, voting rights, minutes, constitution of committees, etc.
● Financial matters: dividends including interim dividend, issues of bonus shares,
accounts and audit, borrowing powers, etc.
● Other clauses - common seal, company secretary, indemnity, winding-up etc.

● Alteration of articles of associations: ( sections 14)

● Any provision in the articles can be altered by passing a special resolution in the
general meeting of the company.
● File with the ROC, within 15 days of passing the special resolution together with altered
copy of the articles of registration.
● If the shares of the company are listed on the Stock Exchanges, the alteration should be
informed to the Stock Exchanges concerned within 30 days as per the listing agreement.

● Limitation on power to amend articles:

● Alteration is subject to the following limitations or restrictions:
- The alterations should not be inconsistent with any of the provisions of the
Companies Act or any other Statute
- The alterations should not be in conflict with the provisions of the MOA. in the
event of conflict the MOA will prevail.
- That the altered articles must not obtain anything illegal or against public policy
- The alterations must be in the bona fide interests of the company as a whole and
not just for the benefit of a group of shareholders or otherwise.
- Shuttle worth V. Cox Bros & Co. Ltc 1927
 - A company cannot justify a breach of contract with other parties by altering its
articles. Though the right to alter the articles cannot be questioned, it shall
remain liable for the damages for its breach (British Moorae Syndicate V.
Alpherten Rubber Co. Ltd)
- The alteration must not constitute a fraud on the minority nor inflict any kind of
hardship on them (Brown V. British Abrasive Wheel Co. Ltd)
- The alteration must not be inconsistent with an order of the court.
- No alteration can increase the liability of the members on the share unless all the
members concedes in writing to such increased liability.
- Any alteration to articles empowering the directors to expel a member from the
company is illegal and void
- The alterations of articles may be with prospective or retrospective effect.

● Conversion of Company: (section 18)

● For the conversion of a company of any class registered as a company of other class, by
alteration of memorandum and articles of the company in accordance with the provisions
of the Act. File the same with ROC within 15 days.
● The Registrar shall on an application with fee, effecting the conversion of a private
company into a public company or vice-versa, after satisfying that the provision have
been complied with, close the form registration of the company and after registering the
documents, issue a certificate of incorporation in the same manner as its first
registration.
● The conversion shall not affect any debts, liabilities, obligations or contracts incurred or
interested into by the company before such conversion.
● For conversion of Public company into private company the existing promoters,
directors, major shareholders and others should take effective steps to purchase the
shares so as to reduce the number of member to 200
● Inform the Stock Exchange concerned where the shares of the company are listed
regarding the board meeting which is considering the proposal for conversion.

● Procedure for incorporation of a company: (section 7)

● Type of company (sec 3)
● Name of the company
● Preparation of MAO
● Preparation of AOA
● Vetting of MOA and AOA
● Statutory declaration in Form no. INC.8
● Situation of Registered Office in Form No. INC.22
● Consent of directors in Form No. INC.12
● Particulars of first directors in Form No. INC.12
● Power of attorney
● Payment of fees
● Application for incorporation of company (Rule 12 of the Companies (incorporation)
Rules, 2014)
● Certification of incorporation (Rule 18)
● Corporate identity Number : sec 7(3)
● Preservation of all documents : sec 7(4)

● Legal effect of MOA and AOA

● The MAO and AOA, when registered, bind the company and its members to the same
extent as if they have been signed by the company and by each member to observe and
be bound by all the provisions of MOA and AOA.
● Also, all monies payable by any member to the company under the MOA or AOA shall
be a debt due from him to the company (section 10)
● The extent to which the MOA & AOA bind:
a) The members of a company :
- Boreland’s Trustee V. Steel Brother and Co. Ltd (1901)
b) The company to the members
c) The members inter se
d) The company to outsiders
- Eley V. Positive Life Insurance Co. (1876)

● Doctrine of constructive notice

● The MOA & AOA are public documents and can be inspected by any person on payment
of a nominal fee. The documents filed with the Registrar are public documents as per
Section 399 of the Act
● Every person entering into a contract with the company has to ascertain not only the
exact powers of the company but also extent which the powers have been delegated to
the director and limitations on such powers.
● The Doctrine imposes an obligation on persons dealing the company to read and
understand MOA & AOA before entering into any contract
● Therefore, every person dealing with the company is presumed that he read the MOA &
AOA and understood properly.
● If the articles provide that a cheque must be signed at least by two directors, the outsider
dealing with the company must see that it is so signed,; otherwise he cannot claim under
it.
● This doctrine protects the company against the outside
● In Kotla Venkataswamy V. Rammurthy, AIR 1934 Mad, the articles of a company
required that all the documents and deeds of the company shall be signed by MD, the
secretary and a working director of the company. A mortgage deed was signed by the
secretary and working director only. It was held that the mortgage deed was invalid even
though the plaintiff had acted in good faith and money was utilised for the benefit of the
company.
● Doctrine of ultra-vires:
● The term ‘ultra-vires’ means beyond one’s power or authority. Where exercise of powers
vested in a person arisies, the question arises as to whether a person is acting within the
limits of authority conferred on him. If the person exercising the powers goes beyond the
jurisdiction of his powers, the person is said to have acted ultra-vires .
● The doctrine of ultra-vires contemplates -
- That the person exercising the power is not having an unlimited or infinite power
to do all acts of things at his will and pleasure, and
- That the person exercising the power derives the same from some other person
on behalf of whom the person acts.
- The person may be delegated by an express or implied act on the said person/s.

● As far as a company is concerned, any act done beyond the objects mentioned in the
MOA is ultra-vires, null and void.
● The acts of the company are subject to the provisions contained in the Act in terms of
which it is incorporated and its two-constitutional documents, viz, the MOA and AOA.
● Ashbury Rly. carriage & iron Co. Ltd. V. Riche (1875)
● Lakshmanaswami Mudaliar V. LIc (AIR 1963 SC)
● The court observed that an ultra vires contract, which is ultra vires the MOA, remains an
ultra-vires contract, even if all the shareholders agree to it.
● Where any act of the company is ultra-vires the MOA, it is void and has no legal effect. It
cannot be ratified even if all the shareholders unanimously agree to ratify it. Such an act
does not bind neither the company not the other party can use it.
● Effect of ultra-vires transaction s:
● Void ab initio
● Suit for injunction
● Right of subrogation
● Directors personal liability
● Liability for torts and crime
● Exceptions to the doctrine of ultra-vires:
● If an act is ultra-vires the powers of the directors but intra-vires the company, the
company is liable and it can ratify it
● If an act is ultra-vires the articles but intra-vires the MOA the articles can be altered to
give effect to such act
● If an act is within the powers of the company but is irregularly done, consent of all
shareholders will validate it.
● If a company takes ultra-vires loans and uses it to discharge intra-vires debts, the lender
gets the right of subrogation
● If a person borrows money from a subrogation under ultra-vires contract, the company
can sue him for recovery of the money. It has a right to protect its property.
● In Evans V. Brunner, Mond & Co., (121), a company engaged in manufacture of
chemicals, proposed to devote a substantial sum of money to the encouragement of
scientific education. It was proved that this act would ultimately benefit the company, but
a shareholder objected on the ground that it was beyond the powers of the company.
The court held that the proposal was fairly incidental to the company's object.
● In Forest V. Manchester Rly Co. )1801), a railway company had the authority to keep
boats to be supplied for a ferry. It employed the boats for excursion trips to the sea when
these were not wanted for the ferry. The court held that the use of the boats was
incidental to the main purpose and was within the powers of the company.
● Doctrine of Indoor Management:
● The doctrine of constructive notice proved too inconvenient for business transactions
and hindered the smooth flow of business.
● It was replaced by the Doctrine of indoor management in 1856 in the Royal British Bank
V. Turquand Case.
● According to this doctrine, “any person dealing with the company having satisfied himself
that the proposed contract is not inconsistent with the MOA and AOA. he is not bound to
inquire into the regularity of any internal proceedings of the company. He is bound to
presume that the provisions of articles have been observed and complied with, by the
officers of the company.”
● It is not the duty of the outsider to see that the company carries out its own internal
regulation
- Royal British Bank V. Turquand, (1856)
● Exceptions to doctrine of indoor management:
● The doctrine of indoor management will not protect the outsider and the company will
not be liable in the following circumstances:
- Where the outsider had knowledge of irregularity
- No knowledge of memorandum and articles-
- Rama corporation V. proved Tin & General Investment Co. (1952)
- Forgery -
- Rouben V great fingal consolidated (1906)
- Negligence -
- Anand behari lal V. dinshaw & co. ltd. AIR 1942

● Section 6 gives overriding force and effect to the provisions of the act. A provision
contained in the memorandum, articles, agreement or resolution to the extent to which it
is repugnant to the provisions of the Act, will be regarded as void.

● Prospectus
● Prospectus is a disclosure document inviting the public, to subscribe for the securities of
the company, to enable the inventors to take rational investment decisions and to protect
their rights, by giving various materials facts and prospectus about the company.
● Section 2(70) defines a prospectus as “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.”
● A document should have following ingredients to constitute a prospectus:
- There must be an invitation to the public
- The invitation must be made “by or on behalf of the company or in relation to an
intended company”
- The invitation must be “to subscribe or purchase”
- The invitation must relate to any securities of the company
● A document is deemed to be issued to the public, if the invitation to subscribe for share
capital is such as to be open to any one who brings his money and applies in prescribed
form, whether the prospectus was addressed to him or not.
● The first remedy against the company is to rescind the contract. A person who takes
securities on the faith of a prospectus containing false statements, ay apply to the Court
for setting contract aside, and striking off his name from register of members. He may
also claim his money back.
● The second remedy against the company is to sue for damages for deceit. The allottee
may recover damages from the company for any loss he may have suffered if the
invitation to take securities from the company and the persons making it on behalf of the
company have fraudulently misrepresented material facts.
● The allottee cannot both retain the securities and get damages against the company. In
actual practice, however, suits for damages against the company are rarely filed.
Damages are generally claimed from the directors, promoters and other persons who
authorised the issue of the prospectus.
● The test is not who receives the document, but who can apply for the securities in
response to the invitation contained in it.
● However, an issue will not be “public” if-
- It is directed to a specific person or a group of persons, and
- It is not calculated to result in the securities becoming available to other persons.

● Advertisement in newspaper to invite application for purchase of remaining shares of a

company is prospectus (Pramatha Nath Sanyal V. Kali Kumar Dutt, AIR 1925 Cal 714).
● A single private communication does not satisfy the term “issue” (Nash V. Lynde 1929
AC 158).

● Contents of Prospectus
● According to sec 26 the prospectus of a public company must be signed and dated and
contain all the necessary information as stated under:
● Name and registered address of the office, its secretary, auditor, legal advisor, bankers,
trustees, etc.
● Date of the opening and closing of the issue
● Statements of the Board of Directors about separate bank accounts where receipts of
issues are to be kept and details of utilization and non-utilization of receipts of previous
issues.
● Consent of the directors, auditors, bankers to the issue, experts opinions.
● Authority for the issue and details of the resolution passed for it
● Procedure and time scheduled for the allotment and issue of securities.
● The capital structure of the in the manner which may be prescribed
● The objective of a public offer
● The objective of the business and its location
● Particulars related to risk factors of the specific project, gestation period of the project,
any pending legal action and other important details related to the project.
● Minimum of directors, their remuneration and extent of their interest in the company
● Reports for the purpose of financial information such as auditor’s report, report of profit
and loss of the five financial years, business and transaction reports, statement of
compliance with the provisions of the Act and any other report.

● Golden Rule for framing of Prospectus

● The golden rule for framing of a prospectus was valid down by Justice Kindersley in New
Brunswick & Canada Rly. & Land Co. V. Muggeridge (1860). Everything must be stated
with strict and scrupulous accuracy. In a word, the true nature of the company’s venture
should be disclosed.
● In Rex V. Kylsant (1932), the prospectus though true in itself was rendered false in the
context in which it was stated.
● A half truth, for instance, represented as a whole truth may tantamount to false
statement (Lord Halsbury In Aarons Reefs V. Twisa).
● Thus, the persons issuing the prospectus must include in the prospectus all the relevant
particulars, which are required to be stated compulsorily but should also voluntarily
disclose any other information within their knowledge which might in any way affect the
decision of the prospective investor to invest in the company.

● Filing of Copy with the registrar

● According to Sec 26(4), the prospectus is not to be issued by a company or on its behalf
unless on or before the date of publication, a copy of the prospectus is delivered to the
registrar for registration.
● The copy should be signed by every person whose name has been mentioned in the
prospectus as a director or proposed director or the assigned attorney on his behalf

● Registration of prospectus
● Section 26(7) states about the registration of a prospectus by the registrar. The registrar
can register a prospectus when:
- It fulfills the requirements of section 26 and
- It contains the consent of all the persons named in the prospectus in writing

● Issue of prospectus after registration

● If a prospectus is not issued before 90 days from the date from which a copy was
delivered before the registrar, then it is considered to be invalid.

● Types of Prospectus
● There are 4 types of a prospectus, which are as under:
● Abridged Prospectus
● According to Section 2(1), abridged prospectus means a memorandum containing
salient features of a prospectus as may be specified by the SEBI on this behalf. It means
that a company cannot issue application form for purchase of securities unless such
form is accompanied by an abridged prospectus.
● Deemed Prospectus
● According to section 25(1), where a company allots or agrees to allot any securities of
the company with a view to all or any of those securities being offered for sale to the
public. Any document by which such offer for sale to the public is made is deemed to be
a prospectus by implication of law.
● Shelf Prospectus
● According to section 31, shelf prospectus is a prospectus in respect of which the
securities or class of securities included therein are issued for subscription in one or
more issues over certain persons without the issue of a further prospectus. Only the
companies (Eg. financial institutions, banking companies) which have been prescribed
by the SEBI can issue a Shelf prospectus with the Registrar.
● Red Herring Prospectus (RHP)
● According to section 32, an RHP means a prospectus which does not have complete
particulars on the price of the securities offered and quantum of securities to be issued.
● A company may issue an RHP prior to the issue of a prospectus. The company shall file
RHP with the Registrar at least 3 days prior to the opening obligations as are applicable
to a prospectus and any variation between the RHP and a prospectus shall be
highlighted as variations in the prospectus.

● Liability for Untrue/Misstatement in Prospectus

● Where an untrue statement occurs in a prospectus, there may arise (i) civil liability (ii)
criminal liability.
● Every person who is a director of the company at the time of the issue of the prospectus,
every promoter of the company and every person, including an expert, who has
authorised the issue of a prospectus, shall be liable.
● What is an Untrue/Mis-statement?
● Whether a statement is untrue or not is to be judged by the context in which it appears
and the totality of impression it would create.
● Further, where any inclusion or omission of any matter in a prospectus is likely to
mislead, the prospectus shall be deemed, in respect of such omission, to be a
prospectus in which an untrue statement is included.
● The expression “included” with reference to a prospectus means included in the
prospectus itself or contained in any report or memorandum appearing on the face
thereof or by reference incorporated therein or issued therewith.
● Even if every word included in the prospectus is true, the suppression of material facts
may cause the prospectus to be fraudulent.

● Criminal Liability for Misstatement in the prospectus

● Where a prospectus is issued which includes any statement which is untrue or
misleading the investor, then every person who authorised the issue of prospectus shall
be punishable with imprisonment for a term which may not be less than 6 months but
which may extend to 10 years; or a fine not less than the amount involved in fraud bt it
may extend to three times the amount of fraud; or with both
● Onus for Proof of Misstatement
 ● The burden of proof lies upon an allottee that he has been misled by the misstatement in
the prospectus. He must prove:
- The misrepresentation was of a fact
- It was in respect of a material fact. What is a material statement of fact will
depend upon the circumstances of each case.
- He acted on the misrepresentation and
- He suffered damages in consequence.

● Remedies for Misstatement in Prospectus

● A company is responsible for a statement in prospectus only if it is shown that the
prospectus was issued by the company, or by someone with the authority of the
company, e.g. the board of directors. The company is also liable for misstatement in
prospectus even though the prospectus is issued by the promoters & the Board ratifies
and adopts the issue of prospectus.

Membership in a Company
● Shareholder and Member:
● Member is a person whose name appear in the Register of members of the company.
On the other hand a shareholder is a person who holds the shares of a company.
● In case of a company limited by shares, the terms “members” and “shareholders” are
interchangeably used since there is not other method of becoming a member other than
through share holding
● The membership is a company is obtained through subscribing to the memorandum,
through allotment/transfer/ transmission etc.

● Differences between a member and shareholder:

● When a person transfers his shares, until registration of shares if affected by the
company, he continues to be the member of the company even though not a
shareholder. Similarly, the buyer of shares, until the registration is effected, continues to
be the shareholder of the company and not a member.
● In case of a company limited by guarantee not having share capital, the members are
those persons who are liable under the guarantee clause in its memorandum, in the
event of liquidation. There are no shareholders in such a company.
● Similarly in case of unlimited company, the members are liable for the entire debts and
liabilities of the company in the event of winding up. Even in this case there are no
shareholders.
● The legal representative, official receiver or official assignee in case of transmission of
shares due to death, insolvency or insanity of a member, are not members of the
company even though they continue to be shareholders with certain rights including right
to receive dividend, right to receive notices of meeting, etc.
● A share warrant holder is a holder of shares in the company and not a member of the
company.

● Definition of ‘Member’
 ● According to section 2(55)
● The subscribers to the memorandum of a company who shall be entered as members
in its register of members
● Every person whose name is entered in its register of members shall, be a member
of the company.
● Every beneficial owner in the records of a depository shall be deemed to be a
member of the concerned company
● There are two important elements which must be present before a person can
acquire membership of a company viz.,
● Agreement to become a member, and
● Entry of the name of the person so agreeing, in the register of a member of the
company.
● The person desirous of becoming a member of a company must have the legal capacity
of entering into an agreement in accordance with the provisions of the Indian Contract
Act 1972
● Modes of Acquiring Membership
● As per Section 2(55), a person may acquire the membership of a company:
a) By subscribing to the MOA (deemed agreement); or
b) By agreeing in writing to become a member:
1) By application and allotment of shares; or
2) By executing an instrument of transfer; or
3) By transfer of share of a deceased member; or
4) By acquiescence or estoppel.
c) by beneficial owner in the records of a depository shall be deemed to be a member of the
concerned company