COMPANY LAW

19/7 2023 (Wednesday)

Book- A rammaih
JJ Rani Committee- constituted in 2005 which drafted

Company Law, Mercantile Law, Corporate Law, Business Law and Commercial Law

Company law- How companies are incorporated, how they carry on their businesses?

Difference between Company Law and Corporate Law

Diff b/w company and corporation

 All companies are corporations but all corporations are not company.
 Both are legal entity that has identity of their own. Their identity is separate from
members.
 Sec 2(20) Company Act- Defines company-
 Sec 2(11)- Defines Corporation- includes a company incorporated outside India- ex.
LIC
 Types of company on the basis of incorporation
a. Chartered Company
b. Registered Company- Registered under company act
c. Statutory Company- not registered under company act- Thus for the purpose of
company act they are corporations.

Mercantile Law- Anything related to merchants

 About trading of goods.
 Ex- International Trade law

Business Law- Include Company Law, Mercantile Law, Corporate Law and other things ex
sale of goods act, contract act, IPR etc.

Diff Forms of Business org

  Sole Prope…- registration is not necessary
 Partnership- Company act sec 464- maximum number of people- 100. Section 69 of
partnership act- Talks about the registration of partnership- If the registration is not
their then partners would not be able to…..
 Limited Liability partnership- combination of partnership and company-
 Diff b/w LLP and partnership
a. In LLP there are minimum 2 designated partner (Maximin no restriction) whose
liability is unlimited and others liability may be limited to extent of their contribution.
 ….
 Hindu Undivided family

3 types of company based on liability

1. Company limited by shares- liability of members is limited to the subscription of their
shares
2. Company limited by Guarantee- Members are called members not shareholders.
3. Unlimited company-
 Section 2

 Company- Features
1. Corporate personality - case Salomon v Salomon, 1897- what are the features of the
company recognised in this case
 Case: Lee V Lee air farming company

20/7/2023 (Thursday)

Corporate personality- company has identity separate from its members.

Bombay stock exchange established in 1875 but incorporated in 2004.

2. Limited liability- liability of shareholders is limited to the extent of contribution in

shares.
 3. Perpetual succession-
4. Separate property
5. Capacity to sue and be sued
Case: Kelner v Baxter
Can after incorporation, a company can ratify pre-incorporation contract- No- Because
if the party changes during ratification, it is a new contract.
6. Contractual obligation
7. Limitation of action
Section 4- Memorandum of Association of Company- 3rd clause- object clause

 There is restriction that the company cannot hold its own share. If it holds it is called
Treasury stock. There is prohibition. Though section 68 provides a procedure for buy
back of shares. Once the company buy its share it has to destroy them, it cannot hold
its own share.

21/7/2023 (Friday)
 Section 4 read with section 13
 Section 13- Procedure of alteration of MoA
Case: Asbary Railway Carriage & Iron Co ltd v Hecter Riche- Related to limitation of action

8. Transferability of shares
9. Common seal- earlier it was compulsory but in 2015 amendment act it was made
optional
10. Voluntary association for profit- Profit not necessary in terms of money. Ex. Section
8 Companies are charitable company
11. Separation of ownership from management- advantage as well as disadvantage
12. Termination of existence- lengthy process,
 Winding up Procedure that leads to dissolution. It is of two kinds- voluntary and
compulsory. Voluntary binding reasons- no reason, purpose is fulfilled or the
company is for fixed period. Voluntary binding up is not given in company act, it is
given in section 59IBC. Compulsory binding up- Given under IBC as well as
company act.
  Dissolution - End of Company- Can be


 Liquidation, Insolvency, bankruptcy

13. .

Types of company on the basis of membership

a. One person Company
b. Private company- Two types of right- Right of premption and right of 1st refusal
c. Public company
.

 Diff between Public company and public sector company

 But PSC is nowhere used in company act
 Public company- where public money is used

24/7/2023 (Monday)

Liquidation- Part of winding up which leads to dissolution. But not every liquidation is part
of winding up but in every winding up liquidation is there.

Dissolution- Civil death of company. Termination of existence.

Insolvency- Inability to repay debts.

 Section 6 and 7 of IBC.
 Insolvency proceeding can also be initiated upon default.

Bankruptcy-
  A company has number of stakeholder- Directors, Shareholders, suppliers,
employees, Government, customers, distributers, promoters, creditors, Banks,

Initially there were no provisions for revival and rehabilitations of companies. Chapter 19 in
the 2013 company act inserted for revival and rehabilitation of companies but the provisions
were never notified. In 2016 IBC came into picture. The reason was NCLT was not in
existence when NCLT was established in 2016 and provisions for revival and rehabilitations
were introduced through IBC, they repealed chapter 19 and enforced provisions under IBC.

Disadvantages
1. Number of formalities and expenses for incorporation of company.
2. Corporate disclosures- Ex. SEBI (ICBR) requirements, SEBI (LODR) Requirements,
SCRA act, SEBI (SAST).
3. Greater social responsibility- sec 135- corporate social responsibility- Comply or
explain approach
4. Greater tax burden- Bacha F. Gujdar v CIT
5. Separation of control from management-
6. Detailed winding up procedure
7. The concept of corporate personality is not absolute

Merger- two kinds

a. By consolidation/by formation of new of new company- new entity is formed-Ex.
Company A and B merges and forms Company C
b. By absorption- Ex. Company A and B merges and forms company B.

26/7/2023 (Wednesday)

 Lifting of corporate veil

 Case: LIC v Escorts, 1986, SC (IMP Case)- FERA, 1983 was in force. In FERA
there was a requirement that if there is foreign investment coming then the NRI
 investment should not be more than 60% and total investment should ……..limit 5%.
SC- did not lift the corporate veil.

Certain situation in which the corporate veil can be lifted.

 Judicial interpretation
1. For the determination of the character of the company, the corporate veil can be
lifted- Daimler Company Ltd v Continentel Tyre and Rubber- Company was of enemy
character
2. If there is fraud or improper conduct- Gilford motors Ltd v Horne-
3. Avoidance of some statutory obligation or existing legal duty- Jones v Lipman-
4. In case of Government companies-Even if Govt holds 100% of the shares in the
company, the identity of the company and Govt remains different. They are two
separate company- Bharat Aluminum company ltd v Special area development
authority. Note: Courts are not saying that in the case of Govt company they will lift
corporate veil but you will not file a case where this was asked
5. Holding and subsidiary company [Section 2(87)]-
Holding company- When it has control over other company
Control- Defined in SEBI (SAST) Regulation)
 More than 50% shares and voting rights
 More than 50% voting rights
 Control over the composition of Board of directors

**Free wheels India ltd v Dr veda mitra- Subsidiary company is a separate legal entity
and it can go for further issuance of shares

** Where corporate veil can be lifted- There is a subsidiary company which is

incorporated for some purpose other than carrying on the business of its own- Case-
Inalsa Ltd v UoI, 1996 Del HC- Held- The exemption that were given to the small scale
industries were not given to the subsidiary company and the holding of corporate veil
doctrine were applied and subsidiary and holding companies were treated as same.
 ** Case: State of UP v Renu sadar- The purpose of registration of subsidiary company
was to generate and supply energy and power to holding company in order to help
holding company to …….Held: Subsidiary company is not separate company.

** For benefit of revenue- SATYAM-MAYTAS

 Statutory interpretation

1. Section 166- Duties of directors

2. Section 124- Interested directors
3. Section 188- Related party transactions
4. Section 3-
5. Section 12- Registered….(3)
6. Section 2(12)- Special fraud investigation officer
7. Section 447
8. Section 138- Internal Auditors

28/7/2023 (Friday)

Theories of Corporate personality (will not come in exam)

1. Fiction theory- The reason because corporate personality is given to these businesses
because they are creation of fiction.
2. Realist theory- A company is always run by natural persons.
3. Symbolistic or Bracket theory- Association of individual who come together to
form some business and they symbolize….
4. Concession theory- concession given by the state to form these organizations.
5. Purpose theory- Common objective or common purpose.
Types of Companies

1. On the basis of mode of incorporation

a. Chartered company
b. Statutory company
c. Registered company

2. On the basis of liability

a. Company Limited by shares- Section 2(22)
 2(22) “company limited by shares” means a company having the liability of its
members limited by the memorandum (Section 4(1)(d)) to the amount, if any, unpaid
on the shares (Section 2(84), Section 44) respectively held by them;
 Diff b/w share and stock-
 Case: Hansraj Gupta v Ashthana, 1952, privy council- Whatever is unpaid on the
nominal value of shares is statutory liability. It is the statutory liability of the
members to pay the unpaid amount. When the company makes call, the remaining
amount has to be paid and when default is committed as per section 106 of the
company act, the voting rights of the defaulters suspended and if the default
continues, the company also has power to forfeit such shares.
 Two situations when liability of shareholders arise- when company make call on
shares and when company goes for liquidation (goes for winding up).

b. Company limited by Guarantee

 Section 2(21)
 “company limited by guarantee” means a company having the liability of its members
limited by the memorandum to such amount as the members may respectively
undertake to contribute to the assets of the company in the event of its being wound
up;
 4(1)(d)(ii)

c. Unlimited company
 Section 2(92)
 2(92) “unlimited company” means a company not having any limit on the liability of
its members;
  Except for limited liability. Unlimited company has all the characteristic of corporate
personality, which means if the creditor of the company files a case …..he cannot
directly sue the members.
 Advantage
i. Provisions relating to buy back of shares is not applicable in case of unlimited
company.
ii. Can be incorporated with or without share capital.
iii. Section 162 talks about number of directors. While calculating maximum number
directorship of unlimited companies are excluded.

 Can a minor be member of company?

3. On the basis of membership

i. One person company-
 Defined section 2(62) rw Section 4(1)(f)
 Section 122-
 Features/requirement
a. It is registered as private company.
b. (section 3).
c. Section 4(1)(f)- talks about the requirement of naming nominee in the MoA.
d. Only Indian Citizens can register OPC.
e. While naming the nominee, he should be natural person and citizen of India.
Companies incorporation rule, 2014- 2 and 3).
f. Minors cannot register or cannot become nominee of OPC- Since to register a
company, you have to sign an agreement.
g. Cannot be converted into section 8 company (section 8 company are charitable
companies)- Read JJ Rani Committee report- doubtful.
h. Cannot convert OPC into any other form of company before 2 years from the
incorporation of OPC.

 Advantage
 a. Convening meetings and decision-making is easy.
b. Not necessary to sign accounts and books by CS.

ii) Private Company-

 Section 2(68)
 Minimum members- 2, Maximum-200.
 Will always have some restrictions on the transferability of shares. (article of
association). Right of 1st rejection, right of pre-emption. Two situations where these
restrictions will not work:
a. When there is a devolution of rights. (Section 42 and 45 of contracts act- talks about
devolution of rights). Schedule 1, table F- Art 24(ii). Case: Bentham mills spinning
company. Section 56 of companies act.
b. In case rights issue where the members have the rights to renounce the shares in favor
of their nominees.
 Dahiben Umedbhai patel v Norman james Hamilton, 1983.
 Case: Rangraj V. B. V. B Gopal krishanan, 1992- Held: If there is private agreement
b/w some of the members of the company that includes additional restrictions in case
transferability of shares which are not there in AoA, such restrictions are not binding
either on the company or the rest of members of the company.
 Case: Borland's trustee v steel brothers and co ltd- pre-emptive rights are binding even
if ….
 In case of pre-emptive rights, they are binding on pledgee as well. Pre-emptive rights
can also applies on a company when it creates a lien on it.
 Features of private company
a. Number of members
b. Name
c. Restriction on transferability of shares
d. No need to issue prospectus.
e. Private placement-
f. Minimum directors-2, Maximum -15.
2/8/2023 (Wednesday)

 Rule 3(6) of companies incorporation rules, 2014.

iii) Public company-

 Section 2(71)
 Features
a. Min members -7, Max- no limit.
b. Suffix- Ltd
c. Shares free transferable, no restriction.
d. Necessary that a prospectus is issued.
e. Can raise capital - By private placement and by public offer.
f. Min directors- 3. max- 15
g. Prior amendment min number of wage of share capital was….

Classification of companies on the basis of control

1. Holding Company
 Section 2 (46)1
 Section 2(87)
 Control defined in….
 Case: Freewheels India Ltd v Dr. Veda Mitra (imp case)- Identity of holding
company is separate from its subsidiary company.
 Case: VelaYudhan M v ROC, 1980, ker HC Judgement- One company advance loan
to the other and the agreement provided that the lending company would have power
to nominate majority of Board of directors.
2. Subsidiary
3. Government
4. Foreign
3/8/2023 (Thursday)

Subsidiary company

- Sec 2(87)- Provided that such class or classes of holding companies as may be
prescribed shall not have layers of subsidiaries beyond such numbers as may be
prescribed.
- The numbers are provided the companies (restriction on no of Layers) Rules, 2017-
One company cannot have more than two layers of companies but while calculating
these layers Wholly own companies are excluded. But certain classes of companies
are exempted from the restriction on the number of layers. Those companies are
a. Banking companies- As defined in sec 5(c) of the banking regulation act. A
license under sec 22 RBI act.
b. NBFC-Non banking financial companies- Sec 45-1 of RBI Act, 1934.
c. Insurance companies registered under the insurance act 1958.
d. Government companies

Sections talk about holding and subsidiary companies

- Section 19-Subsidiary company not to hold shares in its holding company.

- Section 186- Loan and investment by company.
- Section 70- a restriction that a holding company cannot buy back its shares through its
subsidiary.
- Section 129-submission of financial statement- when a company submits its financial
statement, the holding company is required to attach its subsidiaries' account as well.
- Section 213-
- 128- rights of holding companies representatives and members
- 216-219-
- 197- directors cannot receive….
Government Company

- Section 2(45)- “Government company” means any company in which not less than
fifty-one percent. 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.
- A Govt Company is neither a department of Govt nor Govt establishment- Hindustan
steelwork ltd v state of Kerala.
- AK Bindal v UOI, 2003 SC- the employees of Govt company are not Govt servants
and it is the responsibility of the company to pay their salary.
- Exemptions given to Govt Companies
a. Section 89-
b. 90
c. 134(3)(a)
d. 149(1)(b)
e. 149(6)(c)
f. 164(2)
g. 196(2), (4), and (5)-
h. 197
i. 152(6)(d)
j. 162- does not apply to Govt companies where the entire share capital is held by
either the Central Govt or the state Govt or both.
k. 164- provides a list for disqualification of directors.

 Partial exemption
l. 170-
m. 186- Govt company in defense production or unlisted Govt Company.
n. 230-240-
o. 439- Offences to be non-cognizable. But in the case of Govt company, no court
shall take cognizance of any offense under this act except on the complaint of a
person in writing authorised by the central Govt in his behalf.

- 182- Govt company are not eligible for any kind of political contribution
4/8/2023 (Friday)

 Market- 2 kinds
a. Money market - short-term instruments are used.
b. Capital market- long-term instruments are used.

 Foreign company- Section 2(42)

- “Foreign company” means any company or body corporate incorporated outside
India which—
(a) has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and
(b) conducts any business activity in India in any other manner;

- As regard the status, the place where it is incorporated, the laws of that country will
apply.
- As regard the contract and…..
- Chapter 22 of the companies act- COMPANIES INCORPORATED OUTSIDE
INDIA
- Section 381- Accounts of foreign companies.
- 376- Power to wind up foreign companies, although dissolved.

 Small Company- section 2(85)- only after 2013 act we came up with this
classification.
- 233- fast track mergers
- exceptions given to small companies
a. 2(40)- they need not include the cash flow statement
b. 67-
c. 92- annual return- CS sign is not necessary
d. 121-need not prepare a report on AGM (annual general meeting).
e. 134-
f. 149-need not have more than two directors. no need to appoint an independent
director.
 g. 152- directors retiring by rotation does not apply.
h. 164-can include more grounds for disqualification.
i. 165-
j. 167- some additional ground for the vacation of office can be included.
k. 173- Requirements not necessary except the board of directors meeting.
l. 197

7/8/2023 (Monday)

Section 455- Dormant Company-r/w sec 89

- New concept, originally was not there in companies act.

- Objective- To identify shell company.
- Section 2(40)
- section 173zz

 Associate company
- Section 2(6)-
- Diff b/w merger and joint venture- In case of merger some entity loses it identity
whereas in case of joint venture these….
- Some subsidiaries can be associate companies whereas there are chances that some
will not be. Section 2(76)-Related party and 188- Related party transaction.

 Charitable Company-section 8
- cannot carry on its business without licence.
- Revocation of Licence- 8(6).
- Partnership firm can become a member of company but all the partners are joint
member or shareholder.
- Can convert itself in any other form of company.
- Exemptions
a. 2(24)- Definition of secretary does not apply.
b. Rule 3- 6
 c. 2(
d. Section 96
e. 101
f. 136
g. 118
h. 149
i. 150
j. 152
k. 160
l. 165
m. 173
n. 174
o. 177
p. 178
q. 171
r. 182
s. 189- Contract and arrangements
t. 184- interested director-
u. 188- Related party transaction

4 Kinds of Committies are to be constituted by Board of directors are

- CSR committee
- Audit-
- Nomination and remuneration- 168
- The stakeholders relationship Committee

8/8/2023 (Tuesday)

Investment Company- Section 186 Explanation defines

- (a) the expression “investment company” means a company whose principal business
is the acquisition of shares, debentures or other securities 2[and a company will be
deemed to be principally engaged in the business of acquisition of shares, debentures
or other securities, if its assets in the form of investment in shares, debentures or other
 securities constitute not less than fifty per cent. of its total assets, or if its income
derived from investment business constitutes not less than fifty per cent. as a
proportion of its gross income.]

Producers Companies

- Part 9a of 1956 Act- Section 581(a)(2), 581(z)(b)

- For the registration minimum number of directors required is 5 and the minimum
number of members should be 10.

Nidhi Company

- Sec 406
- Similar to non-banking financial companies (NBFC) because they are involved in
lending and borrowing of money.
- Difference- NBFC Deals with outsiders as well but in the case of Nidhi they are
limited to their members only. NBFC is not a mutual benefit society.
- Requirements
a. Declaration by central Govt as Nidhi Company
b. Should be incorporated with the share capital of a minimum 10 lakh
c. Minimum number of members 200.
d. Within 120 days of incorporation its net owned fund should be 20 lakh rupees.
e. Restrictions to issue preference share.
f. AOA – restriction not should be involved in high purchase financing, lease
financing, insurance etc.
g. Should not accept deposits from its members.

FORMATION AND PROMOTION OF COMPANY

- Promotion of Company- Before the company is incorporated.

- Promotion done by promoters- defined in section 2(69).
- Reg 2(oo) SEBI
 - Reg 2(pp)
- Reg 2(s) of
- Reason for determining who the promoter is to be able to determine their liability.
- Promoter is the initiator of the company. He is the one who conceives the idea of
incorporation of the company. The promoter is also the agent of the Company (But
there is a case that held that he is not the agent of the company). He is a fiduciary
agent. It is his responsibility to think in the interest of the company.
- sec 2(60)- Shadow director- Not director but controlling.
- Case: Twycross v Grand, 1877 (not imp)-

9/8/2023 (Wednesday)

- Promoter can be a natural person as well as a company. Any legal entity can also be a
promoter.

Case: Twycross v Grand, 1877 (not imp)-

- Definition of promoters- one who undertakes to form a company with reference to a

given project and to set it going and who takes the necessary steps to accomplish that
project.

Case: Phosphate Sewage company v Hartmount, (1876) 5 (imp for definition)

- Promoter is a person who procures or aids in procuring the incorporation of the

company.

Case: Official Liquidator v Velumudaliar, 1938 (Imp)

- Even if the promoter takes a lesser role in the formation of a company, he can be
called a promoter.

 Broad functions of promoter

- Planning of a business or the scheme of its formation. Conceive the idea of
company/business.
- Preparing the documents required for registration of the company. Domicile of the
company would be decided.
 - Negotiation for all the preliminary contracts.
- Everything related to prospectus. This point is relevant only in case of public
companies.
- Making arrangements for obtaining certificate of incorporation.

Case: Emma Silver mining company v Grant, (1879) 11 CHD 918

Case: Lagunas Nitrate company v Laguna Syndicate Ltd, 1899

- Promotion ends when board of directors are formed but the liability of promoters still
continues.

Duties of promoters

- To disclose hidden profits.

Case: Erlanger v New Sombrero Phospahte Co ltd
- Discloser of material facts.
- To act in the best interest of the company.
- Disclose of private arrangement.

Duties of promoters in the light of pre-incorporation contract

 Case: Kelner v Baxter, 1866 (imp)

- It is the liability of promoters for pre-incorporation contract.

Rights of promoters

- Right of reimbursement against the company.

- Right of indemnification against the co-promoter.
-
10/8/2023 (Thursday)

Formation of Companies

- The steps for formation of company

a. Application for digital signature certificate.
b. Apply for Directors identification number- 153, 158
c. MoA/AoA
d. Certificate of incorporation

 Section 3 – Formation of company

 Section 7- Incorporation of Company
 SPICe- Simplified proforma for incorporation of the Company electronically.

Steps for Registration of a company

A. Application for availability of names – Section 4(2). The reserved name is only valid
for 20 days.
- MCA will not check if there is a trademark violation.
B. Preparation of MoA and AoA.
C. Section 7- Registration of documents with RoC.
- Declaration from professional- CA, CS, etc.
- Affidavit/Declaration from the subscribers of MoA- Rule 15 of Companies
incorporation rules. sec 29.
- Furnishing verification of registration office- Section 12, Rule 25 of Companies
incorporation rules.
- All the particulars of subscribers.
- Particulars of the 1st directors of the company along with their consent letter that they
are okay with being the directors of the company.

 If the company is OPC- also submit all the details of nominee.

  Documents for Registration of Companies

1. MoA- Section 4, 6, 12, 13

a. Section 4 – MoA should have 5 main Clauses
- Name clause- 4(1)(a), (2) and (3)
- Registered Office- 4(1)(b), Section 12 and Rule 25.
- Object- 4(1)(c)
Doctrine of Constructive Notice
case: Kotla Venkata Swami v Chinta Ramamurthy
- Liability
- Share Capital
- Nominee clause in case of OPC.
- It should be in compliance with Company’s Act
- And AOA should be in compliance of MOA- should not contradict whatever written
in MOA

2.
3. AoA
4. Prospectus (If public Company)

16/8/2023 (Wednesday)

Doctrine of constructive Notice

- Case: Kotla Venkata Swamy v Chinta Ramamurthy (imp)

Facts:
- Sec 4 and 5

Doctrine of Ultra-vires
 - Case: Ashbury Railway Carriage v Riche (imp)
facts: 3rd clause of MoA.
Even if 100% of members of company are okay with the act, they cannot
retrospectively ratify it.
- Sec 4(1)(c)

Doctrine of indoor management

- Case: Royal British Bank v Turquand (imp)

- Sec 5

21/8/2023

PROSPECTUS

Section- 2(70)- means any document described or issued as a prospectus and includes a red
herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any
notice, circular, advertisement or other document inviting offers from the public for the
subscription or purchase of any securities of body corporate;

- Reason to issue prospectus is to give an overview to prospective investors about the

company. It is invitation to offer.
- Company prospectus is released by company to inform the public and investors of the
various securities that are available. These documents describe about mutual funds,
bonds, stocks and other forms of investments offered by the company. A prospectus is
generally accompanied by basic performance and financial information about the
company.
- A document shall be called a prospectus if it satisfies two things : 1. It invites
subscription to, or purchase of, shares or debentures or any other security of a body
corporate; 2. The aforesaid invitation is made to the public

LEGAL REQUIREMENTS OF PROSPECTUS

- A Prospectus is required to be issued only after the incorporation of company.

 - The prospectus must contain all the particulars, listed in the schedule II of Companies
act.
- The prospectus must be dated.
- Before a prospectus is issued, a copy of it must be registered with the registration of
companies.
- Prospectus shall be issued within ninety days of its registration.

Types of prospectus

1. ABRIDGED PROSPECTUS.

Sec 2(1)- abridged prospectus means a memorandum containing such salient features of a
prospectus as may be specified by the Securities and Exchange Board by making
regulations in this behalf.

Sec 33

2. DEEMED PROSPECTUS.

Sec 25

3. SHELF PROSPECTUS.

Sec 31

4. RED HERRING PROSPECTUS.

Sec 32

 Sec 26- Matters to be stated in prospectus

-
 Sec 34- Criminal liability for mis-statements in prospectus
 Sec 35- Civil liability for mis-statements in prospectus.

Public offer is invitation to offer while private placement is an offer.

Book building is a process in which company determines final price of shares

Merchant bankers- reg in SEBI- function- under-writing of shares (to make share that 90% of
issued share should be subscribed)

Independent directors can not be held liable

3 options to investors- who relied on mis-statement in prospectus while investing

 Repudiate the contract

 Ask for damages and compensation
 Action for Deceit

Sec 36- Punishment for fraudulently inducing persons to invest money.

Section 35(1)(d)- Any officer of company involved in issuance. Any key managerial person.

Sec 26(5)

Options available to investor if they spent the money based on the prospectus

1. they can repudiate the contract (Consent was based on misstatement).

2. Can ask for compensation or damages.
3. Can bring action against the deceit.

Section 36-

36 (a)- Difference b/w the following terms:

Acquiring-

Disposing of-

Subscribing-

underwriting of the securities- means you are doing it in your professional capacity as an
underwriter or as merchant banker.
Financial market

1. Money market
2. capital Market
a. Securities
- Primary- Directly purchase from company- Subscriber
- Secondary- Purchased over the counter
b. …

MEMBERSHIP

every shareholder is member but vice versa in not true- Sec- 2(55), 56, 57, 58, 59, 88

Section- 2(55)- Definition of member

2(55)(i) - It is necessary that the subscribers make some payment to company for subscription
of shares.

Section 54 Talks about Sweat equity shares. (Section 52, 53).

2(55)(ii) - Initially in Original Companies act the “Agreement in writing” was not there.
Agreement in writing means to become member of company, you should be eligible to
contract.

There are four modes of agreeing in writing

a. By making an application to the company for allotment of shares.

- It is example of purchasing directly from the company

b. By executing an instrument of transfer of shares as transferee.

- Sec 56- Transfer

c. By consenting to the transfer of shares of a deceased member in his name.

- Sec 56- Transmission

d. By acquiescence or estopple.
 - Case: Re M.F.R.D Cruz, 1939 mad 803

Section 56, 57, 58, 59, 88

23/8/2023

2(55)(iii)-

What if someone if beneficial owner but his name is in depository- Depositories Act 1996
read with sec 29 of CA

SEBI has introduced SEBI (Depository Participants Regulations)- act as intermediatory b/w
investors and companies

Sec 88- it is mandatory for company to maintain registers of shareholders

two depositories in India- NSDL and CDSL

Who all can be members in a company?

1. A Company can be a member in another company except a subsidiary company

cannot acquire a membership in its holding company (Sec 19). However, in these 3
circumstances even a subsidiary company can become a member of holding company.
a. Where the subsidiary company holds shares as the legal representative of a
deceased member of a holding company.
b. Where the subsidiary company holds such shares as a trustee before it became a
subsidiary.
c. Where the subsidiary company is a shareholder of the holding company before it
became a subsidiary of the holding company.
2. LLP (Section 7 of LLP act talks about designated partners, whose liability is
unlimited) (LLP is a body corporate, sec 3 and 14 of llp act talks about the nature of
LLP). LLP can acquire membership in any company.
3. Section 14 and 15 or partnership act. Sec 8(3) of companies act. (ask someone).
Partnership firm cannot acquire share except in case of sec 8(3).
 4. Foreign National- Subject to foreign exchange management act, 1999 (FEMA) and
also subject to the FDI policy. There are two route- Govt route (Seek the approval of
rbi) and private
5. Section 8 Companies- subject to their MoA. If they are authorised to invest by their
MoA. They have to convince govt that this is necessary to achieve their object.
6. Insolvent person- can continue as a member of a company,

24/8/2023

Case: Morgan v Grey

7. Pawnee- Can a pawnee acquire membership just because share can be pledged?- No.
Principle of equity (One cannot transfer the right which he himself does not have).
Pawnee has no right of forclosure. Since he never had the absolute ownership and his
equitable title cannot exceed what is specifically granted by law. Pawnee can never be
treated as holder of shares. the pawner continues the member of company and can
exercise right of member. (Case: Balkrishna Gupta v Swadeshi polytax ltd, 1985 SC)
(Imp case)
8. Fictitious person- cannot become member of company and if you acquire this is a
fraud under sec 447 and 38.
9. Trade union- can acquire membership in a company.

case: All India bank officers confederation v Dhanlaksmi bank ltd, 1997

10. Official receiver- No

- a person who is ordered by the government to deal with the income and property of a
company or a person after they have gone bankrupt
11. minor- A minor can hold share.
case: Karnataka Theatre Ltd . Re (2001)100 Com Cases 124 (imp)
Held: Minor can acquire membership but after attaining majority if minor does not
want to be member must repudiate his liability on the shares on the ground of
minority and if he does so the company cannot plead estoppel on the ground of his
having received dividence during his

Case: sadiq Ali v jai Kishori (not imp)

 minority or that he had fraudulently misrepresent his age in his application of shares

Whoever transferred the shares to the minor shall remain liable for all future call on
shares so long as they are held by minor.

Case: Nandita Jain v Benett Coleman Ltd.

A minor can acquire fully paid share

12. Holder of GDR (Global depository receipt)- sec 41

Holder of GDR is not member of company b/c his name is not there in the register of
company, it is name of overseas depository that is there in the ….but ultimately holder
of GDR are member of companies. When the holder of GDR redeems the DR into
underline shares, then he becomes the member of the company.

25/8/2023

Secession of membership/ Discontinuation of membership

1. Transfer of membership/Shares- If this transfer is registered. Registration is

necessary.
2. When the member’s shares are forfeited- the shares can only be forfeited when the
company makes call on shares under section 49 and shareholders defaults in making
payment, then the company has right to suspend the member’s voting rights. Still if
you are not paying then the company can forfeit the shares.
3. When the shares sold by the company to enforce lien- (Right of lien means
retaining the movable property and not transferring the possession. Right of lien is
applicable in case of shares b/c in the definition of goods under sale of goods act
shares are included. But right of stoppage in transit is not applicable in case of share.)
4. When the member of the company dies- he discontinues to be member. His estate
still remains liable for any outstanding debts, obligations, or liabilities of the
company. (Sec 44-45 ICA-devolution of rights).
5. The member is adjudged as an insolvent and the officer receiver either disclaim the
shares or he transferred his shares to somebody else to repay the insolvent’s….
 6. Shares were redeemable preference share and shares are redeemed- sec 55 says
that only redeemable share can be issued- redemption means whatever is the amount
of the property it can be …. In case of infrastructure project the locking period for
redemption shares is 20 years
7. When the person resigns the contract b/c of fraud or misrepresentation.
8. When the shares are purchased under section 242 by another person or by the
company itself.
9. When the company is bound up
10. Expulsion of member from company-
case: Gowmathi Solvent oil ltd v Mallina Bharti (2001) 105 Com cases 710- No
member shall be expelled without reasonable and just cause and only if the interest of
company demands and not just to serve the interest of a shareholder or a group of
shareholders.
Case: Gaiman v National association for Mental health (1970)2 All Er 362- The
member cannot be expelled from the company without serving notice and without
giving reasonable opportunity of being heard.

Ministry of corporate affairs came up with the notification that only private company
can come up with grounds to expel members whereas it is not applicable in case of
public companies. The reason given was that it is against companies jurisprudence.

Case: Bajaj Auto Ltd v N.K. Firodia (2001)- related to section 58 (refusal of registration and
appeal against refusal)

This case provides the grounds on which a company can refuse registration of membership
under sec 58 and on the same ground a member can be expelled.

Sec 57 provides punishment/liability for impersonation- it acknowledges doctrine of holding

out….

Important section related to membership of a company- Sec 2(55), 56, 57 58, 59, 88
Case- NI- Foss v. Harbottle Rule – Democracy- Majority Rules

- The decision of the majority should prevail. However, if it is only serving the interest
of a group of shareholders, then you can’t expel a member.
-

Case- Lalithamba Bai v Harrisons Malayalam Ltd., 1988

In this case, it was held that a person who claims to have purchased the shares of a company
will be entitled to have his name entered in the registration by satisfying the requirements of
Sec 56 of the Companies Act, 2013.

Sec 88- Register of the members is only prima facie evidence of membership but is not
conclusive proof.

UNIT-III

Kinds of share Capital (Sec 43-68) in a company:

1. Authorised/nominal share capital [Sec 2(8)]- such capital as is authorised by the

memorandum of a company to be the maximum amount of share capital of the company.

2. Issued Share capital [Sec 2(50)]- such capital as the company issues from time to
time for subscription- The issues of shares for subscription by the public.

3. Subscribed Share capital [Sec 2(86)]- such part of the capital which is for the time
being subscribed by the members of a company.

4. Paid up share capital [Sec 2(64)]- subscription amount paid by the shareholders. For
instance- if a shareholder subscribes 100 shares @ 100 each and pays 5000, the paid-up share
capital is 5000 only.

5. Called-up share capital [Sec 2(15)]- such part of the capital, which has been called
for payment. Sec 49 talks about a call on shares.

Sec 106 says if a shareholder defaults (when the company calls for payment of share capital),
his voting rights will be suspended. If still not paid, then forfeiture of shares.
Kinds of shares (Sec 43):

This classification is done on the basis of making of payment to …..

1. Preference- In this, preference is given in dividing the profits or dividends in

proportion to the share of shareholders in the company. The company has also the power to
capitalize on the profits rather than declaring it as a dividend. The shareholders might not like
this arrangement, so the company issues bonus shares to such shareholders. The rate is fixed.
Preference shareholders don’t have voting rights except according to section 47. For
institutions, public financial institutions.

2. Equity- The profits are given in proportion to their contribution. The rate is not fixed
and fluctuates with the market price. Equity shareholders are normal people. Equity
shareholders have voting rights. These are also called risk capital.

3. Deferred (given on internet not in statute)

Characteristics of equity shareholders

- equity shareholders have voting rights- sec 47

- They have right to subscribe at the time of further issue of capital- rights issue- Sec
62(1)(a). Issue of shares to existing shareholders not to new shareholders -pre-emptive
right.
- Right to appoint proxy and vote on his behalf- Sec 105. An equity shareholder can
appoint a proxy to exercise voting rights on behalf of him.
-
- Rights to receive copy of annual accounts of the company- Sec 136.
- Right to receive notice for companies meeting- sec 101 and 102.
- Right to inspect various statutory registers maintained by the company- sec 94.
- Right to requisition the extra ordinary general meeting- 100

Characteristics of preference shares:

1. Dividends are paid at fixed rate.

2. It is possible that dividends are paid to preference shareholders but not to equity
shareholders.

3. Preference is given in terms of payment of dividend and when company goes into
winding up.

4. They don’t have voting rights except for sec 47.

5. Can’t appoint proxy

Voting rights of preference shareholders (Sec 47):

1. Their rights are affected.

2. Winding up.

3. Reduction/ if payment of equity on preference shares.

4. When no dividend for 2 yrs or more

Variation of shareholders' rights (Section 48):

1. Read section.

2. It provides an exception when the decision of majority shareholders is not binding on

dissenting shareholders and they can approach a tribunal. (Where the holders of not less than
ten per cent of the issued shares of a class did not consent to such variation or vote in favour
of the special resolution for the variation, they may apply to the Tribunal to have the variation
cancelled)

Calls on shares of same class to be made on uniform basis (sec 49)

1. Where any calls for further share capital are made on the shares of a class, such
calls shall be made on a uniform basis on all shares falling under that class

Shares 2(84)- Barland trustee v. steel bros ltd

1. Equity shares -sec 43

i. Equity shares
 ii. Equity shares with differential rights- as to voting (means- voting rights will
not be in proportion to their contribution in share capital of the company) or
otherwise
2. Preference shares- Dividends or Winding up
i. Redeemable/ irredeemable (banned in India)
ii. Convertible/ non-convertible
iii. Cumulative/ non-cumulative
iv. Participating/ non-participating

Diff b/w equity and preference shares

1. Preference is given to preference shareholders in dividends and winding up

2. Equity shareholder receive dividend in proportion to their contribution in share capital
of company whereas preference shareholders receive dividend in fixed rate
3. Equity shareholders have voting right while pref. shareholders don’t have voting right
except in certain situation- Sec 47- 4 condition
i. When the decision is going to directly affect their rights
ii. When resolution for winding up is passed
iii. If there is repayment or reduction of share capital
4. Definition of both

NI

Sec 44- shares are movable property

Sec 45- numbering of shares

Sec 46- share certificate

Sec 48- Variations of shareholders‘ rights – 75% of same class shareholder has to approve

Miheer H. Mafatlal vs Mafatlal Industries Ltd

Reason that classes is not defined is that…..

Shareholders with common

6/9/2023
Section 48- Variations of shareholders’ rights.

Section 49- Calls on shares of same class to be made on uniform basis

- Read this with sec 106- Restriction on voting rights

- Calls on shares should be done on specific class of shareholders but it should be done
on uniform basis.
- When a company making calls on share and you paid the remaining amount….You
can only exercise voting rights on the called amount.

Sec 51

sec 52, 53, 54- interrelated.

Sec 2 (88)- Sweat equity shares

Sec 55

Termination and expulsion of membership are different

- Sec 58
- case of sufficient cause