Corporate Nov 2013 Notes

8/13/2019 Corporate Nov 2013 Notes

1/47

1

MBL1 contact class

Ms. Arpitha H.C

Assistant CoordinatorDistance Education Department

National Law School of India University

Bangalore-560 072.

email- [email protected]


2/47

2

Overview of the syllabus

Unit 2 - Characteristics of corporate personality Memorandum of association

Doctrine of ultra vires

Articles of association

Doctrine of constructive notice

Doctrine of indoor management Prospectus


3/47

3

Memorandum of Association


4/47

4

Meaning and Importance

One of two official documents that describe the company's constitution First step in the formation of a company.

Contains the fundamental conditions as to upon which the company isincorporated.

Section 2(28)- Memorandum of a company as originally framed oraltered from time to time in pursuance of any previous companies lawor of this act. - Under Section 2(56) of the Act of 2013.

What is the Purpose of MOA?

Defines and confines the powers.

Anything done beyond the powers is ultra vires and void. Ashbury Railway Carriage & Iron Co. Ltd. v. Riche[1875]L.R. 7

H.L.653- Two Purposes


5/47

5

Form and contents

To be printed, divided into paragraphs and signed by thesubscribers.

To be in the format and order given in the Tables ofSchedule I.[ Section 14]- Section 4( 6) of the 2013 Act.

Signatures of subscribers to be attested by a witness. Incase of One person Companies

- The MOA of a one person company shall indicate thename of the person who shall, in the event of thesubscribers death, disability or otherwise, become themember of the company.


6/47

6

Six clauses

Compulsory Clauses of Memorandum of

Association

Name Registered

office

Liability CapitalAssociation

or subscription

Objects


7/47

7

Requirements with respect to Memorandum

(1)

Name clause (section 13 (1) (a))- Now under Section 4(1) (a) of the2013 Act.

Name of the company- Its significance

A company being a legal person must have a name to establishits identity.

The name of the company ,with Limited or PrivateLimited as the last words of a name in the case of a Publiccompany or a private company as the case may be.

License to drop Limited

Incase of a One Person Company?

The MOA of a company shall state the last letters and wordOPC Limited in the case of a One Person limited company.

But certain restrictions

1. Opinion of the central government is undesirable if identical

name [Section 20]- Section 4 (2) of the 2013 Act.


8/47

8

Guidelines for deciding the availability ofnames

According to the clarification issued by the department ofcompany affairs:

Identical names

Society of motor manufacturers and traders Ltd v Motor

Manufacturers and traders Mutual Assurance Ltd.[1925]1 ch.675. Identical to the company in liquidation.

Addition and subtraction of words.

Resemblance with abbreviated companies, for example, TISCO.

Attracts the provisions of emblem and names (Prevention ofImproper Use) Act, 1950.


9/47

9

Guidelines for deciding the availability ofnames

Ifit connotes Government participation unless circumstances justify(National, President, Central).

Association of a national hero or any person of High esteem.

Name of a Registered Trademark

If the name suggests a business that is not to be undertaken by a

company If the name is a exact Hindi translation of an existing company.

Words offensive to any section of the public

Phonetic resemblance

J.K Industries, Jay Kay

Publication of Name[ Section 147] Reservation of Name- Section 4 (4) of the 2013 Act

Penalty- Fine upto Rs 500 per day till the default continues.


10/47

10

Change of name (section 21)- Section 13 ofthe Act of 2013

Change name by special resolution at a general meetingwith the approval of the Central Government signified inwriting.

But by ordinary resolution if the company is registeredand it resembles the other co.

1965 Amendment Dispenses with the approval of thecentral Govt when the only change occurring in thename is the deletion or addition of the word Pvt.Consequent upon the conversion of the company from

Pvt to Public and vice versa.


11/47

11

Rectification of Name

In such case, within 12 months it should rectify itsname.

The company should change the name within 3 months.

Penalty- upto Rs 1000 everyday

Change of name by a Banking Company Sec 49B ofthe Banking (Regulation) Act,1959- A non objectioncertificate is required from the RBI before the approvalby the central Govt.

Reasonable opportunity to defend in case of change ofname- Sholay Comp. (P.) Ltd. v. Regional Director,Govt. Of India[2004] 53 SCL 460 (Mad.)

Change of Name during Legal Proceedings


12/47

12

Registered Office Clause (Section 13(1)(b))-Section 12 of the Act of 2013

Name of the state in which the registered office of thecompany is situated and not the place

Changes made in the 2013 Act

Notices and communications are sent here.

The exact address of the registered office should be

given to the ROC in Form no.18,within 30 days from the

date of incorporation {section 146} determines its

domicile for all the purposes and determines the courtwhich will have jurisdiction over it.


13/47

13

A company is required to keep variety of registers andrecords at its registered office.

Register of members(163)

Register of directors(303)

Accounts books(209)

Register of mortgages and charges and the copies of

registered documents(s.143)etc


14/47

14

Change of Registered office

a) Change of registered office from one premise to another premise inthe same city, town or village (sec 146)

- By passing a resolution of the Board of Directors.

- Within 30 days to be filed with the registrar as in Form no. 18.

- No alteration in the memorandum

b) Change of registered office from one town or city or village toanother town or city or village in the same state

- Special resolution

- Confirmation of Regional Director

- Both the copies to be filed with ROC within 30 days

- Notice of new location

c) Change of registered office from one state to another

Special resolution and confirmation of central government


15/47

15

Loss of revenue or employment of state, whether relevant

consideration

- Orient Paper Mills Ltd. v. State AIR 1957 Ori,232

- Minerva Mills Ltd. v. Govt. of Maharashtra [ 1975] 45Comp. Cas.1 (Bom.)

- Registered office can be changed only for some purposes.

( Same as Alteration of Objects- grounds being common)


16/47

16

Objects Clause (section 13(1)(c) &(d))

Defines the Objects of the company and thespheres of its activities.

Anything done behind the companys objects is

Ultravires and void and cannot be ratified evenby the assent of the whole body of shareholders.

Choice of the objects lies in the subscribers to

the memorandum


17/47

17

The objects clause must be divided in to three sub-clauses,namely:

(i) Main Objects- It has to state the main objects to be pursuedby the company on its incorporation and objects incidental

or ancillary to the attainment of the main objects. (Sec. 13(d))

(ii) Other Objects- This must state other objects which are notincluded in the above clause.

(iii) State to which objects extend- In the case of non-tradingcompanies, whose objects are not confined to one state,this sub-clause has to mention the states to whoseterritories the objects extend.

.


18/47

18

Why objects?

1) Protection to the shareholders by ensuring thatthe funds raised for one undertaking are notrisked by another.

2)

Offers a certain degree of protection to thecreditors also

3) Serves the public interest also Cotman V. Brougham [(1918) A.C. 514], :gives protection to subscribers

who learn from it the purposes to which their money can be applied. In thesecond place it gives protection to persons who deal with the company andwho can infer from it the extent of the companys powers


19/47

19

Which is prohibited by the General Law. Forexample, Business in gambling

Which is prohibited by the Companies Act.

Eg- Power to purchase its own shares by the companymay lead to reduction of capital which is prohibited byS.77A,77AA etc.

Which is beyond the objects of the Company-

Ultravires

The objects of the company mustnot include


20/47

20

Both are objects of the company If the main objects are not commenced within

one year of the incorporation then a petition may

be filed for winding up of the company( see s.433(c) ).

In case of other objects no consequences if notimplemented.

Main objects vs Other Objects


21/47

21

Alteration of objects

A company may change its objects only in so far as thealteration is necessary for any of the following purposes:

To carry on its business more economically or moreefficiently; or

To attain its main purpose by new or improved means; or

To enlarge or change the local area of its operation; or

To carry on some business which under existingcircumstances may conveniently or advantageously becombined with the business of the company; or


22/47

22

To restrict or abandon any of the objects specified in thememorandum; or

To sell or dispose of the whole or any part of the

undertaking, or of any of the undertakings, of the

company; or

To amalgamate with any other company or body of

persons.


23/47

23

Doctrine of Ultra Vires

Ultra means beyond and Vires means powers Object of the Doctrine laid in Ashbury Railway Carriage

and Iron Company Ltd v. Riche[1875]LR 7 HL 653

To protect investors and creditors

Lakshmanaswami Mudaliarv.Life Insurance Corporation

Of India.AIR 1963 SC 1185

Doctrine- An Illusory protection

- Belhouse Ltd v. City Wall Properties Ltd [(1966)36 Comp. Cases 779] In this case, theobject clause included the power to carry on any other trade or business whatsoever,

which can, in the opinion of Board of Directors, be advantageously carried on by the

Company


24/47

24

Effects of ultra vires transactions

1) Void ab initio Ashbury Railway carriage and Iron Company v. Riche and NEPC India

Ltd v. Registrar of Companies[1999]22 SCL 94- Conflicting decisions.

2) Injunction

- Attorney General v. G.E. Rly.Co.[1980]S.A.C. 473

3) Personal Liability of DirectorsIt is the duty of the director to ensure that the corporate capital is used only for the legitimate

business of the company, In case of such capital being diverted, the directors arepersonally liable to replace it. The directors and other officers are personallyaccountable to third parties in case of ultra vires transactions.

- Distinction between Ultra vires the Company and Directors

4) Acquisition of property that is ultra viresWhere a companys money has been used ultra vires to acquire some property, thecompanys right over such property is held secured.

2) Directors personally liable to third parties


25/47

25

Liability clause[ sec. 13 (2)]

A declaration that the liability of the members islimited.

Alteration of Liability clause[ Sec 38]

- The liability of a member of a company cannot be

increased unless the member agrees in writing.

- From unlimited liability, it can be made limited by re-

registration of the company.


26/47

26

Capital clause

The amount of authorized share capital (in thecase of a company having share capital) divided

into shares of fixed amount.


27/47

27

Alteration of capital clause [sec 94]

- Increase of Authorised share capital- Consolidation and sub-division of shares

- Conversion of shares into stock and vice versa


28/47

28

Subscription clause (section 13(4)(c))

We the several persons whose name and addresses aresubscribed, are desirous of being formed in to a

company, in pursuance of this memorandum and we

respectively agree to take the number of shares in the

capital of the company set opposite our respective

names


29/47

29

Subscription clause (cont)

1. Signed by each subscriber in the presence of atleast one witness who must attest the signature.

2. Must take at least one share.

3. Opposite his name the no. of shares taken.


30/47

30

Articles of Association

DefinitionArticle means the articles of association of a company

as originally framed or as altered from time to time in

pursuance of any previous companies laws or of this

Act

Sec.2 (2) of the Companies Act, 1956

Sec.2(5) of the Companies Act, 1956


31/47

31

Articles of Association (cont)

Management of the Internal regulations of acompany

Next important to MOA But must not violate the

memorandum and the Act. Optional for company limited by shares

Compulsory for company limited by guarantee

and unlimited company.


32/47

32

Form and Contents of AOA

Should be in Table F,G,H,I and J of Schedule I

AOA provide information on:a. Adoptions or execution of pre-incorporation contracts.

b. Alteration of Authorised Capital.c. Shares-issue, transfer, transmission, buy-back etc.

d. Mode and limit of Borrowings.e. General Meetings-Notice etc.f. Directors-appointment, remuneration etc..g. Dividend, reserves etc.h. Accounts and audit.

i. Amalgamations, mergers etc.j. Common seal-use and custody.k. Managers and Secretaries.l. Winding up.

Relationship between memorandum and Articles Of

Association


33/47

33

Section 30- to be printed , divided into paragraphs,numbered consecutively and signed by the

subscriber.


34/47

34

Alteration of Articles (sec 31) ( Section 14 asper the Act of 2013)

Procedure: Alteration by passing a special resolution.

Copy of resolution to be sent to registrar within 30

days.( Now within 15 days as per the 2013 Act)

Copy of altered articles to be registered within 3

months of passing of resolution.


35/47

35

Limitation on power to alter Articles

Must not be inconsistent with the Act

Must not conflict with Memorandum

Must not be inconsistent with an order of the Tribunalunder section 397 or 398 of the companies Act.

Must not sanction anything illegal Must be bonafide for the benefit for the company.

-Allen v. Gold Reefs of West Africa Limited[1900] 1 Ch.656

Approval of govt. to be obtained in certain cases

Alteration must not constitute a fraud on the minority


36/47

36

Binding force of Memorandum and articles(sec 36)

The following are the legal implications: Company is bound to its members

Each member is bound to the company

Each member is bound to other members in exceptional

case only

Neither the company nor the members are bound to

outsiders


37/47

37

Difference between MOA & AOA

MOA

Lays down the mainobjects

Bound by Company Law

Requires special

procedures

Must for every company

Governed by Doctrine of

Ultravires

Act, Ultra Vires is

wholly void & cannot be

ratified.

AOA

Lays down the rules and regulations of thecompany regarding the internal administration

of the company.

Bound by MOA.

simpler procedure.

for its endorsements

Company limited by shares need not have it

(Table A applies)

Governed by Doctrine of Indoor

Management Act Ultra Vires (but intra vires the

memorandum) can be ratified.


38/47

38

DOCTRINE OF CONSTRUCTIVE NOTICE[ Section 610]

Documents are open & accessible to all. Presumption that any outsider dealing with

company has read & understood the documents.

It is a negative doctrine, acting only against theoutsiders & not the company.


39/47

39

DOCTRINE OF INDOOR MANAGEMENT

Persons dealing with the company in good faithhave a right to assume that the internalrequirements prescribed in public documents have

been observed

Persons are not bound to enquire into regularity ofinternal proceedings

Royal British Bank v. Turquand[1856]6 327.


40/47

40

Exceptions

Knowledge of irregularity No knowledge of Articles

Forgery

Negligence


41/47

41

Prospectus (Section 2(36))

Any document described or issued as prospectus andincludes any notice,circular,advertisement or otherdocument inviting deposits from the public for thesubscription or purchase of any shares or debentures of abody corporate.

Section 2(70) of the 2013 Act- Any document described orissued as a prospectus and includes a red herringprospectus referred to in section 32 or shelf prospectusreferred to in section 31 on any notice, circular,advertisement or other document inviting offers from thepublic for the subscription or purchase of any securities ofa body corporate.


42/47

42

Contents of the Prospectus

General Information of the Company Capital structure of the company

Terms of the present issue

Particulars of the issue Company management and project

Particulars in regard to the company

Outstanding litigation pertaining to matters Management perception of risk factors


43/47

43

Experts consent to the issue of prospectus When prospectus is not to be issued?

Statutory requirements in relation to a prospectus.

- Dating of Prospectus

- Registration of a prospectus


44/47

44

Shelf prospectus (section 60 A) Information memorandum (section 60 B)

Statement in lieu of Prospectus( Section 70)


45/47

45

Misstatements in a Prospectus and theirLiabilities


46/47

Q&AClarifications

Suggestions for improvements

46


47/47

47

Thank You!