Company Law

Case: Start-up
Ajay wants to set up a company to run a consulting business. a. Can he form a company alone? How many more people would he need to form a private company? b. What is the minimum amount of money the founding members would need to raise to form a private company?

Formation of Company
12. Mode of Forming Incorporated Company. (1) Any seven or more persons, or where the company to be formed will be a private company, any two or more persons, associated for any lawful purpose may, by subscribing their names to a memorandum of association .... form an incorporated company, with or without limited liability.

Definition of Private Company

3. Definitions of "company", "existing company", "private company" and "public company" ... (iii) "private company" means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,(a) restricts the right to transfer its shares, if any; (b) limits the number of its members to fifty ... (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; (d) prohibits any invitation or acceptance of deposits...

Case: Start-up
Ajay wants to set up a company to run a consulting business. a. Can he form a company alone? How many more people would he need to form a private company? (Two) b. What is the minimum amount of money the founding members would need to raise to form a private company? (One lakh)

 cond
Ajay wants to set up a company to run a consulting business. c. 57 students want to join Ajay. company would Ajay have to form? kind of

d. Ajay was joined by 57 batch mates to form a company. However, they all wanted to make the minimum possible contribution. What is the minimum total which would be needed to form the company?

Definition of Private Company

3. Definitions of "company", "existing company", "private company" and "public company" ... (iii) "private company" means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,(a) restricts the right to transfer its shares, if any; (b) limits the number of its members to fifty ... (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; (d) prohibits any invitation or acceptance of deposits...

Definition of Public Company

(iv) "public company" means a company which-

(a) is not a private company; (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed; (c) is a private company which is a subsidiary of a company which is not a private company.

 cond
Ajay wants to set up a company to run a consulting business. c. 57 students want to join Ajay. company would Ajay have to form? kind of

d. Ajay was joined by 57 batch mates to form a company. However, they all wanted to make the minimum possible contribution. What is the minimum total which would be needed to form the company?

Case: Solar Power

Suman has the idea but not the money

a. Banks have promised unlimited amount of loan to the proposed company. Can Suman form a private company? Must he form a public company as the amount of money involved is large?

Definition of Private Company

3. Definitions of "company", "existing company", "private company" and "public company" ... (iii) "private company" means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,(a) restricts the right to transfer its shares, if any; (b) limits the number of its members to fifty ... (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; (d) prohibits any invitation or acceptance of deposits...

Suman has the idea but not the money

b. Banks do not consider the venture of Suman profitable and thus, would not provide assistance. Suman wants to form a company and advertise through newspaper and internet for others to subscribe to the capital of the company. He is confident that knowledgeable people would understand the merits of his technology and come forward. What kind of company would he need to form?

Definition of Private Company

3. Definitions of "company", "existing company", "private company" and "public company" ... (iii) "private company" means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,(a) restricts the right to transfer its shares, if any; (b) limits the number of its members to fifty ... (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; (d) prohibits any invitation or acceptance of deposits...

Definition of Public Company

(iv) "public company" means a company which-

(a) is not a private company; (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed; (c) is a private company which is a subsidiary of a company which is not a private company.

Suman has the idea but not the money

c. Banks do not consider the venture of Suman profitable and thus, would not provide assistance. Suman is apprehensive that he would lose control if he lets others subscribe to the capital. A friend of Suman advised him that he should form a private company and take fixed deposit from a large number of people for five years. Is the advice sound?

Definition of Private Company

3. Definitions of "company", "existing company", "private company" and "public company" ... (iii) "private company" means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,(a) restricts the right to transfer its shares, if any; (b) limits the number of its members to fifty ... (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; (d) prohibits any invitation or acceptance of deposits...

Definition of Public Company

(iv) "public company" means a company which-

(a) is not a private company; (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed; (c) is a private company which is a subsidiary of a company which is not a private company.

Case: Risk in Business

Film company- The creditors want to recover from the individual assets of the persons forming the company. Should they form a company limited by shares; a company limited by guarantee; or an unlimited company? What kind of company should be formed if the family could only take a risk of paying up to 50 lakhs to the creditor if the film failed?

12(2) Such a company (public or private) may be either (a) a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them (in this Act termed "a company limited by shares"); (b) a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up (in this Act termed "a company limited by guarantee"); or (c) a company not having any limit on the liability of its members (in this Act termed "an unlimited company").

Case: Risk and Creditors

A rich industrialist, with his wife as the only other subscriber, formed a company Wellbeing Private Ltd. The wife held only one share. The share capital of the company was 10 lakhs. The company borrowed 2 crores from a creditor. The money was to be returned by June 30. The company was running in a loss for two years and could not re-pay the loans. The company was liquidated and the creditor was given 30 lakhs from the proceeds. The creditor is demanding 2.2 crores as the remaining capital and interest on the capital from the wealthy industrialist.

12(2) Such a company (public or private) may be either

(a) a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them (in this Act termed "a company limited by shares");

Case: Computer Software

Manu is setting up a private company to run a software development business. The others involved in the formation of the company are his friend and brother. What are the documents he would need to prepare for incorporation of the company? They are based in Ahmedabad. However, they want the address of the company to be in Bangalore. Where should they apply for registration of the company?

12. Mode of Forming Incorporated Company. (1) Any seven or more persons, or where the company to be formed will be a private company, any two or more persons, associated for any lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company, with or without limited liability.

Section 33- Registration Process

33. Registration of memorandum and articles. (1) There shall be presented for registration, to the Registrar of the State in which the registered office of the company is stated by the memorandum to be situate(a) the memorandum of the company; (b) its articles, if any; and (c) the agreement, if any, which the company proposes-to enter into with any individual for appointment as its managing or whole-time director or manager. (2) A declaration by an advocate ...or a chartered accountant ... all the requirements of this Act and the rules thereunder have been complied ...

... cond
(3) If the Registrar is satisfied that all the requirements ... have been complied with by the company ... he shall retain and register the memorandum, the articles, if any, and the agreement referred to in clause (c) of sub-section (1), if any.

S 34- Certificate of Incorporation

34. Effect of Registration. (1) On the registration of the memorandum of a company, the Registrar shall certify under his hand that the company is incorporated (2) From the date of incorporation mentioned in the certificate of incorporation, such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company, and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as mentioned in this Act.

S 41- Member
41. Definition of "member". (1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of a company, and on its registration, shall be entered as members in its register of members.

(2) Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company. (3) Every person holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the concerned company.

Case: New Age

The name of a company in its memorandum of association is New Age Publishing Limited. a. Is it a public company or a private company? b. Is the company engaged in publishing business? c. From the memorandum of association of the company, can we find out the city it is based in? d. From the memorandum of association, can we find out the State the company is registered in?

Is New Age Publishing Limited a public company or private company?

Is New Age Publishing Limited a public company or private company? 13. Requirements with respect to memorandums: (1) The memorandum of every company shall state (a) the name of the company with "Limited" as the last word of the name in the case of a public limited company, and with "Private Limited" as the last words of the name in the case of a private limited company;

From the memorandum of association of the company, can we find out the city it is based in? From the memorandum of association, can we find out the State the company is registered in?

From the memorandum of association of the company, can we find out the city it is based in? From the memorandum of association, can we find out the State the company is registered in? 13. Requirements with respect to memorandums: (1) The memorandum of every company shall state (b) The State in which the registered office of the company is to be situate .

Is New Age Publishing publishing business?

Limited

engaged in

Is New Age Publishing publishing business?

Limited

engaged in

13. Requirements with respect to memorandums: (1) The memorandum of every company shall state (d) (i) The main objects of the company to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects; (ii) Other objects of the company not included in subclause (i); and (e) In the case of companies (other than trading corporations), with objects not confined to one State, the States to whose territories the objects extend.

Case: Internal Management

Does the Companies Act provide a model memorandum of association? Does the companies Act provide a default articles of association? Why does section 26 mention may register with an article of association for a public company while a private company shall register an article of association? Section 27 requires the articles of association of a private company to make certain provisions. How can these requirements be met? Can a public company adopt the articles of association mentioned in Section 28? Can a private company adopt the articles of association in Section 28 without making any modification. (See Sections 26, 27 and 28)

Case: Companys Name

Pratap is in the process of drawing up the memorandum of association for a company. The objective of the company is to manufacture food and beverages. Pratap is contemplating several names including Britannia Ltd, RIL Ltd, Tropicana Ltd, Amul Ltd, Pratap Computers Ltd., Pratap Food Ltd. Advice Pratap on an appropriate name for the company.

Britannia Ltd, RIL Ltd, Tropicana Ltd, Amul Ltd, Pratap Computers Ltd., Pratap Food Ltd. 20. Companies not to be registered with undesirable names (1) No company shall be registered by a name which, in the opinion of the Central Government, is undesirable. (2) Without prejudice to the generality of the foregoing power, a name which is identical with, or too nearly resembles, (i) the name by which a company in existence has been previously registered, or (ii) a registered trade mark, or a trade mark which is subject of an application for registration .

Case: Company for Restaurant

Husband and wife, Niraj and Seema Mishra, based in Mumbai, are forming a company. The company is being formed to run a restaurant. They project they would need 20 lakhs as the capital of the company. Immediately, the husband would contribute Rs. 2, 00, 000 to the share capital of the company and wife Rs. 10. Mr. Mishra hopes to find others, after the company is formed, to take the shares of the company. They also contemplate occasionally hiring out the car they would buy for the company. Develop a Memorandum of Association for the Company. What would the company do after registration?

Kumar Foods Private Limited

Memorandum of Association
Kumar Foods Private Limited I. The name of the Company is Kumar Foods Private Limited II. The registered office of the company will be situated in the State of Gujarat. III. The objects for which the company is established is procurement, storage, manufacturing and selling of food products. iv. The liability of the members is limited. v The authorised share capital of the company is Rs. 8, 00, 000 (Rs. eight lakh) divided into 80, 000 (eighty thousand) Equity shares of Rs. 10/ (Rs. Ten each)

Case: Tailoring Business

The family had good experience in tailoring business. Mr. Kumar came across a lucrative business offer. The company signed up a contract with Mr Ramesh to tailor and supply to him 500 sets of school uniform for a price of Rs. 400 per set. A dispute developed between Mr. Kumar and his brother Dhruv Kumar. Dhruv Kumar was not in favour of the company taking up the assignment. Dhruv is challenging the validity of the contract. Is Mr. Kumar justified in getting into the contract? In addition to Dhruv, who could have an interest in the dispute? Explore.

Company is a contractual relationship. The contracting parties have committed for taking up only certain kinds of activities. It is not for the employees or others to subvert it. Any act outside the objects of a company is not only beyond the authority of the executives but beyond the capacity of the company itself. Thus, the activity of any company beyond its objects is void. This was termed as the doctrine of ultra vires. Ultra means beyond, and vires means power. Thus, ultra vires literally means beyond power and competence. Members and creditors are the interested person.

Ashbury Railway Carriagev.Riche

With regard, therefore, to the memorandum of association, if you find anything which goes beyond that memorandum, or is not warranted by it, the question will arise whether that which is so done is ultra vires, not only of the directors of the company, but of the company itself. The question is not as to the legality of the contract; the question is as to the competency and power of the company to make the contract. Now, I am clearly of opinion that this contract was entirely, as I have said, beyond the objects in the memorandum of association. If so, it was thereby placed beyond the powers of the company to make the contract.

A response to the doctrine of ultra vires is to put objectives very widely and in broad and general terms. Should this be allowed?

Cotman v. Brougham
The company had very broad and general objectives. The court ruled: The question whether or not a transaction is ultra vires is a question of law between the company and a third party A person who deals with a company is entitled to assume that a company can do everything which it is expressly authorised to do by its memorandum of association, and need not investigate the equities between the company and its shareholders.

Case: Training for Mr. Kumar

Mr. Kumar signed up to attend a one week training programme Food Technology for Small Business conducted by a premier food technology institute. The fee for the course was Rs. 30, 000. Mr. Saraf, a creditor has raised objection to this. He claims that sending board members for attending seminars and conferences is not an object of the company. Thus, the Act of Mr. Kumar is not valid. Dhruv has also joined the creditor in opposing the decision. Explore.

Company Act- Object Clause

Company Act requires objectives in the Memorandum of Association to be listed under three heads: Main Objectives, Ancillary Objectives, and Other objectives Appraise MOA of a company.

Ultra Vires and doctrine of constructive notice

Constructive notice extends documents of the company.

to

all

registered

Indoor management- An outside person could not have known dealings within the company on the aspects not made public.

Mahony v. East Mining Co.

those who deal with joint stock companies are bound to take notice of that which I may call the external position of the company. Every joint stock company has its memorandum and articles of association those articles of association are open to all who are minded to have any dealings whatsoever with the company, and those who so deal with them must be affected with notice of all that is contained in those two documents.

... cond
After that, the company entering upon its business and dealing with persons external to it, is supposed on its part to have all those powers and authorities which, by its articles of association and by its deed, it appears to possess; and all that the directors do with reference to what I may call the indoor management of their own concern, is a thing known to them and known to them only; subject to this observation, that no person dealing with them has a right to suppose that anything has been or can be done that is not permitted by the articles of association or by the deed.

Case
The Managing Director of Ace Industries Limited signed a contract with the Management Education Private Limited for training of personnel of the company. The articles of association of the Company provides that the board of directors would resolve the party and amount for any contract for training of the personnel of the company and authorise the Managing Director to enter in a contract. As the managing Director had not studied the articles of association, he was not aware of this. He wrote to the Management Education Private Limited and informed them that he was not authorised by the board and therefore the contract was to be set aside. The Management Education Private Limited is claiming damages. Decide.

Distinct Entity

Case: Treatment of Mrs. Kumar

Mr. Raman Kumar had the powers to sign cheques for the company. He wrote a cheque in favour of the hospital for Rs. 80, 000, where Mrs. Kumar had received treatment. From Mr. Kumars point of view, it was his own money he was using. The law enforcement agency is accusing him of misappropriated money of the company. Decide

Case: Buys Kumars Business

Mr. Kumar was running a bakery, as a proprietary business. Now that he had a company, it was best to run the bakery as a part of the company. The articles of association of the company had authorised him to buy any existing food business. Mr. Kumar sold his bakery to the company. Mr. Kumar signed a cheque for himself for Rs. 1, 80, 000. Thus, most of the money he had paid for his shares came back to him. Is Mr. Kumars action justified?

Salomon v. Salomon Ltd.

Salomon carried on business as a leather and shoe manufacturer. His business was profitable. In 1892, he formed a company with his wife and five children as members. The capital of the company consisted of 40, 000 shares of 1 each. His wife and five children subscribed to one share each. Salomon sold his business to the company. The company paid 30, 000 to Salomon for business. Salomon took 20, 000 as shares in the company. He loaned the remaining 10,000 to the company through debentures. (Debenture is an instrument by which a company takes a loan. It is a certificate of having taken a loan).

.... cond
The debenture was secured by a floating charge on the company assets. In other words, it was to have a priority claim on assets of the company, before any body else. The company took a loan of 8,000 from creditors. The company fell on hard times. It was to be liquidated to meet the demands of the creditors. The total assets of the company were 6, 000. Both Salomon and the creditors are claiming this money.

Decide

Macaura v. Northern Assurance Co. Ltd.

Macaura was the owner of a timber estate. He formed a company and sold the timber to it for 42,000. The purchase money was paid to Macaura and his family as shares of 1. No other shares were issued. The timber was destroyed in a fire. The insurance, however, was in the name of Macaura. Macaura made a claim on the insurance policy for the value of the timber destroyed.

Lee v. Lees Air Farming Ltd.

Mr. Lee formed a company which carried on the business of crop spraying from the air. Lee owned 2999 of the companys 3000 shares and his wife owned the remaining one share. Mr. Lee was the governing director of the company. Lee was killed while spraying crop. Within the New Zealands Workers Compensation Act, Catherine Lee would be entitled to a compensation from the state, if Mr. Lee were an employee. The question arose if Mr. Lee was an employee of the company. He was the managing director of the company. One of his first acts as the managing director was to appoint himself as a pilot of the company for a monthly salary.