The Companies Act, 1956

THE COMPANIES ACT, 1956
Definition of a Company
Sec. 3 defines company as
a company formed and registered under
the Act or an existing company formed
and registered under any of the previous
company laws.
Company - Definition
Lord Lindley has described the company
as
an association of many persons who
contribute money or moneys worth to
a common stock and employ it in some
trade or business, and who share the
profit and loss (as the case may be)
arising therefrom.
Effect of Registration and the

features
it acquires on registration:
From the date 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 is mentioned in the Act.
Features of the company:

1. Incorporated association: An association of
more than 10 persons in the case of a Banking
Company and more than 20 persons in the case
of any other business, is illegal if not registered
as a company under the Companies Act. For
incorporation or registration as a company, the
minimum members required is 2 in the case of a
private limited company (max. 50), and 7 in the
case of a public limited company.

2. Artificial Person: A company is created
by law and is not a human being. But it
has certain rights and obligations. So it is
an artificial person.

3. Separate Legal Entity: Company is distinct from the
persons who constitute it. On registration, the
association of persons becomes a body corporate by
the name contained in the memorandum.
Lord Macnaughtam in the case of Salomon v.
Salomon & Co. Ltd. observed: A company is at law a
different person altogether from the subscribers..; and
though it may be that after incorporation the business is
precisely the same as it was before, and the same
persons are managers, and the same hands receive the
profits, the company is at law not the agent of the
subscribers or trustee for them. Nor are the subscribers
liable in any shape or form, except to the extent and in
the manner provided in the Act.

Separate Legal Entity
Salomon v. Salomon & Co. Ltd.
Salamon was a leather merchant. He sold his
business to a company formed by him, his wife,
daughter and four sons, for a sum of 30000
pounds. The purchase consideration was
satisfied by allotment of 20,000 shares of pound
1 each and debentures of 10000 pounds secured
by a floating charge on the companys assets in
favour of Mr. Salomon. All other shareholders
subscribed for 1 pound each. Salomon was also
the Managing Director of the Company.
Salomon v. Salomon & Co. Ltd

contd.
The company almost immediately ran into
difficulties and became insolvent and winding up
proceedings commenced. At the time of winding
up. Total assets of the company amounted to
6050 pounds; its liabilities were 10,000 pounds
secured debentures issued to Mr. Salomon, and
8000 pounds owing to unsecured trade
creditors. The unsecured creditors claimed the
whole of the companys assets i.e.6050 pounds
on the ground that the company was a mere
alias or agent for Mr. Salomon.
Salomon v Salomon & Co. Ltd

(contd.)
Held: The contention of the trade creditors could
not be maintained, because the company being
in law a person quite distinct from its members,
could not be regarded as an alias or agent or
trustee for Salomon. Also the companys assets
must be applied in payment of the debentures
as a secured creditor is entitled to payment out
of the assets on which his debt is secured in
priority to unsecured creditors.

In Lee v. Lee Air Farming Ltd., Lee, a qualified
pilot, held all but one of the shares of the
Company. By articles of the company, Lee was
appointed Governing Director and Chief Pilot.
Lee was killed while piloting the plane on duty.
Mrs. Lee claimed compensation under the
Workmen Compensation Act. The company
opposed the claim on the ground that Lee was
not a worker as the same person could not be
employer and employee.
Lee vs Lee Air Farming Ltd.

(contd.)
Held: There was a valid contract of service
between Lee and the company and Lee
was a worker and Mrs. Lee is entitled to
compensation.
Bachha F. Guzder v. The

Commissioner of Incometax,
Bombay.
Mrs. Guzder received dividend in respect of shares
held by her in a tea company. Under Indian
I.T.Act, agricultural income is exempt from I.Tax.
60% Income of the tea company is treated as
agricultural and 40% from manufacture and sale.
The plaintiff Mrs. Guzder claimed 60% of
dividend as exempt from tax representing
agricultural income, as in the case of the tea
company, because dividends received by
shareholders represented the income of the
company.
Judgment:
Supreme court held, that the income in the
hands of the company was partly
agricultural, yet the same income when
received by Mrs. Guzder as dividend could
not be regarded as agricultural income.

4. Limited liability: In the case of a
company limited by shares, the liability of
members is limited to the nominal value of
shares held by them. If shares are fully
paid up, then the liability is nil.

Exceptions to limited liability:
1)unlimited liability company : members
liable till each paise of liability is paid off;
2)Company limited by guarantee :
liability of each member shall be
determined by the guaranteed amount.
Exceptions to limited
liability:
3)Where number of members is reduced to

less than 7 for public limited company and
less than 2 for pvt. Ltd. company and the
company carries on business for more than 6
months, every person who is a member and is
aware of the fact that the company is so carrying
on the business with fewer than the statutory
minimum members, shall be liable for the
whole of the debts contracted during that
time.
Exceptions to limited
liability:
4)Fraud: If during the course of winding

up, if any business is carried on with intent
to defraud the creditors, the court may
declare all the persons who are party to
the transactions, personally liable without
any limitation of liability for all or any of the
debts or other liabilities of the company.

5. Separate Property:
Companys property is companys separate
property and in the eyes of law, shareholders
are not part owners of the undertaking.
In Bacha F. Guzder v. The Commissioner of
Incometax, Bombay, the supreme court held that
a shareholder is not the part owner of the
company or its property; he is only given certain
rights by law e.g. to vote or attend meetings, to
receive dividends.
Reference case:
Macaure Vs. Northern Assurance Co.Ltd
(Separate property shareholders not part-owners)
Also
insurable
interest.
Macaure held
allforexcept
one
share of a
timber company. He advanced substantial

amount to the company and also insured
the companys timber in his personal
name.
The timber was destroyed by fire. He claimed
the loss from the insurance company
against his policy. But the claim was
rejected by the insurance company.
Judgment:
The court applying the principle of separate
legal entity held that Macaure being only
a shareholder, was not the owner of
property of the company. Hence, he has
no insurable interest. The insurance
company was, therefore, not liable to pay
the claim.

6. Transferability of shares: In a
company form of organization, the
business is separate from its members, it
facilitates the transfer of members
interests. Shares of a company are
transferable in the manner provided in the
Articles of the company. In the case of a
private company, there are some
restrictions placed on such transfer.

7. Perpetual existence:
A company is an artificial legal person, and does
not have an allotted span of life. Death,
insolvency or retirement of its members, leaves
the company unaffected. Members may come
and go but the company goes on for ever.
The saying King is dead, long live the king
aptly applies to the company form of
organization.

8. Common Seal:
A company being an artificial person has
to work through its directors, officers and
other employees. But it can be held bound
by only those documents which bear its
signatures. Company seal is the official
signature of a company.

9. Company may sue and be sued in its
own name:
Another fall out of the separate legal entity
is that the company, if aggrieved by some
wrong done to it may sue or be sued in its
own name.
(Company may sue and be sued

in its own name
RAJENDRANATH DUTTA VS.

SHIBENDRANATH MUKHERJEE (1982)
A leasedeed was executed by the directors
of the company without the seal of the
company and later a suit was filed by the
directors and not the company to avoid the
lease on the ground that a new term had
been fraudulently included in the
leasedeed by the defendants.
RAJENDRANATH DUTTA VS.

SHIBENDRANATH MUKHERJEE
(1982)..(contd.)
Held that a director or managing director in their

personal capacity could not file a suit, unless it
was by the company in order to avoid any deed,
which admittedly was executed by one of the
directors and the company also accepted the
rent. The case was not made out by the
company and in the case made out, the
company is not even the plaintiff. If the
aggrieved party was the company, it was for the
company, and not the directors, to file the suit.
The suit is therefore, not maintainable.
Lifting of the Corporate veil:

The advantages of incorporation are
allowed to be enjoyed only by those who
want to make an honest use of the
company. In case of a dishonest and
fraudulent use of the facility of
incorporation, the law lifts the corporate
veil and identifies the persons (members)
who are behind the scene and are
responsible for the perpetration of the
fraud.
purpose or is a sham
Delhi Development Authority Vs.
Skipper Construction Co, Private
Skipper construction company failed to pay the full
purchase price of theLtd.
plot to DDA. The company
started construction and sold flats to various
persons. The two sons of the directors who had
business in their own names claimed that they
had separated from the father and the
companies they were running had nothing to do
with the properties of the parents. But no
satisfactory proof could be produced to
substantiate this.
Judgment:
Held: that the transfer of shareholding
between father and the sons must also be
treated as a sham. The fact that the
director and members of his family had
created several corporate bodies, did not
prevent the court from treating all of them
as one entity belonging to and controlled
by the director and his family.
Lifting of the Corporate Weil

(Examples)
i)
For the protection of revenue : only purpose of forming

the company is for evasion of tax.
ii) Company acting as agent of shareholders.
iii) Company formed for avoiding their own contractual
obligations.
iv) Company formed for fraudulent purpose or is a sham.
v) Company formed against public interest or policy.
(London company: tyres made in Germany: During World
War:
Company filed a suit for recovery of debt from Daimler & Co).
There are various other cases of similar nature.
Illegal Association:
Sec.11 of the Companies Act provides that no company,
association or partnership consisting of more than 10
persons for the purpose of carrying on the business of
banking and more than 20 persons for the purpose of
carrying on any other business can be formed unless it is
registered under the companies Act or is formed in
pursuance of some other Indian Law.
If such an association is formed and not registered under
the Companies Act, it will be regarded as an illegal
association although none of the objects for which it
may have been formed is illegal.
Classification of Companies:
1. If a company is incorporated by a
charter granted by the monarch, it is called
a Chartered Company.
2. A company which is created by a

special Act of the Legislature is called a
Statutory Company.
3. A company brought into existence by

registration of certain documents under
the Companies Act 1956, is called a
Registered Company.
4. A company limited by shares or
Share Company is a registered
company having the liability of its
members limited to the amount if any,
unpaid on the shares respectively held by
them
5. A company limited by guarantee or guarantee

company is one having the liability of its members limited
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.The
guaranteed amount can be called upon only at the time of
winding up.
A pure guarantee company does not have a share
capital. The working funds, if required, are raised from
sources like fees, donations, subsidy, endowments, grants,
subscriptions and the like. Such a company is generally
formed for the purpose of promotion of arts, science,
culture, charity. Sports, or for some similar purpose.
6. A company limited by shares as well as by
guarantee is a hybrid form of company which
combines the elements of a guarantee and a share
company. Initial capital of such a company is raised
from its shareholders, while the normal working
funds are provided from other sources, such as
fees, charges, subscription etc. Every member has
a twofold liability the guarantee amount payable
on winding up and the nominal amount unpaid on
the shares which is payable either during the
lifetime of the company or on winding up.
7. An unlimited company is a company
not having any limit on the liability of its
members. The members are liable, in the
event of its being wound up, to the full
extent of their fortunes to meet the
obligations of the company.
8. Both the limited liability company and

an unlimited liability company can be
private or public.
Private Company:
A private company can be formed by merely two persons by

subscribing their names to the Memorandum of Association.
Such a company must have a minimum capital of Rs.1 lakh and
by its articles must
(i) prohibit an invitation to the public to subscribe to its shares
and debentures;
(ii) restrict the rights of its members to transfer shares and
(iii)limit the number of its members to fifty, excluding its
employee members or past employee-members; (two or more
persons holding shares jointly shall be deemed as one person)
(iv)prohibit any invitation or acceptance of deposits from
persons other than its members, directors or their relatives.
Public Company:
Companies Act 1956 defines a public company to mean
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.
(d) where a private company accepts deposits from the
public and/or whose number of members exceed 50.
(e) Minimum paid up capital requirement is not
applicable to Sec. 25 companies.
Distinction between Private and Public Company

Private Company
1.
2.
3.
4.
5.
6.
7.
8.
9.
Minimum members 2.
Minimum capital is Rs.1 lakh
Maximum number is 50.
Restriction on transfer of shares.
Cannot invite general public to
subscribe to shares and debentures.
Cannot accept deposits from public
Can commence business immediately
on incorporation.
Need not hold statutory meeting.
Written consent to act as director, sign
memorandum or contract for
qualification shares.
1.
2.
3.
4.
5.
6.
7.
8.
9.
Public Company
Minimum members is 7.
Minimum capital is Rs.5 lakhs.
No maximum limit to number of
members.
No restriction on transfer of shares.
Through prospectus, can invite general
public to subscribe to its shares and
debentures.
Can accept deposits from public
subject to the provisions of the Act.
Can commence business only after
receipt of certificate of commencement
of business.
Must hold statutory meeting & file
statutory report.
Directors must file written consent to
act as Directors, must sign
Memorandum, and must contract for
qualification shares.
Distinction between Private and Public Company
PRIVATE COMPANY
Directors may be appointed
by a single resolution.
Directors need not retire by
rotation.
Number of directors can be
increased to any extent
without permission.
Quorum is two members
present.
No restrictions on managerial
remuneration.
Special privileges are
enjoyed.
Cannot issue share warrants.
PUBLIC LTD. COMPANY

Directors are elected by
separate resolutions.
Two thrids of Directors must
retire by rotation.
If number of directors be more
than 12, approval of C.Govt. is
necessary.
Five members present form
the quorum.
Act has placed restrictions on
the quantum of managerial
remuneration.
A public company enjoys no
special privileges.
16. Can issue share warrants.
Special Privileges enjoyed by a Private Company

1. A private company can be formed with only two
members.
2. As a private company does not offer shares to the
public, it can proceed to allot shares without waiting for
minimum subscription.
3. A private company is not required to issue a prospectus
or deliver to the Registrar a statement in lieu of prospectus.
4. A private company is free to allot new issue to outsiders.
5. A private company can issue different kinds of shares
with disproportionate voting rights.
6. A private company can commence business immediately
after its incorporation.

7. It need not have an index of members.
8. A private company need not hold any statutory
meeting or to file statutory report with the Registrar.
9. Only two members present constitute the quorum
unless a larger number is provided in the articles.
10.If less than 7 persons are present, poll can be
demanded by any one person or proxy; if more than 7
are present, then any two can demand poll.
11. A private company need have a minimum of two
directors.

12. All directors of a private company can be appointed
by a single resolution.
13. The directors of a private co. need not file their
written consent or take up qualification shares.
14. The directors of a private company need not retire by
rotation.
15. 14 days notice for appointment of a new director is
not required, unless it is a subsidiary of a Public
Company.
16. Directors can vote on a contract in which they are
interested.

17. A private company may provide additional
disqualifications for appointment of directors, by its
articles.
18. A private company may provide for special grounds
for vacation of office of a director, by its articles.
19. A private company is exempted from the restrictions
regarding Managerial remuneration.
20. A private company can give financial assistance
directly or indirectly for purchase of its own shares.
21. Restrictions on holding more than 25% of paid up
capital of a company without previous sanction of
Central Govt. does not apply to private company shares.

22. There are no regulations regarding general meetings
for private companies. They can have their own rules in
the articles.
23. Nobody other than the members of a private
company can inspect or obtain copies of profit and loss
account of the company.
24. There are no restrictions on the powers of the Board
of Directors contained in Sec.293.
25. There is no provision for prohibition of loan to a
Director.
26. The number of companies in which a person can be
Managing Director and the time limit of 5 years do not
apply to private companies.
Formation of a Company:
Broadly three steps are involved :
1. Promotion
2. Registration
3. Floatation.
1. Promotion: Promotion denotes
preliminary steps taken for the purpose of
registration and floatation of the company.
The persons who assume the task of
promotion are called promoters. The
promoter may be an individual, syndicate,
association, partnership or company.
Judge Cockburns, attempted to define
exactly what a promoter is :
A promoter is one who undertakes to
form a company with reference to a
given project, and to set it going, and
who takes the necessary steps to
accomplish that purpose.
2. Registration:
Sec. 12 Any seven or more persons or where the company to be
formed will be a private company, 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.
Sec.33 : The following three documents are required to be
presented to the Registrar of Companies of the State in which the
registered office of the company is to situate, for the purpose of
registration of a company:
(i) the memorandum of the company;
(ii)the articles, if any;
(iii)the agreement, if any, which the company proposes to enter
into with any individual for appointment as its Managing Director or
Wholetime Director or Manager.
Documents to be filed for Registration:

1. The Memorandum of Association.
2. The Articles of Association, if any, duly signed by the subscribers of
the Memorandum.
3. A statement of the nominal or authorised capital.
4. A notice of address of the registered office of the company. This
may be done within 30 days of registration of it cannot be filed at
the time of registration.
5. A list of directors and their consent to act as such, signed by each.
6. An undertaking in writing signed by each such director to take and
pay for their qualification shares.
7. A declaration that all the requirements (provisions) of the
Companies Act have been complied with signed by an Advocate (of
High Court or Supreme Court), or a Chartered Accountant, or
Director, Manager or Secretary of the Company.
Registration by the Registrar:

After the necessary documents are filed, the Registrar shall
register the Memorandum and Articles of Association of
the Company, provided he is satisfied that
The relevant provisions of the Act have been complied
with,
The objects of the company are lawful,
The requisite number have subscribed and duly signed,
The Memorandum and Articles comply with the
provisions of the Act in all respects,
The name selected is permissible and acceptable,
The statutory declaration has been properly made.
Certificate of Incorporation:
On Registration, the Registrar will issue a
Certificate of Incorporation, certifying that the
Company is incorporated. From the date of
incorporation mentioned in the certificate, the
company becomes a legal person separate from
its shareholders and secures perpetual
succession. Hence it is the Birth Certificate of
the Company.
The certificate of incorporation prevents the
reopening of matter prior to registration and
places the existence of the Company as a legal
person beyond doubt.
Certificate of Commencement of Business

(Trading Certificate)
A private company may commence

business immediately after
incorporation.
But a public company can commence
business only after obtaining a
certificate for commencement of
business from the Registrar.
Certificate of Commencement of Business

Certificate of Commencement of Business is
issued if
Minimum subscription shares have been fully
paid in cash,
every director has paid for in full the shares
applied for and allotted to him
no money is liable to be repaid to the
applicants for any legally recognised reason,
statutory declaration that the above conditions
have been complied with has been filed with
the Registrar.
Memorandum of Association
The Memorandum of Association of a company

is its charter which contains the fundamental
conditions upon which alone the company can
be incorporated.
It tells us the objects of the companys formation
and the utmost possible scope of its operations
beyond which its actions cannot go.
It defines as well as confines the powers of the
company. If anything is done beyond these
powers, that will be ultra vires (beyond the
powers of ) the company and so void.
Contents of Memorandum
Name Clause:
The last word in the name of a public company
shall be limited and of a private company
private limited.
The name chosen should not be undesirable or
identical to the name of an existing company.
A company cannot have a name which violates
the provisions of the Emblems and Names
(Prevention of Improper Use) Act, 1950.
(Name Clause)
Kothari Product Ltd. v. Registrar of
Companies
Parag International (KNP) Ltd. was
registered infringing on the name Parag
which was a registered trade mark of
Kothari.
Parag International name was held to be
undesirable.
Registered Office Clause:
This clause states the name of the State in
which the Registered Office will be situated.
The exact address should be communicated
within 30 days of incorporation.
Every company must have its Registered Office
which establishes its domicile. This is the
address to which notices and all other
communications can be sent.
The Objects Clause:
This is divided into 3 parts:
(a) Main Objects
(b) Anciliary Objects (Objects incidental or
anciliary to the attainments of the main
objects)
(c) Other objects.
Liability Clause:
The liability of the members is limited
If limited by shares to the extent of the amount unpaid on
the shares,
If limited by guarantee, to the extent of the amount
undertaken to be guaranteed.
In case of an unlimited company, this clause need not be
given.
Absence of this clause means that the liability of its
members is unlimited.
Capital Clause:
Authorised Capital
Different kinds of shares and
The face value of each share.
The Association Clause :
The Memorandum ends with the Association Clause
which reads :
We, the several persons whose names and
addresses and occupations are subscribed, are
desirous of being formed into a company in
pursuance of this memorandum of association, and
we respectively agree to take the number of shares
in the capital of the company set opposite our
respective names.
Then follow the names, addresses and occupations and
signatures attested by at least one witness for each.
The total number will be at least 7 for public companies
and at least 2 for private companies.
Change of Registered Office

from one state to another or
Alteration of Objects
Sec.17 permits change of registered office or change of objects
on the following grounds:
1.
2.
3.
4.
To carry on its business more economically and more efficiently.

To attain its main purpose by new or improved means.
To enlarge or change the local area of its operation
To carry on some business which under existing circumstances may
be conveniently or advantageously combined with the business of
the company.
5. To restrict or abandon any of the objects specified in the
memorandum.
6. To sell or dispose of the whole or any part of the undertaking.
7. To amalgamate with any other company or body of persons.
Articles of Association
The Articles of Association are rules and
regulations of a company framed for the purpose
of internal management of its affairs.
It deals with the rights of the members of the
company inter-se.
The articles are framed for carrying out the aims
and objects of the Memorandum.
The articles of association are subordinate to
and are controlled by the Memorandum of
Association.
Subject matter of Articles of Association
The articles usually deal with the following matters:

1. the business of the company;
2. the amount of capital issued classes of shares
increase and reduction of share capital.
3. the rights of each class of shareholders and the
procedure for variation of their rights;
4. the execution or adoption of a preliminary agreement,
if any;
5. the allotment of shares; calls and forfeiture of shares
for non-payment of calls;
6. transfer and transmission of shares;
7. companys lien on shares;
Subject matter of Articles of

Association
8. exercise of borrowing powers including issue
of debentures;
9. general meetings, notices, quorum, proxy,
poll, voting, resolution, minutes;
10.number, appointment and powers of
directors;
11.dividendsinterim and finaland general
reserves.
12.accounts and audit;
13.keeping of books both statutory and others.
DOCTRINE OF ULTRA-VIRES
A Company has the power to carry out the
objects set out in the memorandum and also
everything which is reasonably necessary to
enable it to carry out those objects. Any
activities not expressly or impliedly authorised by
the memorandum are ultra-vires to the company.
An act is said to be ultra-vires (beyond the
powers) when it is performed which, though
legal in itself, is not authorised by the objects
clause in the memorandum of association or the
statute. Such an act is void ab-initio and cannot
be ratified even by an unanimous resolution of
all the shareholders.
DOCTRINE OF ULTRA-VIRES
The doctrine of ultra vires was put in its modern
form in the famous case of Ashbury Railway
Carriage & Iron Co. Ltd. v. Riche. There may
be certain acts which are ultra-vires the directors
or ultravires the articles but which are intra-vires
the company. If an act is ultra-vires the directors
only and the shareholders have ratified it, the
company would be bound by it. Where an act is
ultra-vires the articles, it can be ratified by
altering the articles by a special resolution.
Further, if an act is within the powers of the
company, any irregularities can be cured by the
consent of all the shareholders.
Effect of Ultra-vires Acts:

1. A company may be restrained by an injunction to do
an act if it is ultra-vires of its objects.
2. If the money borrowed has been used to pay-off debts
which could have been enforced against the company,
the lender may sue the company being subrogated or
substituted to the rights of the creditors who were paidoff.
3. If the lender can identify his money, or other property
purchased with it, he is entitled to what is known as a
tracing order and can recover.
4. The lender may hold the directors personally liable for
contracting an ultra-vires loan of the company. The
directors are liable for damages to the lender for the
breach of the implied warranty of authority.
Effect of Ultra-vires Acts:

5. If any money is unlawfully disbursed, the directors
shall be personally liable to make good the amount.
6. Where the officers of the company persuade a third
party to enter into a transaction which is unltra-vires the
company, an action may lie against them in breach of
warranty of authority.
7. An ultra-vires contract cannot become intra-vires by
reason of estoppel, lapse of time, ratification or delay.
8. A company can protect its property acquired by an
ultra-vires expenditure from outsiders.
9. A company will be liable for torts or crimes committed
in the pursuit of its stated objects.
DOCTRINE OF INDOOR MANAGEMENT

The doctrine of constructive notice throws a burden on
people entering into contracts with the company that
they are presumed to have read the documents, though
in fact, they might not have read them. On the other
hand, the doctrine of indoor management allows all
those who deal with the company to assume that the
provisions of the articles have been observed by the
officers of the company. In other words, they are not
bound to enquire into the regularity of internal
proceedings of the company. An outsider is not
expected to see that the company carries out its internal
regulations.

Example: The Royal British Bank v.
Turquand:
The directors of a company were authorised by
the articles to borrow on bond by passing a
resolution in general meeting. The directors gave
a bond to T without passing such a resolution.
The question arose whether the company was
liable.
Held: The company was liable on the bond, as T
was entitled to assume that the resolution of the
company has been passed in a general meeting.
Exceptions to the Doctrine of Indoor Management:

1. Knowledge of irregularity : The rule does
not protect any person who has actual or
constructive knowledge of want of authority of
the person acting on behalf of the company.
2. No knowledge of articles: The rule will not
protect a person who did not consult the
memorandum and articles and therefore, did not
rely on them.
3. Void or Illegal transaction: The rule does not
apply to transactions which are void or illegal abinitio e.g. forgery.

(Exceptions)
4. Negligence: If an officer of a company does something which

would not ordinarily be within his powers, it is the duty of the person
dealing with him to make proper enquiries and satisfy himself as to
the officers authority. He cannot rely on the rule if he fails to make
such an enquiry.
5. Doctrine does not apply where question is in regard to the

very existence of agency: The doctrine cannot apply where the
question is not one as to the scope of power exercised by the
apparent agent of the company, but is in regard to the very
existence of the agency i.e. whether he was an agent of the
company.
6. Preconditioin not fulfilled: The doctrine is not applicable where

the company has to fulfill a precondition, before exercising its power.
PROSPECTUS
A Prospectus means any document
described or issued as prospectus and
includes any notice, circular, advertisement
or other document inviting deposits from the
public or inviting offers from the public for
the subscription or purchase of any shares in
or debentures of a body corporate.
A document shall be called a prospectus if it
invites public subscriptions to shares or
debentures or invites deposits from the public.
Formalities to be completed
before issue of Prospectus:
a)Every prospectus issued on behalf of the company must be

dated and that date shall be regarded as the date of
publication, unless proved otherwise.
b)A copy of the prospectus signed by all the directors or their
agent, must be delivered to the Registrar on or before the date
of publication.
c)SEBIs consent or authorization.
d) Evey application for shares or debentures, must be
accompanied by a prospectus.
e) A prospectus must contain necessary information to enable
the public to decide whether or not to subscribe for its shares
or debentures.
f) Every prospectus must state all the particulars required
under Schedule II Part I and II.
Contents of the Prospectus:

Keeping in view the requirements of
Schedule II of the Companies Act 1956
and SEBI guidelines for disclosure and
investor protection, the prospectus should
contain the following information:-

1. General Information:
a) Name and address of the Registered Office of the company.
b) Details of letter of intent/Industrial licence
c) Disclaimer clause of SEBI about non-responsibility for financial
soundness or correctness of the statements.
d) Names of Stock Exchanges, where listed or where listing
applicatioins have been made;
e) Declaration regarding minimum subscription and refund of
application money in terms of Sch. II of the Companies Act, 1956 and
SEBI guidelines.
f) Dates of opening, closing and earliest date of closing.
g) Names and addresses of Lead Managers, Co-Managers, Trustees
(if applicable), Legal advisers to the company, auditors, bankers to
the issue, brokers to the issue, Secretary.
h) Whether or not credit rating from any agency has been obtained
for the proposed debenture issue. As per SEBI guidelines, credit
rating is mandatory for debentures with maturity more than 18
months.

2. Capital structure and issue details:
a) Authorised, issued, subscribed and paid-up
capital of the company.
b) Size of the issue with break-up of preferential
allotment to promoters, shareholders of group
companies, financial institutions, mutual funds,
NRI, permanent employees, etc. Lock in period
for these preferential allotments should be
mentioned. Number of shares per employee and
total number of permanent employees should be
mentioned.
c) Paid up capital after present issue and ater
conversion of debentures, if applicable.
3. Details of the issue:

a) Authority for the issue and details of resolutions passed for the
issue.
b) Terms of payment : amount payable on application, on allotment
and on calls should be stated. In case of premium issues, the
appropriation of application, allotment and call money towards
capital and premium should be indicated. For debenture issues
having several parts, the appropriate application, allotment and call
money towards each part of the debenture should be stated with
further split between capital and premium.
c) rights of the instrument holders.
d) Objects of the issue.
e) Tax benefits available to the company and its shareholders.
f) Justification for the premium on the issue, if any, disclosure of net
asset value on the basis of the last audited results.

4. Details about the company management:
a) History, main objects and present business of
the company.
b) Subsidiaries of the Company.
c) Promoters and their background.
d) Names, addresses and occupation of
manager, managing director and other directors
including nominee directors, whole time directors
and their directorships in other companies.

5. Details about the Project:
a) Cost of the Project and means of financing.

b) Location of the project.
c) Plant and Machinery for the project,
technology adopted and process of
manufacture.
d) Collaboration, performance guarantee or
assistance in marketing by the collaborators.
e) Infrastructure facilities.
f) Utilities like water, power, etc.

5. Details about the Project:(contd.)
g) Schedule of implementation of the project, with separate details

of land acquisition, civil work, installation of plant and machinery and
the progress till the date of the prospectus.
h) Expected date of trial production and commercial production.
i) Nature of the products, consumer/industrial and end users and
approach to marketing and proposed marketing set up.
j) Export prospects and export obligation.
k) expected capacity utilization during the first 3 years from the date
of commencement of production for each of the major groups.
l) Expected year when the company would be able to earn cash
profits and net profits and the expected cash profits and net profits
for the next 3 years.
m) High/low equity prices of the shares/debentures of the company
for each of the last three years and monthly high/low for the last 6
months.

6. Any other information
a) Details in respect of any issue made by the company and other

listed group companies.
b) Declaration about the issue of allotment letter, refunds within 10
weeks and liability to pay interest in case of delay.
c) Any outstanding litigation pertaining to matters likely to affect the
finances of the company or any criminal prosecution against the
company or its directors.
d) Particulars of default in meeting statutory dues, institutional dues,
dues to holders of instruments like debentures, fixed deposits and
arrears of cululative preference shares pertaining to the company or
other companies promoted by the same promoters.
e) Any material developments after the date of the last balance
sheet.

6. Any other information
f) Managements perception of risk factors like exchange
rate fluctuations, difficulty in getting raw materials,
marketing of products. Cost and time over-run etc..
g) Consent of directors, auditors, solicitors, managers to
issue, registrar to the issue, bankers and brokers to the
issue and experts.
h) Changes in directors and auditors in the last three
years and reasons for change.
i) procedure for making applicatioin and availability of
forms, prospectus and mode of payment.
j) Procedure and time schedule for allotment and issue
of share certificates.

7. Financial information:
Auditors Report on :
Profit and Loss Account for the past 5
years,
Assets and Liabilities combined as well
as individually of all its subsidiaries
Rates of Divident paid for the last 5 years
for each class of shares.
And a certificate that such accounts have
been examined and found correct.

8. Statutory and other information:
a) Minimum subscription as laid down in the SEBI guidelines.

b) Expenses of the issue fees to advisers, registrars, managers to
the issue and trustees and debenture holders.
c) Underwriting commission and brokerage.
d) Previous issue for cash or consideration otherwise than for cash.
e) Details of public or right issue during the last 5 years.
f) Details of premium received in respect of any issue in the last 2
years.
g) Commission or brokerage paid on previous issue.
h) Debentures and redeemable preference shares and other
instruments outstanding on the date of prospectus.
i) Optioin to subscribe.

8. Statutory and other information:
j) Particulars of property purchased or proposed to be purchased out of the

proceeds of the current issue.
k) Details of directors, proposed directors, wholetime directors, their
remuneration, appointment and remuneration of the Managing Director/s.
l) Interests of directors, their borrowing powers and qualification shares.
m) Any amount paid or benefits given within last 2 years to any of the
promoters and consideration for giving the benefit.
n) Dates, parties to and general nature of every contract of appointment of
Managing Director or Manager and time and place where they can be
inspected.
o) Full particulars or the nature and extent of the interest of every director or
promoter in the promotion of the company and in any property acquired by
the company.
p) Rights of members regarding voting, dividend, lien on shares,
modification of rights and forfeiture of shares/debentures etc.
q) Restrictioin on transfer and transmissioin of shares/debentures and on
consolidation/splitting.
r) Revaluation of assets, if any, during the last 5 years.
STATEMENT IN LIEU OF PROSPECTUS:

If a public company makes a private arrangement for
raising its capital then it must file a statement in lieu of
prospectus with the registrar at least 3 days before any
allotment of shares or debentures.
If allotment of shares or debentures is made without
filing the Statement in lieu of prospectus, the allottee
may avoid it within two months after the statutory
meeting, or where no such meeting is to be held, within
two months of the allotment. Contravention also renders
the company and every director liable to a fine up to
Rs.1000.
Liability for untrue statement in the

Prospectus:
Remedies against the Company: Any person who, relying on mis-statements or omission of material
facts from a prospectus, takes shares from the company, may
(i) rescind the contract to take the shares (ii) claim damages.
Rescission of contract: Where a person has purchased the shares
of a company on the faith of a prospectus which contained an untrue
or misleading, but not necessarily fraudulent statement, he may seek
rescission of the contract, return the shares allotted to him and get
back his purchase money with interest and get his name removed
from the register of members.
Damages: Any person induced by fraud to take up shares is entitled
to sue the company for damages provided he has rescinded his
contract in time. He cannot both retain the shares and also claim
damages against the company.
Untrue statements in the Prospectus:

Remedies against Directors or promoters:
A shareholder who had been induced to take
shares may claim from the directors or
promoters or from any one else responsible for
untrue statement occurring in the prospectus:
1) damages for fraudulent misrepresentation;
2) compensation for untrue statement under
Sec. 62;
3) damages for non-compliance with the
requirements of Sec. 56 regarding contents of
the prospectus.

Criminal liability of Directors:
Every person who authorised the issue of a

prospectus containing an untrue statement shall
be punishable with imprisonment which may
extend upto two years or with fine which may
extend upto Rs.5000 or with both. The accused
person, however, may not be liable if he proves
a) that the statement was immaterial b) he had
reasonable ground to believe and did believe
upto the time of the issue of the prospectus that
the statement was true.

Remedies against the Expert:
The allottee of the shares who has been induced
to take shares on the faith of an untrue
statement of an expert in the prospectus is
entitled to claim from the expert (i) damages (ii)
compensation for untrue statement under sec.
62.
An expert is liable in damages in respect of his
own untrue statement, wrong report or valuation
made by him and contained in the prospectus,
and the same principles apply as in the case of a
fraudulent or an innocent statement made by the
directors.

The Companies Act, 1956

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The Companies Act, 1956

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THE COMPANIES ACT, 1956

Effect of Registration and the

From the date of incorporation, such of the

Features of the company:

Features of the company:

Features of the company:

Features of the company:

Salomon v. Salomon & Co. Ltd

Salomon v Salomon & Co. Ltd

Features of the company:

Lee vs Lee Air Farming Ltd.

Bachha F. Guzder v. The

Features of the company:

Features of the company:

3)Where number of members is reduced to

4)Fraud: If during the course of winding

Features of the company:

timber company. He advanced substantial

Features of the company:

Features of the company:

Features of the company:

Features of the company:

(Company may sue and be sued

RAJENDRANATH DUTTA VS.

RAJENDRANATH DUTTA VS.

Held that a director or managing director in their

Lifting of the Corporate veil:

Lifting of the Corporate Weil

For the protection of revenue : only purpose of forming

2. A company which is created by a

3. A company brought into existence by

5. A company limited by guarantee or guarantee

8. Both the limited liability company and

A private company can be formed by merely two persons by

Distinction between Private and Public Company

Distinction between Private and Public Company

PUBLIC LTD. COMPANY

Special Privileges enjoyed by a Private Company

Special Privileges enjoyed by a Private Company

Special Privileges enjoyed by a Private Company

Special Privileges enjoyed by a Private Company

Special Privileges enjoyed by a Private Company

Documents to be filed for Registration:

Registration by the Registrar:

Certificate of Commencement of Business

A private company may commence

Certificate of Commencement of Business

The Memorandum of Association of a company

Change of Registered Office

To carry on its business more economically and more efficiently.

Subject matter of Articles of Association

The articles usually deal with the following matters:

Subject matter of Articles of

Effect of Ultra-vires Acts:

Effect of Ultra-vires Acts:

DOCTRINE OF INDOOR MANAGEMENT

DOCTRINE OF INDOOR MANAGEMENT

Exceptions to the Doctrine of Indoor Management:

DOCTRINE OF INDOOR MANAGEMENT

4. Negligence: If an officer of a company does something which

5. Doctrine does not apply where question is in regard to the

6. Preconditioin not fulfilled: The doctrine is not applicable where

a)Every prospectus issued on behalf of the company must be

Contents of the Prospectus: