1 Company Law

Term Paper
of
Business Legislation

Topic: Company Law

Submitted By:
Praveen Rai

Institute of Business Management,

C. S. J. M. University, Kanpur.
 2 Company Law

Company Law
Question 1: What is company and what are its characteristics?

Company: A company, in common parlance, means a group of

persons associated together for the attainment of a common end,
social or economic.

According to Lindley, “It is an association of many persons who

contribute money or money’s worth to a common stock, and employs it
in some common trade or business, and who share the profit or loss
arising there from. The common stock so contributed is denoted in
money and is the capital of the company. The person who contributes
is, or to whom it belongs, are members. The proportion of capital to
which each member is entitled is his share. Shares are always
transferable although the right to transfer them is often more or less
restricted.”

Characteristics of a Company:
1. Separate Legal Entity: It has an independent corporate
existence. Any of its members can enter into contracts with it in the
same manner as any other individual can and he can’t be held liable
for the acts of the company even if he holds virtually the entire
share capital. The company’s money and property belongs to the
company & not to shareholders.

2. Limited Liability: In a company limited by shares, the liability of

members is limited to the unpaid value of shares. E.g. If the face
value of a share in a company is Rs. 10 and a member has already
paid Rs. 7 per share, he can called upon to pay not more than Rs. 3
per share.

3. Perpetual Succession: It means that a company’s existence

persists irrespective of the change in the composition of its
membership. Thus its continued existence is not affected by a
constant change in its membership “in the like manner as the river
Thames is still the same river, though the parts which compose it
are changing every instant.”

4. Common Seal: Since a company has no physical existence, it must

act through its agents and all such contracts entered into by its
agents must be under the seal of the company and it acts as the
official signature of the company.

5. Transferability of Shares: The capital of a company is divided

into parts, called shares. These shares are, subject to certain
conditions, freely transferable, so that no shareholder is
permanently or necessarily wedded to company. In a joint stock
 3 Company Law
company the main object was that the share should be capable of
being easily transferable.

6. Separate Property: A company as a whole represents all the

property and is capable of owning, enjoying and disposing of
property in its own name. Although its capital and assets are
contributed by its shareholders, they are not the private and joint
owners of its property.

7. Capacity to sue: A company can sue and be used in its corporate

name. It may also inflict or suffer wrongs.

Question 2: What is a corporate veil? When is it pierced?

Corporate Veil: A company is a legal person distinct from its

members. This principle is referred to as ‘the veil of incorporation’. The
effect of this principle is that there is a fictional veil (and not a wall)
between the company and its members i.e., the company has a
corporate personality which is distinct from its members. In some
conditions, it is pierced as follows:

1. Protection of Revenue: The Courts may ignore the corporate

entity of a company where it is used for tax evasion. Tax of planning
may be legitimate provided it is within the framework of law.

2. Prevention of Fraud: The legal personality of a company may

also be disregarded in the interest of justice where the machinery of
incorporation has been used for some fraudulent purpose like
defrauding creditors or defeating or circumventing law.

3. Determination of Character of a Company whether it its

Enemy: A company may assume an enemy character when persons
in de facto control of its affairs are residents in an enemy country.
In this case, the Court may examine the character of persons in real
control of the company, and declare the company to be an enemy
company.

4. Where the Company is a Sham: The Court also lifts the veil
where a company is a mere cloak or sham (hoax).

5. Company Avoiding Legal Obligations: Where the use of an

incorporated company is being made to avoid legal obligations, the
Court may disregard the legal personality of the company and
proceed on the assumption as if no company existed.

6. Company acting as Agent or Trustee of the Shareholders:

Where a company is acting as agent for its shareholders, the
shareholders will be liable for the acts of all company.

7. Avoidance of Welfare Legislation: It is as common as

avoidance of taxation and the approach of the Courts in considering
 4 Company Law
problems arising out of such avoidance is generally the same as
avoidance of taxation.

8. Protecting Public Policy: The Courts invariably lift the corporate

veil to protect the public policy and prevent transactions contrary to
public policy. Thus where there is a conflict with public policy, the
Courts ignore the form and take into account the substance.

Question 3: What is Private and Public Limited Companies.

Differentiate between the both?

Private Company: According to Sec. 3 (1) (iii), a ‘private

company’ means a company which has a minimum paid-up capital of
Rs. 1,00,000 or such higher paid-up capital as may be prescribed. Some
more conditions are as follows:

(a) Restricts the right to transfer its shares.

(b) Limits the no. of its members to 50 not including the employee-
members (present or past)

(c) Prohibits any invitation to the public to subscribe to for any

shares in, or debentures of the company.

(d) Prohibits any invitation or acceptance of deposits from persons

other than its members.

Public Company: It means a company which:

(a) has a minimum paid-up capital of Rs. 5 lakh or such higher paid-
up capital, as may be prescribed.

(b) is a private company, which is a subsidiary of a company which is

not a private company.

Every public company, existing on the commencement of the

Companies (Amendment) Act, 2000, with a paid-up Capital of less than
Rs. 5, 00,000 shall, within a period of two years from such
commencement, enhance its paid-up capital of Rs. 5, 00,000.

Difference between Private and Public

Company:
1. Minimum Capital: A private company must have a
minimum paid-up capital of Rs. 1, 00,000 whereas a public limited
company must have Rs. 5, 00,000.

2. Minimum No. of Persons: The minimum no. of persons

required to form a public company is 7. It is 2 in case of a private
company [Sec. 12 (1)].
 5 Company Law

3. Maximum No. of Members: In public company no

restriction is there but in private company no. of members cannot
exceed 50.

4. No. of Directors: A public company must have at least 3

directors [Sec. 252 (1)].and a private company must have at least 2
directors [Sec. 252 (2)].

5. Appointment of Directors: In public company, the

directors must file with the Registrar a consent to act as directors or
sing an undertaking for their qualification shares. The directors of a
private company need not do so [Sec. 266].

6. Restriction on Invitation to Subscribe for shares: A

Public company invites the general public to subscribe for the
shares in, or the debentures of, the company. A private company by
its Articles prohibits any such invitation to the public.

7. Transferability of Shares/ Debentures: In a public

company, the shares and debentures are freely transferable [Sec.
82]. In a private company the right to transfer shares and
debentures is restricted by the Articles.

8. Special Privileges: A private company enjoys some

special privileges. A public company enjoys no such privileges.

9. Quorum: If the Articles of a company do not provide for a

larger quorum, 5 members personally present in the case of a public
company are quorum for a meeting of the company. It is 2 in case of
a private company [Sec. 174].

10. Managerial Remuneration: Total managerial

remuneration in a public company cannot exceed 11 percent of the
net profits [Sec. 198]. No such restriction applies to a private
company.

Question 4: Define Memorandum of Associations, various Clauses

of it. When and how it may be altered?

Memorandum of Association: It is a document of great

importance in relation to the proposed company. It contains the
fundamental conditions upon which alone company is allowed to the
incorporated. It is the charter of the company and defines its raison
d’etre (i.e., reason for existence). It lays down the area of operation of
the company. It also regulates the external affairs of the company in
relation to outsiders. Its purpose is to enable shareholders and those
who deal with the company to know what its permitted range of
enterprise is.

Purpose of Memorandum: The purpose of the Memorandum is two-

fold:
 6 Company Law
1. The prospective shareholders shall know the field in, or the
purpose for, which their money is going to be used by the company
and what risk they are undertaking in making investment.

2. The outsiders dealing with the company shall know with certainty
as to what the objects of the company are and as to whether the
contractual relation into which they contemplate to enter with the
company is within the objects of the company.

Clauses: These clauses are considered in detail:

1. The Name Clause [Sec. 20]: The name of a company
establishes its identity and is the symbol of its existence. A
company may, subject to the following rules, select any suitable
name –

I. Undesirable name to be avoided: A company cannot be

registered by a name which, in the opinion of the Central
Government, is undesirable. It is rejected if it is either –

(a) too similar to the name of another company; or

(b) Misleading, i.e., suggesting that the company is

connected with a particular business or that it is an
association of a particular type when this is not the case.

II. Injunction if identical name adopted: If a company gets

registered with a name which resembles the name of an existing
company, the resembling company can apply to the Court for an
injunction to restrain the new company from adopting the
identical name.

III. ‘Limited’ or ‘Private Limited’ as the last word or

words of the name: The omission to use the word ‘Limited’ as
part of the name of a company must have been deliberate and
not merely accidental.

IV. Prohibition of use of certain names: The use of or

registration of a company or firm with, any name or emblem
specified in the Schedule to that Act. The name of Scientific and
Cultural Organization, the Indian National Flag, the official seal
of the Central Government and State Government, emblem or
official seal or the President of India or Governor of any State.

V. Use of some key words according to authorized

capital: If a company uses any of the following key words in its
name, it must have a minimum authorized capital mentioned
against the key words as per law:
 7 Company Law

Key Words Required

Authorized Capital
(a) Corporation Rs. 5
crores

(b) International, Globe, Universal, Continental

Asiatic, Asia, being the first words of the name Rs. 1

crore

(c) Hindustan, India, Bharat, being the first

word of the name Rs. 50 lakhs

2. The Registered Office Clause [Sec. 146]: Every company

shall have a registered office from the day on which it begins to
carry on business, or as from the 30th day after the date of its
incorporation, whichever is earlier.

3. The Objects Clause [Sec. 13 (1)]: The objects of a company

shall be clearly set forth in the memorandum, for a company can do
what is within, or incidental to, the objects stated in the
memorandum.

4. The Capital Clause [Sec. 13 (4)]: The memorandum of a

company having a share capital, shall state the amount of the share
capital which the company is to be registered and the division
thereof into shares of a fixed amount. The capital with which a
company is registered is called registered, authorized or nominal
capital. A company can’t issue more shares than are authorized for
the time being by the memorandum.

5. The Liability Clause [Sec. 13 (2)]: The member can only be

called upon to pay to the company at any time the uncalled or
unpaid amount on the shares held by them or up to the maximum of
the amount which they have guaranteed.

6. The Association Clause: The memorandum shall be signed by

at least 7 subscribers in the case of public company and by at least
2 subscribers in the case of a private company. The signature of
each subscriber shall be attested by at least 1 witness who can’t be
any of the other subscribers.

Alteration of Memorandum:
Conditions are as follows:

1. Change of Name: A company may change its name by a special

resolution and with the approval of the Central Government
signified in writing. But a change of name which merely involves the
deletion or addition of the word ‘Private’ on the conversion of a
 8 Company Law
public company into a private company or vice versa does not
required the approval of Central Government.

2. Change of Registered Office: This may involve:

a. Where there is more than one ROC (Regional Office of
Companies) within a state. A company can change the place of
its registered office from one place to another within a state if
it is confirmed by the Regional Director. In this case, the
company has to make an application to the Regional Director
for confirmation. The confirmation shall be communicated to
the company within 4 weeks. The company shall then file with
the registrar a certified copy of the confirmation by the RD
within 2 months from the date of confirmation, together with
the printed copy of the Memorandum of Association as altered.

b. A company may by special resolution, change the place of its

registered office from on state to another for certain purpose
referred in Sec. 17.

Procedure of Alteration:
I. A Special resolution shall be passed at a general
meeting so as to change the place of registered office from
one State to another.

II. The alteration shall not take effect until it is confirmed

by the Company Law Board on petition.

III. Before confirmation, the Company Law board shall be

satisfied that sufficient notice has been given to every
person whose interest will be affected by the change, and
that the consent of the creditors of the company has been
obtained.
IV. The Company Law Board shall cause notice of the
petition for confirmation of the change to be served on the
Registrar.

V. Power of Company Law Board to confirm change

discretionary or on such terms and conditions as it think
fit.

VI. The CL Board shall have regard to the rights and

interests of every class of the member and creditors of the
company.

VII. Copy of special resolution and the order of the

Company Law Board to be filed with the registrar as per
the conditions according to law and regulation.

Question 5: Define Article of Association, its clauses and how it is

altered?
 9 Company Law

Alteration of Association: It is the rules, regulations and

by-rules for the internal management of the affairs of a company. They
are meant for the object of carrying out the aims and objectives as set
out in the Memorandum of Association.

The Articles are next in importance to the Memorandum of Association

which contains the fundamental conditions upon which alone a
company is allowed to be incorporated.

Alteration of Articles: A company has very wide range to

alter their Articles. Any clause in the Articles that restricts or prohibits
alteration of Articles is invalid.

Procedure of Alteration [Sec. 31]: A company may by passing a

special resolution, alter its Articles any time. Again any Articles may be
adopted which could have been lawfully included originally. A copy of
every special resolution altering the Articles shall be filed with the
Registrar within 30 days of its passing and attached to every copy of
the Articles issued thereafter.

Limitations to Alteration: There are many limitations as follows –

1. Must not be inconsistent with the Act: The alteration of the
Articles must not be inconsistent with, or go beyond, the provisions
of the Companies Act. E.g. the Articles can’t be altered so as to give
power to a company to purchase its own shares.

2. Must no conflict with the Memorandum: The alteration of the

Articles must not exceed the power given by the Memorandum, or
conflict with the provisions of the Memorandum.

3. Must no sanction anything illegal: The alteration must not

purport to sanction anything which is illegal. But if it is legal and it
is not clearly prohibited by the Memorandum. It may be held to be
valid even where it alters the whole structure of company.

4. Must be for the benefit of the company: The alteration must

be made bona fide for the benefit of the company as a whole. That
the power of alteration must be “exercised subject to those general
principles of law and equity which are applicable to all powers
conferred on majorities and enabling them to bind minority.”

5. Must not increase liability of members: The alteration must

not in any way increase the liability of the existing members to
contribute to the share capital of or otherwise pay money to, the
company unless they agree in writing before or after the alteration
is made.

6. Alteration by special resolution only: The alteration can be

made only by a special resolution. Even clerical errors in the Articles
should be set right by a special resolution.
 10 Company Law

7. Approval of Central Government when a public is

converted into private company: The alteration in the Articles
which has the effect of converting a public company into private
company can be made only if it is approved by the Central
Government and paper filed against registrar within 1 month of the
date of receipt of order of the approval.

8. Breach of contract: A company is not prevented from altering its

Articles even if such an alteration would result in breach of some
contract. The affected party may file a suit for damages for the
breach of contract.

9. Must not result in expulsion of a member: An assumption by

the Board of Directors of a company power to expel a member by
amending its articles is illegal and void.

10. No power of the Tribunal to amend Articles: The Tribunal has

no power to amend or rectify the Articles even where there is a
mistake or drafting error which the Tribunal would rectify in the
case of any other contract.

11. Alteration may be with retrospective effect: The Articles may

be altered with retrospective effect and the fact that some members
suffer a detriment does not make it void.

Question 6: Discuss the Doctrine of Indoor Management?

Doctrine of indoor Management: There is one

limitation to the doctrine of constructive notice of the Memorandum
and the Articles of a company. The outsiders dealing with the company
are entitled to assume that as far as the internal proceedings of the
company are concerned, everything has been regularly done. They are
presumed to have read these documents and to see that the proposed
dealing is not inconsistent therewith, but they are not bound to do
more; they need not inquire into the regularity of the internal
proceedings as required by the Memorandum and the Articles. They
can presume that all is being done regularly. This limitation of the
doctrine of constructive notice is known as the “Doctrine of Indoor
Management”, or the rule in Royal British Bank v. Turquand, or just
Turquand Rule.

Thus, whereas the doctrine of constructive notice protects the

company against outsiders, the doctrine of indoor management seeks
to protect outsiders against the company.

The rule is based on public convenience and justice:

 11 Company Law
First, the Memorandum and the Articles are public documents. They
are open to inspection by everybody. But the details of internal
proceedings are not open to public inspection.

Secondly, the lot of creditors of a limited liability company is not

particularly happy one: it would be unhappier still if the company could
escape liability by denying the authority of the officers to act on its
behalf.

Exceptions to the Doctrine of Indoor

Management:
1. Knowledge of Irregularity: Where a person dealing with a
company has actual or constructive notice of the irregularity as
regards internal management, he cannot claim the benefit under the
rule of indoor management. He may in some cases be himself a part
of the internal procedure.

2. Negligence: Where a person dealing with a company could

discover the irregularity if he had made proper inquiries, he can’t
claim the benefit of the rule of indoor management.

3.Forgery: The rule in Turquand’s case does not apply where a

person relies upon a document that turns out to be forged since
nothing can validate forgery.

4. Acts outside the scope of apparent authority: If an officer

of a company enters into a contract with a third party and if the act
of the officer is beyond the scope of his authority, the company is
not bound.