Module –I

Meaning and Definition of Company:

Literary meaning of the word ‘company’ is an association of persons formed for common
object

According to Justice James, “A company is an association of persons united for a common

object.”
According to Prof. Haney, “A company is an artificial person created by law having a separate
entity with a perpetual succession and a common seal.”
According to Sec. 2(20) of Companies Act 2013, A Company means
a company incorporated under this Act or any previous company law.

In other words, a company is a legal entity which is formed by different individuals to

generate profits through their commercial activities

Characteristics of Company:

1. An Artificial Person Created by Law:

A company is a creation of law, and is, sometimes called an artificial person. It does not take
birth like natural person but comes into existence through law. But a company enjoys all
the rights of a natural person. It has right to enter into contracts and own property. It can
sue other and can be sued. But it is an artificial person, so it cannot take oath, cannot be
presented in court and it cannot be divorced or married.

2. Separate Legal Entity:

A company is an artificial person and has a legal entity quite distinct from its members.
Being separate legal entity, it bears its own name and acts under a corporate name; it has a
seal of its own; its assets are separate and distinct from those of its members.

Its members are its owners but they can be its creditors simultaneously as it has separate
legal entity. A shareholder cannot be held liable for the acts of the company even if he holds
virtually the entire share capital. The shareholders are not agents of the company and so
they cannot bind it by their acts.
3. Perpetual Succession:
The life of company is not related with the life of members. Law creates the company and
dissolve it. The death, insolvency or transfer of shares of members does not, in any way,
affect the existence of a company.

According to Tennyson-

“For men may come, men may go,

But I go on forever.”

In the case of company it may be said that members may come and members may go but
the company goes on. It is a legal person having come into being by law and only law can
bring its end and none else.

4. Common Seal:
On incorporation a company becomes legal entity with perpetual succession and a common
seal. The common seal of the company is of great importance. It acts as the official
signature of the company. As the company has no physical form, it cannot sign its name on
a contract. The name of the company must be engraved on the common seal. A document
not bearing the common seal of the company is not authentic and has no legal importance.

5. Limited Liability:
The limited liability is another important feature of the company. If anything goes wrong
with the company his risk is only to the extent of the amount of his shares and nothing
more. If some amount is uncalled upon a share, he is liable to pay it and not beyond that.

The creditors of a company cannot get their claims satisfied beyond the assets of the
company. The liability of members of a company ‘limited by guarantee’ is limited to the
amount of guarantee.

6. Transferability of Shares:
A shareholder can transfer his shares to any person without the consent of other members.
Under Articles of Association, a company can put certain restriction on the transfer of
shares but it cannot altogether stop it. Private company can put more restrictions on the
transferability of shares.

7. Limitation of Work:
The field of work of a company is fixed by its charter. The Memorandum of Association. A
company cannot do anything beyond the powers defined in it. Its action is, therefore,
limited. In order to do the work beyond the memorandum of association, there is a need for
its alteration.

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8. Voluntary Association for Profits:
A company is a voluntary association of persons to earn profits. It is formed for the
accomplishment of some public good and whatsoever profit is divided among its
shareholders. A company cannot be formed to carry on an activity against the public policy
and having no profit motive.

9. Representative Management:
The shareholders of company are widely scattered. It is not possible for all the
shareholders to take part in the management. They leave their task to the representatives
the Board of Directors and the company is managed by Board of Directors.

10. Termination of Existence:

A company is created by law, carries on its affairs according to law and ultimately is
affected by law. Generally, the existence of a company is terminated by means of winding
up.

Kinds of Companies:
Companies may be classified into various kinds on the following basis:
1. On the basis of incorporation

2. On the basis of liability

3. On the basis of number of members

4. On the basis of control

5. On the basis of ownership.

1. On the Basis of Incorporation:

On the basis of incorporation companies may be classified into the following three
categories:
(i) By Royal Charter-Chartered Companies:
A chartered company is created by the charter or special sanction granted by the Head of
the State giving certain exclusive privileges, rights and powers to a distinct body of persons
for undertaking commercial activities in specified geographical areas. These rights and
privileges are to be enjoyed and the powers are to be used within the terms of the charter.

(ii) Statutory Company:

A statutory company is brought into existence under the Act passed by the legislature of
the country or state. Powers, responsibilities, liabilities, objects, scope etc. of such a
company are clearly defined under the provisions of the Act which brings it into existence.

(iii) Registered Companies:

A registered company is a company which is organised by getting it registered with the
Registrar of Companies under the provisions of Companies Act of the country concerned.

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The formation, working and continuity of such a company are governed by relevant
provisions of the Companies Act.

2. On the Basis of Liability:

On the basis of liability, company may be classified into:
(a) Limited liability companies.

(i) Companies limited by shares

(ii) Companies limited by guarantee

(b) Unlimited liability companies.

(a) Limited Liability Companies:

Where the liability of the members of a company is limited to the extent of the nominal
value of shares held by them, such companies are known as Limited liability companies.

(i) Companies Limited by Shares:

Where the liability of the members of a company is limited by the Memorandum of
Association to the amount unpaid on the shares, such a company is called company limited
by shares. In case of winding up of the company the members cannot be asked to pay more
than the amount unpaid on the shares held by them. A company limited by shares may be a
public company or a private company.

(ii) Companies Limited by Guarantee:

Where the liability of the members of a company is limited by the Memorandum of
Association to such an amount as the members undertake to contribute to the assets of the
company in the event of its winding up. A company limited by Guarantee
is often referred to as a 'not for profit' or 'Charitable company', this
refers to the fact the parties involved do not remove the profit from
the company as shareholders can in a company limited by shares. a
company without any shareholders but it is owned by members called guarantors who
agrees to pay a nominal amount in the event of company's being wound up.
(b) Unlimited Liability Companies:

Where the liability of members is not limited, such companies are known as unlimited
liability companies. Every member of such a company is liable for its debts in proportion to
his interest in the company.

3. On the Basis of Number of Members:

On the basis of number of members, a company may be:
1. Private Company and

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2. Public Company.

1. Private Company:
According to Sec. 3(1)(iii) of the Indian Companies Act, 1956, a private company is
that company which by its articles of association:
(i) limits the number of its members to fifty, excluding employees who are members or ex-
employees who were and continue to be members;

(ii) restricts the right of transfer of shares, if any;

(iii) Prohibits any invitation to the public to subscribe for any shares to debenture of the
company.

Where two or more persons hold share jointly, they are treated as a single member.

According to Sec. 12 of the Companies Act, the minimum number of members to form a
private company is two. A private company must use the word ‘Pvt’ after its name.

2. Public Company:
According to Section 3(1)(iv) of Indian Companies Act, 1956 A public company means a
company which is not a private company.

If we explain the definition of Indian Companies Act, 1956 in regard to the public
company, we note the following:
(i) The articles do not restrict the transfer of shares of the company.

(ii) It imposes no restriction on the maximum number of the members in the company.

(iii) It invites the general public to purchase the shares and debentures of the company.

4. On the Basis of Control:

On the basis of control, companies may be classified into two categories:
1. Holding company [Sec. 4(4)].
2. Subsidiary company [Sec. 4(1)].
1. Holding Company:
According to Section 4(4) of the Companies Act, 1956 “A company shall be deemed to be
the holding company of another, if that other is its subsidiary.”

2. Subsidiary Company:
A company is said to be a subsidiary of another if:
(i) The other company controls the composition of its Board of Directors.

(ii) The other company holds more than half in nominal value of its equity share capital.

(iii) It is a subsidiary of such a company which is itself subsidiary of any other company.

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For example, if company B is the subsidiary of company A and company C is the subsidiary
of company B then company C also becomes the subsidiary of company A. If company D is
the subsidiary of company C, it also becomes subsidiary of Company B and A and so on.

5. On the Basis of Ownership:

On the basis of ownership, company may be a:
(i) Government company.

(ii) Non-government company.

1. Government Company:
According to section 617 of the Companies Act. 1956, Government company means, “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 and includes a company which is a subsidiary of a
Government Company.” It may be a public company or a private company.

2. Non-Government Companies:
Non-Government company means a company which is not government company. The
majority of companies in India belong to this category.

Foreign Company:
Foreign company means any company incorporated outside India but has established
business in India.

These companies may be of the following two types:

(i) Companies incorporated outside India which established a place of business in India
after the commencement of Indian Companies Act, 1956; and

(ii) Companies incorporated outside India which established a place of business in India
before the commencement of this Act and continued to have such a place of business in
India at the time of commencement of this Act.

After the establishment of business in India the following documents must be filed with the
Registrar of Companies within 30 days from the date of establishment.

(i) A certified copy of Memorandum and Articles of the company translated into English.

(ii) The complete address of the Registered Office of the company.

(iii) A list of directors and secretary of the company.

(iv) The complete address of the place at which the company has constituted as its main
office in India.

One-Man Company:

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One-man company is that company where one man holds practically the whole of the share
capital of the company and in order to meet the statutory requirement of minimum
number of members, some dummy names are added. The dummy names which are added
are mostly the relatives or friends of principal shareholder.

One-man company is a legal entity distinct from its members. The company in law is equal
to a natural person and has a legal entity of its own. The shareholder, even if he holds all
the share is not a company. Neither he nor any creditor of the company has any property,
legal or equitable in the assets of the company.

1.Minimum number
Atleast seven persons must be there to form a public limited company. Two persons will be
enough to form a private limited company.

2. Maximum number
There is no limit to the maximum number of share holders in public limited company.
Maximum number of shareholders is limited to fifty in a private limited company excluding
the past and present employees of the company.

3. Commencement of Business
A public limited company has to obtain the Certificate of commencement of business in
addition to the Certificate of Incorporation in order to commence the business. It will be
enough if a private limited company gets Certificate of incorporation to commence the
business.

4. Minimum subscription
A Public limited company has to secure minimum capital before allotting its shares. There is
no such restriction for a private limited company and it can allot shares.

5. Issue of prospectus
A public limited company can invite public to subscribe for its shares. It must issue a
prospectus or file a statement in lieu of prospectus before issuing shares. As per law, a
private limited company has no rights to invite the public and as such cannot issue
prospectus. They cannot get the public to subscribe for its share capital

6. Transfer of shares

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Transfer of shares can be done easily in a public limited company.The rights of members
to transfer their shares is restricted the Articles of Association in a private limited company
by .
7. Statutory meeting
A Public limited company must hold a statutory meeting within six months from the date
of commencement of business. It should file the statutory report with the Registrar of
companies. A Private limited company need not hold any statutory meeting.

8. Articles of Association
A public limited company may or may not have Articles. It can adopt Table-A of Schedule I of
Companies Act. A Private limited company may have its own Articles of Association.
9. No.of directors
There should be atleast three directors for in the management of a public limited company.
At least two directors are required for a private limited company.

10. Consent of directors

The consent of the directors in writing to act as such is necessary in a public limited company.
The consent of directors is not necessary in a private limited company.

11. Qualification shares

A person should possess certain minimum number of shares to qualify himself as a director
in a public limited company. This condition does not apply to the directors of a private
limited company.

12. Retirement of directors

Not less than two thirds of the directors must retire from the management by rotation in a
public limited company. There is no compulsory retirement in a private limited company.

13. Name of the company

A public limited company has to add the word ‘Limited’ at the end of its name. A private
limited company has to add the words ‘Private Limited’ at the end of its name.

14. Annual report

A Public limited company has to file its Annual Report with the Registrar of the Companies.
It is not necessary for a Private limited company.

15. Issue of share warrants

A public limited company can issue share warrants in case of fully paid up shares. A private
limited company cannot issue share warrants.
16. Directors remuneration
There are certain restrictions on the payment of remuneration to Directors in a Public
limited company. There is no such restriction in a Private limited company.

17. Meeting quorum

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The quorum required for a meeting of a public company is 5 persons. The quorum in case of
a private company is 2 persons.

18. Inspection of annual accounts

The Annual Reports are public documents. Any body can inspect the accounts in a public
limited company. Annual accounts are not open for inspection by non-members in a Private
limited company.

Advantages of Incorporation of the company

There are several advantages to becoming a corporation, including the limited personal
liability, easy transfer of ownership, business continuity, better access to capital and
(depending on the corporation structure) occasional tax benefits. The legal structure of
your corporation and the benefits you receive from it will depend on the specific setup of
your business.

1. An Artificial Person Created by Law:

A company is a creation of law, and is, sometimes called an artificial person. It does not take
birth like natural person but comes into existence through law. But a company enjoys all
the rights of a natural person. It has right to enter into contracts and own property. It can
sue other and can be sued. But it is an artificial person, so it cannot take oath, cannot be
presented in court and it cannot be divorced or married.

2. Separate Legal Entity:

A company is an artificial person and has a legal entity quite distinct from its members.
Being separate legal entity, it bears its own name and acts under a corporate name; it has a
seal of its own; its assets are separate and distinct from those of its members.

Its members are its owners but they can be its creditors simultaneously as it has separate
legal entity. A shareholder cannot be held liable for the acts of the company even if he holds
virtually the entire share capital. The shareholders are not agents of the company and so
they cannot bind it by their acts.

3. Perpetual Succession:
The life of company is not related with the life of members. Law creates the company and
dissolve it. The death, insolvency or transfer of shares of members does not, in any way,
affect the existence of a company.

4. Limited Liability:
The limited liability is another important feature of the company. If anything goes wrong
with the company his risk is only to the extent of the amount of his shares and nothing
more. If some amount is uncalled upon a share, he is liable to pay it and not beyond that.

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5. Transferability of Shares:
A shareholder can transfer his shares to any person without the consent of other members.
Under Articles of Association, a company can put certain restriction on the transfer of
shares but it cannot altogether stop it. Private company can put more restrictions on the
transferability of shares.

Disadvantages of Incorporation of the company

Limitation of Work:
The field of work of a company is fixed by its charter. The Memorandum of Association. A
company cannot do anything beyond the powers defined in it. Its action is, therefore,
limited. In order to do the work beyond the memorandum of association, there is a need for
its alteration.

Lengthy application process

Filing your articles of incorporation with your secretary of state can be quick, but the
overall process of incorporating is often a long one. You will likely have to go through
extensive paperwork to properly determine and document the details of the organization
and its ownership..

Rigid formalities, protocols and structure

Alongside the lengthy application process is the amount of time and energy necessary to
properly maintain a corporation and adhere to legal requirements. You have to follow
many formalities and heavy regulations to maintain your corporation status.

Double taxation

Most corporations (like C-corps) face double taxation, which means that the business
income is taxed at the entity level as well as the shareholder level (based on their
percentage of profits earned).

Expensive
The Companies Act 2013
The Companies Act, 2013 passed by the Parliament has received the assent of the President
of India on 29th August, 2013. The Act consolidates and amends the law relating to
companies. The Companies Act, 2013 has been notified in the Official Gazette on 30th August,

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2013. Some of the provisions of the Act have been implemented by a notification published
on 12th September, 2013. The provisions of Companies Act, 1956 is still in force

The key features of the Companies Act, 2013 are as follows;

1. The concept of “dormant companies” introduced (companies not engaged in business for
two consecutive years can be declared a s dormant).
2. National Company Law Tribunal introduced.
3. Provision of self regulation with disclosures/transparency instead of government
approval based regime.
4. Companies are required to go for maintenance of documents in electronic form.
5. Faster merger and acquisitions including short mergers and cross border mergers.
6. For companies which have net assets of 1 cr. or less, then official liquidators are
empowered with adjudicatory powers.
7. Concept of “one Person Company” introduced.
8. Concept of independent directors included as a statutory requirement.
9. Women director for prescribed class of companies.
10. Compulsory provision for constitution of Corporate Social Responsibility (CSR)
committee and formulation of CSR policy, with mandatory disclosure for specified class of
companies.
11. The term “Key Managerial Personnel” and “Promoter” has been defined to affix the
responsibility on main functionaries of the company.
12. Duties of director to shareholders, employees, the community and the environment
defined.
13. Listed companies are required to have one director representing small shareholders.
14. Companies Act, 2013 has put a cap on the number of directorship up to 20 companies
of which 10 can be public companies.
15. Search and seizure of documents, during investigation, without an order from a
magistrate.
16. Freezing assets or disgorgement of illegal gains of company under investigation.
17. Stringent norms made for the accepting the deposits from the public.
18. Internal audit for bigger companies and auditor is not authorized to perform specified
non audit services.
19. National Financial Reporting Authority (NFRA) to be constituted.

Important stages in the Incorporation/formation of a company

The whole process of company formation can be divided into four stages as given below.

1. Promotion of a Company
2. Registration of a Company
3. Certificate of Incorporation; and
4. Commencement of the Business.
1. Promotion of a Company:
A business enterprise does not come into existence on its own. It comes into existence as a
result of the efforts of an individual or group of people or an institution. That is, it has to be

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promoted by some person or persons. The process of business promotion begins with the
conceiving of an idea and ends when that idea is translated into action i.e., the establishment
of the business enterprise and commencement of its business.

Who is a Promoter in a Company?

A successful promoter is a creator of wealth and an economic prophet. The person who is
concerned with the promotion of business enterprise is known as the Promoter. He
conceives the idea of starting a business and takes all the measures required for bringing the
enterprise into existence.

For example, Dhirubhai Ambani is the promoter of Reliance Industries.

2. Registration of a Company
It is registration that brings a company into existence. A company is properly formed only
when it is duly registered under the Companies Act.

Procedure of Registration
In order to get the company registered, the important documents required to be filed with
the Registrar of Companies are as follows.

1. Memorandum of Association: It is to be signed by a minimum of 7 persons for a public

company and by 2 in case of a pvt company. It must be properly stamped.
2. Articles of Association: This document is signed by all those persons who have signed
the Memorandum of Association.
3. List of Directors: A list of directors with their names, address and occupation is to be
prepared and filed with the Registrar of Companies.
4. Written consent of the Directors: A written consent of the directors that they have
agreed to act as directors has to be filed with the Registrar along with a written undertaking
to the effect that they will take qualification shares and will pay for them.
5. Notice of the Address of the Registered Office: It is also customary to file the notice of
the address of the company’s registered office at the time of incorporation. It is to be given
within 30 days after the date of incorporation.
6. Statutory Declaration: A statutory declaration by
a. any advocate of the Supreme Court or
b. of a High Court, or
c. an attorney or pleader entitled to appear before a High Court or
d. a practicing chartered accountant in India, who engages in the Company formation or
e. by a person indicated in the articles as director, managing director, Secretary or
manager of the company

3. Certificate of Incorporation
On the registration of Memorandum of Association, Articles of Association and other
documents, the Registrar will issue a certificate known as the ‘Certificate of Incorporation‘.
The issue of certificate is the evidence of the fact that the company is incorporated and the
requirements of the Companies Act have been complied with.

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4. Certificate of Commencement of Business
As soon as a private company gets the certification of incorporation, it can can commence its
business. A public company can commence its business only after getting the ‘certificate of
commencement of business‘. After the company gets the certificate of incorporation, a
public company issues a prospectus for inviting the public to subscribe to its share capital. It
fixes the minimum subscription. Then it is required to sell the minimum number of shares
mentioned in the prospectus.
After completing the sale of the required number of shares, a certificate is sent to the
Registrar along with a letter from the bank stating that all the money is received.

The Registrar then scrutinizes the documents. If he is satisfied he issues a certificate known
as ‘Certificate of Commencement of Business’. This is the conclusive evidence for the
Commencement of Business.

Promoter:
The idea of carrying on a business which can be profitably undertaken is conceived either
by a person or by a group of persons who are called promoters. After the idea is conceived,
the promoters make detailed investigations to find out the weaknesses and strong points of
the idea, to determine the amount of capital required and to estimate the operating
expenses and probable income.

According to Justice C. Cockburn. “Promoter is one who undertakes to form a company with
reference to a given object and to set it going, and who takes the necessary steps to
accomplish that purpose.”

FUNCTIONS OF A PROMOTER

(1) The formation of idea and forming the company and explore the posssibilties

(2) To conduct the negotiation for the purchase of business

(3) To collect the number for signinig of the MOA and the AOA

(4) To decide the name of the company, location of the registered office, amount and form of
share capital

(5) To get the MOA and the AOA drafted and printed

(6) To arrange for the minimum subscription

(7) To arrange for the registration of company and certificate of incorporation .

RIGHTS OF PROMOTERS

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(1) Right to Indemnity :The promotors are severally and jointly liable for any false
statement given in the prospects therefore when more than one person act as the promoters
of the company, one promoter can claim against another promoter for the compensation and
damages paid by him.

(2) Right to Receive the legitimate Preliminary expenses:He has to the right to recover
the legitimate expenses which had spend during the process of the company in cost of
advertisement, fees for the solicitor etc. The right to receive the preliminary expenses is not
a contractual right. It depends upon the discretion of the directors of the company

(3) Right to receive the remuneration:The right to receive remuneration is not a

contractual right. It completely depends on the company to make sure to provide the same
or not. n some cases, articles of the company provide for the directors paying a specified
amount to promoters for their services but this does not give the promoters any contractual
right to sue the company.

DUTIES OF PROMOTERS

(1) To disclose the secret profit

The promotor should not make any secret profits. If on case he has it is his duty to disclose
the same he is although empowered to deduct the reasonable expense incurred by him

(2) To disclose all the material facts

The promotor of the company must disclose all the material facts and information,

(3) The promoter must make good to the company what he has obtained as a trustee

The promotor has a fiduciary relationship with the company. It is the duty of the promotor
to make the best for his company to whatever he has obtained ad a trustee.

(4) Duty to disclose private arrangement

It is the duty of the promoter to disclose all the private arrangement resulting him profit by
the promotion of the company.

LIABILITIES OF PROMOTERS

(1) Liability to account in profits-The promoter is liable to account to the company for all
secret profits made by him without full disclosure to the company. They will sue the
promotor for the amount of profit and recover the same with interest

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(2) Personal Liability-The promoter is personally liable for all contracts made by him on
behalf of the company until the contracts have been discharged or the company takes over
the liability of the promoter.

(3) Liability of the misstatement in the prospectus-In Case of Mismanagement of the

prospectus the promotor is liable and needs to pay compensation of every share and
debenture for any loss or damage sustained due to the wrong information on the prospectus.

(4) Liability at the time of winding up the company-In Case of winding up of the company,
on an application made by the official liquidator, the court may make a promoter liable for
misfeasance or breach of trust. Further where fraud has been alleged by the liquidator
against a promoter, the court may order for his public examination

Remuneration of promoters
The remuneration of a promoter, may be paid in cash or partly in cash and partly in shares
and debentures f the company.But in the absence of an agreement with the company after
its incorporation a promoter can not file a suit in a court of law for the recovery of his
remuneration and other preliminary expenses incurred by him

What is CIN Number?

Corporate Identification Number or Corporate Identity Number (Which is CIN Full Form) is
a 21 digit alpha-numeric number provided to all Private Limited Companies, One Person
Companies, Companies owned by Government of India, State Government Companies, Not-
for-Profit, Nidhi Companies, etc. registered in India. CIN number is a unique identification
number that is given by RoC (Registrar of Companies) of various states under MCA
(Ministry of Corporate Affairs). CIN number is assigned to companies registered in India by
RoC located in states across the nation.

Memorandum of Association
Memorandum of Association is the most important document of a company. It states the
objects for which the company is formed. It contains the rights, privileges and powers of the
company. Hence it is called a charter of the company. It is treated as the constitution of the
company. It determines the relationship between the company and the outsiders.

Definition of Memorandum of Association

Lord Cairns:

“The memorandum of association of a company is the charter and defines the limitation of the
power of the company established under the Act”.
Contents of Memorandum of Association
According to the Companies Act, the Memorandum of Association of a company must contain
the following clauses:

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1. Name Clause of Memorandum of Association
The name of the company should be stated in this clause. A company is free to select any
name it likes. But the name should not be identical or similar to that of a company already
registered. It should not also use words like King, Queen, Emperor, Government Bodies
(police, military) and names of World Bodies like U.N.O., W.H.O., World Bank etc. If it is a
Public Limited Company, the name of the company should end with the word ‘Limited’ and
if it is a Private Limited Company, the name should end with the words ‘Private Limited’.

2. Situation Clause of Memorandum of Association

In this clause, the name of the State where the Company’s registered office is located should
be mentioned. Registered office means a place where the common seal, statutory books etc.,
of the company are kept.The company should intimate the location of registered office to the
registrar within thirty days from the date of incorporation or commencement of business.

3. Objects Clause of Memorandum of Association

This clause specifies the objects for which the company is formed. It is difficult to alter the
objects clause later on. Hence, it is necessary that the promoters should draft this clause
carefully. This clause mentions all possible types of business in which a company may engage
in future.

4. Liability Clause of Memorandum of Association

This clause states the liability of the members of the company. The liability may be limited
by shares or by guarantee. This clause may be omitted in case of unlimited liability.

5. Capital Clause of Memorandum of Association

This clause mentions the maximum amount of capital that can be raised by the company. The
division of capital into shares is also mentioned in this clause. The company cannot secure
more capital than mentioned in this clause. If some special rights and privileges are
conferred on any type of shareholders mention may also be made in this clause.

6. Subscription Clause of Memorandum of Association

It contains the names and addresses of the first subscribers. The subscribers to the
Memorandum must take at least one share. The minimum number of members is two in case
of a private company and seven in case of a public company.

Provisions relating to alteration of Memorandum of Association

Alteration in the Memorandum of Association can be carried out only by a special resolution
at the Shareholders meeting. This is a complicated and lengthy procedure. So Memorandum
must be very carefully prepared at the beginning itself.

Provisions relating to alteration of Memorandum

The following are the provisions related to alteration in Name Clause, Objects Clause,
Liability Clause, Capital Clause and Subscription Clause.

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1. Alteration of Name Clause in Memorandum of Association
A company may by passing a special resolution alter is name with the approval of the Central
Government. If the alteration involves change of the name to private limited or public
limited, permission of Central Government is not required.

In case a company has been registered with a name which resembles a name of an existing
company, the Central Government may ask it to change its name. In such case ordinary
resolution is sufficient.

2. Alteration of Situation clause

1. In case registered office has to be shifted within the same city, town or village, a notice has
to given to the Registrar within thirty day of the change.

2. In case registered office has to be shifted from one town to another town or one village to
another village, a special resolution has to be passed.

3. Alteration of Objects Clause in Memorandum of Association

A company can alter is objects clause by passing a special resolution

3. Alteration of Liability Clause in Memorandum of Association

The liability clause can be altered only when a public company is converted to a private
company.

4. Alteration of Capital Clause in Memorandum of Association

A company can alter its capital clause by passing an ordinary resolution in a general meeting.

5. Alteration of subscription clause in Memorandum of Association

The company can alter is subscription clause to make the liability of the directors appointed
subsequent to the alteration as unlimited.

Articles of Association

Articles of Association is an important document of a Company. It contains the rules and

regulations or bye-laws of the company. They are related to the internal working or
management of the company. It plays a very important role in the affairs of a company. It
deals with the rights of the members of the company between themselves.

The contents of articles of association should not contradict with the Companies Act and the
MoA
Contents of Articles of Association
1. Classes of shares, their values and the rights attached to each of them.

2. Calls on shares, transfer of shares, forfeiture, and conversion of shares and alteration of
capital.

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3. Directors, their appointment, powers, duties etc.

4. Meetings and minutes, notices etc.

5. Accounts and Audit

6. Appointment of and remuneration to Auditors.

7. Voting, poll, proxy etc.

8. Dividends and Reserves

9. Procedure for winding up.

10. Borrowing powers of Board of Directors and managers etc.

11. Minimum subscription.

12. Rules regarding use and custody of common seal.

13. Rules and regulations regarding conversion of fully paid shares into stock.

14. Lien on shares.

Alteration of Articles of Association

The alteration of the Articles should not sanction anything illegal. They should be for the
benefit of the company. They should not lead to breach of contract with the third parties. The
following are the regulations regarding alteration of articles:

A company may alter its Articles with a special resolution. Due importance and care should
be given to ensure that the alteration of AoA does not conflict with the provisions of the
Memorandum of Association or the Companies Act. A copy of every special resolution
altering the Articles must be filed with the Registrar within 30 days of its passing.

MoA vs. AoA

BASIS FOR ARTICLES OF

MEMORANDUM OF ASSOCIATION
COMPARISON ASSOCIATION

Meaning Memorandum of Association is a Articles of Association is a

document that contains all the document containing all the
fundamental information which are rules and regulations that
governs the company.

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 BASIS FOR ARTICLES OF
MEMORANDUM OF ASSOCIATION
COMPARISON ASSOCIATION

required for the incorporation of the

company.

Defined in Section 2 (56) Section 2 (5)

Type of Powers and objects of the company. Rules of the company.

Information
contained

Status It is subordinate to the Companies Act. It is subordinate to the

memorandum.

Retrospective The memorandum of association of the The articles of association

Effect company cannot be amended can be amended
retrospectively. retrospectively.

Major contents A memorandum must contain six The articles can be drafted
clauses. as per the choice of the
company.

Obligatory Yes, for all companies. A public company limited

by shares can adopt Table
A in place of articles.

Compulsory filing Required Not required at all.

at the time of
Registration

Alteration Alteration can be done, after passing Alteration can be done in

Special Resolution (SR) in Annual the Articles by passing
General Meeting (AGM) and previous Special Resolution (SR) at
approval of Central Government (CG) or Annual General Meeting
Company Law Board (CLB) is required. (AGM)

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 BASIS FOR ARTICLES OF
MEMORANDUM OF ASSOCIATION
COMPARISON ASSOCIATION

Relation Defines the relation between company Regulates the relationship

and outsider. between company and its
members and also between
the members inter se.

Acts done beyond Absolutely void Can be ratified by

the scope shareholders.

Prospectus - meaning

The prospectus is a legal document, which outlines the company’s financial securities for
sale to the investors.According to the companies act 2013, there are four types of the
prospectus, abridged prospectus, deemed prospectus, red herring prospectus, and shelf
prospectus.

Types of prospectus

According to Companies Act 2013, there are four types of prospectus.

Deemed Prospectus – Deemed prospectus has mentioned under Companies Act, 2013
Section 25 (1). When a company allows or agrees to allot any securities of the company, the
document is considered as a deemed prospectus via which the offer is made to investors.
Any document which offers the sale of securities to the public is deemed to be a prospectus
by implication of law.
Red Herring Prospectus – Red herring prospectus does not contain all information about
the prices of securities offered and the number of securities to be issued. According to the
act, the firm should issue this prospectus to the registrar at least three before the opening
of the offer and subscription list.
Shelf prospectus – Shelf prospectus is stated under section 31 of the Companies Act, 2013.
Shelf prospectus is issued when a company or any public financial institution offers one or
more securities to the public. A company shall provide a validity period of the prospectus,
which should not be more than one year.
Abridged Prospectus – Abridged prospectus is a memorandum, containing all salient
features of the prospectus as specified by SEBI. This type of prospectus includes all the
information in brief, which gives a summary to the investor to make further decisions. A

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company cannot issue an application form for the purchase of securities unless an abridged
prospectus accompanies such a form.

What is prospectus and its contents?

The prospectus contents are specified in the Companies Act. The prospectus must touch
over the following content points:

1. Details of the company, such as name, registered office address, and objects
2. Details of signatories to the Memorandum and their shareholding particulars
3. Details of the directors
4. Details of shares offered and the class of the issue as well as voting rights
5. Minimum subscription amount
6. The amount payable on application, on allotment, and on further calls
7. Underwriters of the issue
8. Auditors of the company
9. Audited reports regarded profit and losses of the company

Mis-statements in prospectus

A prospectus contains the information which is relied on by the public to either subscribe
or purchase the securities of a company. If it contains any misstatement then it would
invite serious consequences. Any statement that is incorrect or misleading is included in
the prospectus then it would be termed as mis-statements in prospectus. Any inclusion or
omission of a fact which is likely to mislead the public shall also be termed as a
misstatement

Liabilities for Mis-statements in prospectus

The liabilities for Mis-statements in prospectus can be covered under the following
heads:

1. Civil Liability
2. Criminal Liability

Civil Liability

Where a person who has subscribed for securities of a company based on any statement
included or any inclusion or omission of a matter, in the prospectus that is misleading and
upon acting on the content of the prospectus, suffers any loss or damage as a
consequence, then the company and every person who–

• is a director of the company at the time of issue of the prospectus,

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 • or is named in the prospectus as the director of the company or agreed to become
such director,
• or is a promoter of the company,
• or has authorised/allowed the issue of the prospectus
• and is an expert who has been engaged or interested in the formation, management
or promotion of the company.

Shall be liable to pay compensation to every person, without prejudice to any punishment
to which any person may be liable, to every person who has suffered such loss or damage.

Exemption from civil Liability

No person shall be liable for misstatement if the person proves that-

1. the person had withdrawn his consent before the issue of the prospectus. If a person
who had consented to become the director of the company, withdraws his consent
before the issue of the prospectus and that it was issued without his consent.
2. or the prospectus is issued without the consent or the knowledge of a person. In
case the prospectus was issued without the knowledge or the consent of a person,
and after knowing of its issue, the person gives a reasonable public notice specifying
that the prospectus was issued without his consent.

Criminal Liability

Section 63 of the Companies Act deals with criminal liability for mis-statements in
prospectus

Where a prospectus issued, circulated, or distributed includes any statement that is untrue
or misleading in any form in which it is included or where any inclusion or omission of any
matter is likely to mislead, every person who authorises such issue of the prospectus shall
be liable for fraud.

Punishment -If a person is found to be guilty of the offence of fraud, then that person shall be
punished with imprisonment for a term that shall not be less than six months and may extend to ten
years. He shall also be liable to fine, which shall not be less than the amount involved in the fraud and
may extend to three times the amount involved in the fraud.

If the fraud so committed involves public interest, the term of imprisonment shall not be
less than three years.

Exemption from the criminal liability

No person shall be liable for criminal liability if the person proves that-

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 1. Such statement or omission was immaterial,
2. Or he had reasonable ground to believe, and did up till the time of issue of
prospectus believe that the statement was true and the omission or the inclusion
was necessary.

Doctrine of ultra-vires
It is a Latin term made up of two words “ultra” which means beyond and “vires” meaning
power or authority. So we can say that anything which is beyond the authority or power is
called ultra-vires. In the context of the company, we can say that anything which is done by
the company or its directors which is beyond their legal authority or which was outside the
scope of the object of the company is ultra-vires.
Ultra-vires acts can be generally of four types:

1. Acts which are ultra-vires to the Companies Act.

2. Acts which are ultra-vires to the Memorandum of the company.
3. Acts which are ultra-vires to the Articles of the company but intra-vires the
company.
4. Acts which are ultra-vires to the directors of the company but intra-vires the
company.

Exceptions to the doctrine of ultra-vires

1. Any act which is done irregularly, but otherwise it is intra-vires the company, can be
validated by the shareholders of the company by giving their consent.
2. Any act which is outside the authority of the directors of the company but otherwise
it is intra-vires the company can be ratified by the shareholder of the company.
3. If the company acquires property in a manner which is ultra-vires of the contract,
the right of the company over such property will still be secured.
4. Any incidental or consequential effect of the ultra-vires act will not be invalid unless
the Companies Act expressly prohibits it.
5. If any act is deemed to be within the authority of the company by the Company’s Act,
then they will not be considered as ultra-vires even if they are not expressly stated in
the memorandum.
6. Articles of association can be altered with retrospective effect to validate an act
which is ultra-vires of articles.

Effects of ultra vires Transactions – Doctrine of Ultra Vires

1. Void ab initio: The ultra vires acts are null and void ab initio. These acts are not
binding on the company. Neither the company can sue, nor it can be sued for such
acts.[Ashbury Railway Carriage and Iron Company v. Riche ].
2. Estoppel or ratification cannot convert an ultra-vires act into an intra-vires act.

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 3. Injunction: when there is a possibility that company has taken or is about to
undertake an ultra-vires act, the members can restrain it from doing so by getting an
injunction from the court. [Attorney General v. Gr. Eastern Rly. Co., (1880) 5 A.C.
473].
4. Personal liability of Directors: The directors have a duty to ensure that all
corporate capital of the company is used for a legitimate purpose only. If such funds
are diverted for a purpose which is not authorized by the memorandum of the
company, it will attract a personal liability for the directors.

Doctrine of Constructive Notice-The memorandum and articles of association of every

company are registered with the Registrar of Companies. The office of the Registrar is a public
office and consequently the memorandum and articles become public documents. They are
open and accessible to all. It is therefore, the duty of every person dealing with a company to
inspect its public documents and make sure that his contract is in conformity with their
provisions. But whether a person actually reads them or not, he is to be in the same position
as if he had read them. He will be presumed to know the contents of those documents. The
knowledge of MoA and AoA is called Doctrine of Constructive Notice
Doctrine of Indoor Management- The doctrine of indoor management is an exception
to the earlier doctrine of constructive notice. It is important to note that the doctrine of
constructive notice does not allow outsiders to have notice of the internal affairs of the
company.

Exceptions to the Doctrine of Indoor Management

The Turquand rule or the law of indoor management is not applicable to the following cases:

The outsider has actual or constructive knowledge of an irregularity-In such cases, the rule
of indoor management does not offer protection to the outsider dealing with the said company.
The outsider behaves negligently-The rule of Indoor management does not protect a person
dealing with a company if he does not initiate an inquiry despite suspecting an irregularity. Further, this
rule does not offer protection if the circumstances surrounding the contract are suspicious. For example,
the outsider should get suspicious if an officer purports to act in a manner outside the scope of his
authority.
Forgery-The doctrine of indoor management is applicable to irregularities that affect a transaction
except for forgery. In case of a forgery, the transaction is deemed null and void.

Corporate Veil

Corporate veil is a legal term which distinguishes a company from its shareholder.
According to it the individual members shall not be personally responsible for the debts
and obligations of the company. However, they began to abuse it as a mask for fraud and
unethical conduct. It is therefore necessary for the courts to break through the corporate

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shell and look behind the corporate body as if there is no independent existence of the
organization from its members.

Lifting or piercing of the Corporate Veil

When is corporate veil lifted?

There are no hard and fast rules for the applicability of this doctrine, However, over a
period of time, Courts and Legislatures throughout the globe have attempted to narrow
down scope and applicability of the doctrine under following two heads:-
1. Statutory Provisions:
The Companies Act, 2013, integrated with various provisions, points out the person liable
for any such improper/illegal activity as “officer who is in default” under Section 2(60) of
the Act.A few instances of lifting of the corporate veil cases are listed below:
A. Misstatement in Prospectus:
Under Section 26 (9), Section 34 and Section 35 of the Companies Act, it is a punishable
offence to furnish untrue or false statements in prospectus of a company offering securities
for sale.
B. Misdescription of Company’s name:
The name of the company is very important. if any representative of the company collect
bills or sign on behalf of the company, and enter in incorrect particulars of the company,
then he is personally liable.
C. Fraudulent conduct:
Under Section 339 of the Act, in case of winding up of the company, it is found that
company’s name was being used for carrying out a fraudulent activity, the Court is
empowered to hold any such person be liable for such unlawful activities, be it director,
manager, or any other officer of the company.
D. Inducing persons to invest money in company:
Under Section 36 of the Companies Act, any person making false, deceptive, misleading or
untrue statements or promises to any other person or concealing relevant data from other
person with a view to induce him to invest money.
2) Judicial Provisions:
Following are few such scenarios where Court has without any doubt lifted the corporate
veil:
A. Tax Evasion:
It’s the duty of every earning person to pay taxes. Company is no different than a person in
eyes of law. If anyone attempts to unlawfully avoid this duty, he is committing an offence.
B. Prevention of fraud/ improper conduct:
It is obvious that no company can commit fraud on it’s own. Human agency involved
commits such acts. Thus, one may make efforts to prevent upcoming frauds, but such
efforts are in vain, when human agency here has ulterior motive.
C. Determination of enemy character:
The purpose of forming a company is prfit driven. A company will not attempt to do good
towards society consciously. However, it may opt to cause damage instead.

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D. Liability for ultra-vires acts:
Every company is bound to perform in compliance of it’s memorandum of association,
articles of association, and the Companies Act, 2013. Any action done outside purview of
either is said to be “ultra-vires” or improper or beyond the legitimate scope. Such
operations of the company can be subjected to penalty.
E. Public Interest/Public Policy
Where the conduct of the company is in conflict with public interest or public policies,
Courts are empowered to lift the veil and personally hold such persons liable who are
guilty of the act. To protect public policy is a just ground for lifting the corporate
personality.
F. Sham Companies:-
The Courts are also empowered to lift the corporate veil if they are of the opinion that such
companies are sham or hoax. Such companies are mere cloaks and their personalities can
be ignored in order to identify the real culprit.

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