Indian Institute of Management, Kashipur

MBA 2022-2024

Subject - Legal Aspects of Business

Case - MALABAR IRON & STEEL WORKS LTD. V.

REGISTRAR OF COMPANIES & ANOTHER

Guided By – Prof. K M BAHARUL ISLAM

SUBMITTED BY – GROUP - 03

MBA22242 Shivam Verma

MBA22214 Ishika Agrawal
MBA22240 Shailesh Tirkey
MBA22190 Aman Chowdhury
MBA22203 Naveen Kumar Chandina
MBA22279 VVS Siddharth
Table of Contents
Overview & Legal Issue.............................................................................................. 3
CASE ANALYSIS....................................................................................................... 4
Incorporation of a Company................................................................................... 4
Section 2(69) The Companies Act, 2013................................................................. 5
Commencement of business/ Raising of Share Capital:........................................ 5
Lessons Learnt from The Case.................................................................................. 7
REFERENCES............................................................................................................ 9
Overview & Legal Issue

The business was unable to obtain the necessary minimum subscription and was
forced to incur debt before beginning operations. Within a year of its incorporation on
November 28, 1960, the company did not start operations.

The minimum subscription was established at Rs. 6 lacs in the prospectus the company
had released urging the general public to subscribe for its stock. Despite the lack of any
documentation regarding share allocation, the firm's counsel claimed that shares with a
face value of Rs. 6 lacs had been allocated and fully paid. The subscription, however, was
well below the necessary amount, and it didn't appear likely that the requisite minimum
would be obtained anytime soon.

According to the decision, the corporation would never be able to formally launch
operations. The company appealed the decision, arguing that the declaration made by its
counsel was fraudulent and that the firm had received the minimum subscription
necessary to comply with S.149(1) of the Companies Act and start operations. The
appellate court ruled that this affidavit, submitted by N.S.P. Iyer, was not accepted as
being truthful. During cross-examination, N.S.P. Iyer produced three additional affidavits.
His claims and supporting evidence were incompatible. According to N. S. P. Iyer, the
company awarded shares on September 1, 1961, with a face value of Rs. 20,88,001, of
which Rs. 20,54,001 had been paid in cash. However, the court discovered that only 37,00
were paid in cash, with the remaining shares being given by N. S. P. Iyer and his relatives
in some manner. On the other hand, the judge has stated that the alleged allocation cannot
be regarded as an allocation subject to payment.

The rule in the Spargo's Case 1873 (8) Ch App 407, according to the court, must satisfy
two conditions. The second condition cannot be met where an allocation of shares is made
for money owed by the company because payment for the shares by set off of the debt is
not an agreement and satisfaction of the debt by the allocation of shares, and the first
condition cannot be met where an allocation of shares is made for money owed by the
company because money can only be due after the minimum subscription is raised. The
second need is that Iyer bought the property in his individual capacity, and the
responsibility of the business does not start until he transfers it to the corporation. The
minimum subscription amount of Rs. 19.6 lacs cannot be said to have been raised in light
of the situation.

According to the court, NSP Iyer's proof appears to be fraudulent. His testimony and the
affidavits he submitted did not agree. The facts are as follows as a result: NSP Iyer's two
wives combined their funds to buy the land, build on it, and buy equipment. Iyer claimed
to have all of the records for the funds he raised and spent, but for obvious reasons, he
was unable to present them as evidence in any of the sessions. After a month had passed
without any attempts to submit evidence, the investigation was declared ended.

The Court decided that the corporation should be dissolved because it cannot continue to
operate.

CASE ANALYSIS

MALABAR IRON AND STEEL WORKS LTD. vs REGISTRAR OF

COMPANIES was formed through the procedure of company incorporation under Section
(7) of the 1956 Company Act. One individual cannot start a business under section 7 of
company act of 1956.

Incorporation of a Company

The process of forming a corporation include registering the firm with the
Registrar of Companies. When a business is registered, it becomes a distinct legal entity.
The practise is sometimes referred to as company incorporation. The registrar will provide
a "CERTIFICATE OF INCORPORATION" to company when the AoA, MoA, and
signed approval of all company directors have been submitted.

Section 2(69) The Companies Act, 2013

A promoter is broad phrase for someone who begins a firm and is in charge of
obtaining cash, chasing first business possibilities, and entering into the first commercial
contracts for the company's growth. In this case, the firm's promoter, N. S. P. Iyer,
acquired land in his name for the company for 1.45 lacs. N. S. P. Iyer was also accused of
keeping monthly accounts, complete with supporting bills and vouchers, for the money he
raised and spent on behalf of the firm.

Commencement of business/ Raising of Share Capital:

All public companies must get a certificate for start of operation after receiving a
certificate of formation, as per Section 149 of the Companies Act of 1956. However,
under section 149(7)(a) of Companies Act 1956, a private company is exempt from this
clause and can begin operations after receiving a certificate of formation.

A corporation with a share capital will be unable to start doing business or use its
borrowing capacity until it has completed the following formalities: -

1. When a firm hasn’t produced prospectus asking general public to subscribe, it is

not permitted to start a business or borrow money, Unless –
 All memorandum subscribers must pay the value of the shares he has
obtained, which is equal to the minimum subscription amount.
 On application and allotment, each director must pay an amount equivalent
to the share's public offering price.
 Failure to apply for or acquire approval for listing from any stock exchange
results in no money being refunded to applicants who have been offered
for public subscription. The underwriters will agree to underwrite
subscription of aforementioned shares on terms and circumstances set
forth.
 The secretary or any of the directors must make a legal statement that the
following provisions have been compiled and filed with the ROC.
2. The Registrar certifies that firm is permitted to begin business and exercise
borrowing power after reviewing declaration in line with sub-section (1) or (2).

The minimum share capital necessary for the company's start-up was not lawfully
satisfied, according to the case. It was discovered that none of the share capital was raised
with public funds. It was also noted that not all of the share capital was raised in cash and
that some of it was raised in kind. The money raised in kind was a business debt that was
paid off in the form of shares on 1/6/1963, much before the firm's official start date of
9/1963. This is not in conformity with the part of the act, as any debt accrued before to the
company's formation may only be paid after the company's formation. As a result, the
company did not require a minimum number of shares to begin operations.

Companies or corporations are sometimes unable to meet the fundamental

requirements that allow them to continue operating legally, resulting in the
termination of their licences. The Companies Act of 1956, Section 433, describes the
conditions under which a company can be forced to close.

The conditions are laid forth in the several subsections.

a. If there is a special resolution reached by the court, the corporation will be

wound up.
b. If the business fails to submit the statutory report to Registrar of Companies or
fails to convene statutory meetings, The corporation may be forced to close
down by the court.
c. The court can also order the firm to be wound up if it doesn’t start doing
business within year of its formation or if it suspends its operations for a year.
d. If firm does not maintain the requisite number of members, which is 7 in the
case of a public company and 2 in the case of private company, the court can
order business to be wound up.
e. The Court can also order the firm to be wound up if it has acquired a large
amount of debt and is unable to pay it.
f. Court can also order firm to be wound up if the court believes it is equitable
and right to do so.

The winding up of a firm is the process of doing so. This process concludes the business's
affairs and marks the end of the corporation. The firm's assets and properties are managed
for the benefit of its creditors and shareholders. The administrator, also referred to as the
liquidator, does this by realising the assets' value in order to liquidate or liquidate the
company's assets, pay off the debt owed by the business, and distribute any remaining
funds to the various stakeholders in accordance with their rights as stated in the articles of
incorporation. In this instance, the organisation repeatedly neglected to provide the
Registrar with the required report. Additionally, the business had debt that it couldn't pay
off with its present bank balance of Rs. 37,000 because it had accrued it before it even
existed. The court also found that it was fair and acceptable to shut down the company's
operations. In this instance, the court rendered a specific ruling. As a result, this
component played a crucial role in the final judgement that ordered the winding up and
termination of the corporation.

Under Section 439 of Companies Act, 1956, it is mentioned that petition to compulsorily
wind up the company can be presented in court by company itself, the creditors, the
contributors, the registrar and any person authorised by central government.

Subsection 5 of Section 439 outlines the requirements under which a registrar may submit
a petition if and only if the registrar has received prior approval from the Central
Government, as detailed in clauses (b), (c), (d), (e), and (f) of Section 433.

The Registrar issued order exclusively in compliance with this statute in this case. The
court granted authorization to the presentation of a petition to the court in Kerala by the
Registrar of Companies, Kerala, in accordance with the conditions indicated in the second
proviso to Subsection (5) of Section 439. It was provided to wind up the company's
operations, and the reason used to justify it was listed in Section 433(c) of the Act.

Lessons Learnt from The Case

As a group, we have discovered that a company is created when a number of

people come together with the goal of building an organisation in order to take advantage
of business opportunities by bringing in staff, resources, capital, and management.
Following then, the business becomes a separate legal entity after being registered with
the Registrar of Companies. The procedure of incorporating a business is called as
incorporation. It is crucial to raise money once the company has been registered in order
for it to start operating.

The case discusses the prohibition of sub-section (1) of Section 149 of Companies Act
prohibiting commission of business and exercising power to raise debt until condition of
minimum subscription has been met, as well as sub-section (4), which states that Any
contract entered into by the company prior to the day on which it is authorised to do
business is merely provisional and becomes binding on the company on that date. It is also
critical for a company to start operating within one year of its formation date or not to stop
operations for more than one year. The firm shall not miss any statutory meetings or fail
to submit the statutory report to the Registrar of the company.
REFERENCES

CASE - MALABAR IRON & STEEL WORKS LTD. V. REGISTRAR OF COMPANIES &

ANOTHER. (n.d.). Indian Kanoon. Retrieved December 30, 2021, from

https://indiankanoon.org/doc/1368258/