General MeetingMeeting of the members of the company with the board of directors. This may be Extra ordinary General Meeting or Annual General Meeting. Rights Issue Rights issue is an issue of capital to be offered to the existing shareholders of the company through a letter of offer. 4.10 LEARNING ACTIVITY 1. What are the various modes through which a public and private company may issue securities and the governing laws for issue of securities? ___________________________________________________________________________ ___________________________________________________________________________ 2. Jacob,who is managing director in Z Limited has been issued 5000 Sweat Equity Shares in consideration of providing know how without cost to Z Limited last year. Jacob now wants to transfer half of these shares in the name of his brother. Can he do so? if not,why? ___________________________________________________________________________ ___________________________________________________________________________ 4.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define government company. 2. Define producer company. 3. What is inactive company. 4. Who are called foreign company? 5. What is one person company. Long Questions 1. What are the salient features of One Person Company? 2. Which provisions of the Act in regard to Management and Administration are not applicable to One Person Company? 3. Differentiate between a private company and a public company 4. How are the companies classified on the basis of liability? 5. Discuss the provisions about the ‘nominated member’ of One Person Company. B. Multiple Choice Questions 1. as regards to ratification of promoter’s contracts the view taken in the case of ...........was that the company cannot ratify the contract made by promoter before its incorporation. a. BSN v. Janardan Mohandas Pilai 51 CU IDOL SELF LEARNING MATERIAL (SLM)
b. Commissioner of Income Tax v. Meenakshi Mills Ltd. c. Kelner v. Baxter LR d. Connors Bros. v. Connors 2. Who among them cannot become member of One Person Company. a. Minor b. Non-Resident Indian c. Both ‘a’ & ‘b’ d. None of these 3. ________ is a new form of Private Company under the Companies Act, 2013 a. Holding company b. Small company c. Body corporate d. None of these 4. Every company Public or Private has to be registered with ______ a. Central Government b. Registrar of Companies c. RBI d. None of these 5. .A certificate of Incorporation given by the registrar in respect of any association shall be _______ evidence. a. Conclusive b. Persuasive c. Mandatory d. None of these Answers 52 CU IDOL SELF LEARNING MATERIAL (SLM)
1-c, 2-c, 3-b, 4-b, 5-a 4.12 REFERENCES Textbooks/ReferenceBooks T1 Kapoor, N.D.; Elements of Company Law; Himalayan Publishing House, Mumbai.T2Kuchhal, M.C. :Company Law Avtar Singh,Company Law, EasternBook Company,Lucknow R1 Pathak AkhileshwarGarg, Chawla, Sareen, Mercantile Law, Kalyani Publication,NewDelhi. SecuritiesContracts(Regulation)Act,1956 R2SinghAvtar:CompanyLaw; EasternBookCo.,Lucknow 53 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 5 – FORMATION STRUCTURE 5.0 Learning objectives 5.1 Introduction 5.2 Formation of company 5.3 Incorporation of company 5.4 Incorporation of one person company 5.5 Formation of Companies with charitable objects 5.6 Effects of registration 5.7 Summary 5.8 Keywords 5.9 Learning activity 5.10 Unit end questions 5.11 References 5.0 LEARNING OBJECTIVES After studying this unit, the student will be able to Understand the incorporation procedures for different types of companies Differentiate between a company and one person company Appreciate the importance of registration Analyse the need for incorporation of section 8 companies 5.1 INTRODUCTION A company is a separate legal entity with perpetual succession for lawful purpose. Development of this concept is equally significant in economic terms as invention of steam engine is for the industrial revolution. Persons who initiate promotion of a company are known as promoters. All persons who take steps for the registration of a company e.g., those associated with the preparation of a prospectus or in drawing up the Memorandum of Association of the company and assisting in its registration are regarded as promoters.
The Companies Act, 2013 defines the term “Promoter” under section 2(69) which means a person— (a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or (b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or (c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act. However, a person who is acting merely in a professional Capacity, shall not be regarded as promoter [under (c)], e.g., the solicitor, banker, accountant etc. are not regarded as promoters. 5.2 FORMATION OF COMPANY (SECTION 3) As you can observe in above chart that companies could be with limited liability (by shares or guarantee) or with unlimited liability. Note: For Government Companies, suffix “Pvt. Ltd / Ltd.” not required (Notification dated 5th June 2015). This exception shall be applicable to a government company which has not committed a default in filing its financial statements under section 137 or annual return under section 92 with the Registrar of companies [Notification dated 13th June 2017]. Section 3 of the Companies Act, 2013 deals with the basic requirement with respect to the constitution of the company. In the case of a public company with or without limited liability, any 7 or more persons (i.e. minimum number of shareholders) can form a company for any lawful purpose by subscribing their names to memorandum and complying with the requirements of this Act in respect of registration. In exactly the same way, 2 or more persons 55 CU IDOL SELF LEARNING MATERIAL (SLM)
can form a private company and 1 person where company to be formed is one person company (OPC). However, that one person company (OPC) need to specify the name of one nominee in the Memorandum of Association (MOA) who would take his place in case of his death or his incapacity to contract. The nominee could be changed as per the process, and this will not attract process for alteration of the Memorandum of Association. Formation of Company [Section 3] (1) A company may be formed for any lawful purpose by— (a) 7 or more persons, where the company to be formed is to be a public company. (b) 2 or more persons, where the company to be formed is to be a private company; or (c) 1 person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration. The memorandum of One Person Company shall indicate the name of the other person (i.e. Nominee), with his prior written consent in the prescribed form, who shall, in the event of the subscriber's death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles. However, such other person may withdraw his consent in such manner as may be prescribed. The member of One Person Company (OPC) may at any time change the name of Nominee by giving notice in such manner as may be prescribed. It shall be the duty of the member of One Person Company (OPC) to intimate the company the change, if any, in the name of the other person nominated by him by indicating in the memorandum or otherwise within such time and in such manner as may be prescribed, and the company shall intimate the Registrar any such change within such time and in such manner as may be prescribed. However, any such change in the name of the person shall not be deemed to be an alteration of the memorandum. (2) A company formed under sub-section (1) may be either— (a) a company limited by shares; or (b) a company limited by guarantee; or (c) an unlimited company. 56 CU IDOL SELF LEARNING MATERIAL (SLM)
Members severally liable in certain cases [Section 3A] • If at any time the number of members of a company is reduced, in the case of a public company, below 7, in the case of a private company, below 2, and the company carries on business for more than six months while the number of members is so reduced, then every person who is a member of the company during the time that it so carries on business after those six months and is cognizant (aware) of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time (after six months) and may be severally sued, therefore. 5.3 INCORPORATION OF COMPANY [SECTION 7] I. INCORPORATION OF COMPANY: Section 7 of the Companies Act, 2013 provides for the procedure to be followed for incorporation of a company. (1) Filing of the documents and information with the registrar: For the registration of the company following documents and information are required to be filed with the registrar within whose jurisdiction the registered office of the company is proposed to be situated— ♦ the memorandum of association and articles of association of the company duly signed by all the subscribers to the memorandum. ♦ a declaration by person who is engaged in the formation of the company (an advocate, a chartered accountant, cost accountant or company secretary in practice) and by a person named in the articles (director, manager or secretary of the company), that all the requirements of this act and the rules made thereunder in respect of registration and matters precedent or incidental thereto have been complied with. ♦ a declaration from each of the subscribers to the memorandum and from persons named as the first directors, if any, in the articles stating that— he is not convicted of any offence in connection with the promotion, formation or management of any company, or 57 CU IDOL SELF LEARNING MATERIAL (SLM)
he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the last five years, and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief. ♦ the address for correspondence till its registered office is established. ♦ the particulars (names, including surnames or family names, residential address, nationality) of every subscriber to the memorandum along with proof of identity, and in the case of a subscriber being a body corporate, such particulars as may be prescribed. (2) Issue of certificate of incorporation on registration: The Registrar on the basis of documents and information filed, shall register all the documents and information in the register and issue a certificate of incorporation in the prescribed form to the effect that the proposed company is incorporated under this Act. (3) Allotment of Corporate Identity Number (CIN): On and from the date mentioned in the certificate of incorporation, the Registrar shall allot to the company a corporate identity number, which shall be a distinct identity for the company, and which shall also be included in the certificate. (4) Maintenance of copies of all documents and information: The company shall maintain and preserve at its registered office copies of all documents and information as originally filed, till its dissolution under this Act. (5) Furnishing of false or incorrect information or suppression of material fact at the time of incorporation (i.e. during incorporation process): If any person furnishes any false or incorrect particulars of any information or suppresses any material information, of which he is aware in any of the documents filed with the Registrar in relation to the registration of a company, he shall be liable for action for fraud under section 447. (6) Company already incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact (i.e. post Incorporation): Where, at any time after the incorporation of a company, it is proved that the company has been got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company, or by any fraudulent action, the promoters, the persons named as the first directors of the company and the persons making declaration under this section shall each be liable for action for fraud under section 447. (7) Order of the Tribunal3 : Where a company has been got incorporated by furnishing false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants— 58 CU IDOL SELF LEARNING MATERIAL (SLM)
♦ the particulars (name, including surname or family name, the Director Identification Number (DIN), residential address, nationality) of the persons mentioned in the articles as the first directors and such other particulars including proof of identity as may be prescribed; and ♦ the particulars of the interests of the persons mentioned in the articles as the first directors of the company in other firms or bodies corporate along with their consent to act as directors of the company in such form and manner as may be prescribed. (a) pass such orders, as it may think fit, for regulation of the management of the company including changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its members and creditors; or (b) direct that liability of the members shall be unlimited; or (c) direct removal of the name of the company from the register of companies; or (d) pass an order for the winding up of the company; or (e) pass such other orders as it may deem fit: Provided that before making any order,— ♦ the company shall be given a reasonable opportunity of being heard in the matter; and ♦ the Tribunal shall take into consideration the transactions entered into by the company, including the obligations, if any, contracted or payment of any liability. Simplified Proforma for Incorporating Company Electronically (SPICe) The Ministry of Corporate Affairs has taken various initiatives for ease of business. In a step towards easy setting up of business, MCA has simplified the process of filing of forms for incorporation of a company through Simplified Proforma for incorporating company electronically. 59 CU IDOL SELF LEARNING MATERIAL (SLM)
5.4 INCORPORATION OF ONE PERSON COMPANY Law with respect to formation of OPC provides that— ♦ The memorandum of OPC shall indicate the name of the other person (nominee), who shall, in the event of the subscriber’s death or his incapacity to contract, become the member of the company. ♦ The other person (nominee) whose name is given in the memorandum shall give his prior written consent in prescribed form and the same shall be filed with Registrar of companies at the time of incorporation along with its Memorandum of Association and Articles of Association. ♦ Such other person (nominee) may be given the right to withdraw his consent. ♦ The member of OPC may at any time change the name of such other person (nominee) by giving notice to the company and the company shall intimate the same to the Registrar. ♦ Any such change in the name of the person shall not be deemed to be an alteration of the memorandum. ♦ Only a natural person who is an Indian citizen 4whether resident in India or otherwise- (a) shall be eligible to incorporate One Person Company (OPC); (b) shall be a nominee for the sole member of One Person Company (OPC). Explanation I - For the purposes of this rule, the term \"resident in India\" means a person who has stayed in India for a period of not less than 120 days during the immediately preceding financial year. ♦ A natural person shall not be a member of more than one OPC at any point of time and the said person shall not be a nominee of more than one OPC. ♦ Where a natural person being member in OPC becomes member in another such company by virtue of his being a nominee in that OPC, such person shall meet eligibility criteria (as given in point above) within a period of 180 days. 60 CU IDOL SELF LEARNING MATERIAL (SLM)
♦ No minor shall become member or nominee of the OPC or can hold share with beneficial interest. ♦ Such Company cannot be incorporated or converted into a company under section 8 of the Act. Though it may be converted to private or public companies in certain cases. The procedure of conversion is given in the rules 6 & 7 of Chapter II of the Companies Act, 2013. ♦ Such Company cannot carry out Non-Banking Financial Investment activities including investment in securities of anybody corporate. 5.5 FORMATION OF COMPANIES WITH CHARITABLE OBJECTS, ETC. [SECTION 8] 1. Object of formation of Section 8 Company : Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment etc. Such company intends to apply its profit in promoting its objects and prohibiting the payment of any dividend to its members. 2. Power of Central government to issue the license: This section allows the Central Government to register such person or association of persons as a company with limited liability without the addition of words ‘Limited’ or ‘Private limited’ to its name, by issuing licence on such conditions as it deems fit. The registrar shall on application register such person or association of persons as a company under this section. Where it is proved to the satisfaction of the Central Government6 that a limited company registered under this Act or under any previous company law has been formed with any of the objects and with the restrictions and prohibitions it may, by licence, allow the company to be 61 CU IDOL SELF LEARNING MATERIAL (SLM)
registered under section 8 subject to such conditions as the Central Government deems fit and to change its name by omitting the word ―’Limited’, or as the case may be, the words ―’Private Limited’ from its name and thereupon the Registrar shall, on application, in the prescribed form, register such company under this section and all the provisions of this section shall apply to that company. 3. Privileges of limited Company: On registration, the company shall enjoy same privileges and obligations as of a limited company. 4. A firm may be a member of the company registered under section 8. 5. Alteration of Memorandum and Articles: A company registered under this section shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government7. 8 6. Conversion into any other kind of Company: A company registered under this section may convert itself into company of any other kind only after complying with such conditions as may be prescribed. A company registered under section 8 which intends to convert itself into a company of any other kind shall pass a special resolution at a general meeting for approving such conversion. 7. Revocation of license (i) The 9Central Government may by order revoke the licence of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or in violation of the objects of the company or prejudicial to public interest, and on revocation, the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register. But before such revocation, the Central Government must give it a written notice of its intention to revoke the licence and opportunity to be heard in the matter. (ii) Where a licence is revoked, the Central Government may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section. However, no such order shall be made unless the company is given a reasonable opportunity of being heard. (iii) Where a licence is revoked and where the Central Government is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order. 62 CU IDOL SELF LEARNING MATERIAL (SLM)
(iv) If on the winding up or dissolution of a company registered under this section, there remains, after the satisfaction of its debts and liabilities, any asset, they may be transferred to another company registered under this section and having similar objects, subject to such conditions as the Tribunal may impose, or may be sold and proceeds thereof credited to the Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and Bankruptcy Code, 2016. (v) A company registered under this section shall amalgamate only with another company registered under this section and having similar objects. 8. Penalty/ punishment in contravention: If a company makes any default in complying with any of the requirements laid down in this section, the company shall, be punishable with fine varying from ten lakh rupees to one crore rupees and the directors and every officer of the company who is in default shall be punishable with fine varying from twenty-five thousand rupees to twenty-five lakh rupees10. And where it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447. 9. Exceptions: (i) Can call its general meeting by giving a clear 14 days’ notice instead of 21 days. (ii) Requirement of minimum number of directors, independent directors etc. does not apply. (iii) Need not constitute Nomination and Remuneration Committee and Shareholders Relationship Committee. 5.6 EFFECT OF REGISTRATION [SECTION 9] Section 9 of the Companies Act, 2013 provides for the effect of registration of a company. According to section 9, from the date of incorporation (mentioned in the certificate of incorporation), the subscribers to the memorandum and all other persons, who may from time to time become members of the company, shall be a body corporate by the name contained in the memorandum. Such a registered company shall be capable of exercising all the functions 63 CU IDOL SELF LEARNING MATERIAL (SLM)
of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name. From the date of incorporation mentioned in the certificate, the company becomes a legal person separate from the incorporators; and there comes into existence a binding contract between the company and its members as evidenced by the Memorandum and Articles of Association [Hari Nagar Sugar Mills Ltd. vs. S.S. Jhunjhunwala]. It has perpetual existence until it is dissolved by liquidation or struck out of the register. A shareholder who buys shares, does not buy any interest in the property of the company but in certain cases a writ petition will be maintainable by a company or its shareholders. A legal personality emerges from the moment of registration of a company and from that moment the persons subscribing to the MOA and other persons joining as members are regarded as a body corporate or a corporation in aggregate and the legal person begins to function as an entity. A company on registration acquires a separate existence and the law recognizes it as a legal person separate and distinct from its members [State Trading Corporation of India vs. Commercial Tax Officer]. It may be noted that under the provisions of the Act, a company may purchase shares of another company and thus become a controlling company. However, merely because a company purchases all shares of another company, it will not serve as a means of putting an end to the corporate character of another company and each company is a separate juristic entity [Spencer & Co. Ltd. Madras vs. CWT Madras]. As stated above, the law recognizes such a company as a juristic person separate and distinct from its members. The mere fact that the entire share capital has been contributed by the Central Government and all its shares are held by the President of India and other officers of the Central Government does not make any difference in the position of registered company and it does not make a company an agent either of the President or the Central Government [Heavy Electrical Union vs. State of Bihar]. 5.7 SUMMARY A company can be defined as an “artificial person”, invisible, intangible, created by or under law, with a distinct legal personality and perpetual succession. It is not affected by the death, insanity, or insolvency of an individual member. The memorandum of association (MOA) is the document that sets up the company and the articles of association (AOA) set out how the company is run, governed and owned. Once an association becomes incorporated it acquires a new legal status – it becomes a legal entity in its own right, separate from the individual members. 64 CU IDOL SELF LEARNING MATERIAL (SLM)
A company of any class may convert itself as a company of other class by alteration of its MOA and AOA. Section 20 of the Companies Act, 2013, provides the mode in which documents may be served on the company, on the members and also on the registrars. Section 12 of the Companies Act, 2013 seeks to provide for the registered office of the companies for the communication and serving of necessary documents, notices, letters etc. Section 14 of the Companies Act, 2013, vests companies with power to alter or add to its articles. A company cannot divest itself of these powers [Andrews vs. Gas Meter Co. [1897] 1 Ch. 161]. Matters as to which the memorandum is silent can be dealt with by the alteration of article. Section 14 of the Companies Act, 2013 vests companies with power to alter or add to its articles. 5.8 KEYWORDS Contributory means a person liable to contribute towards the assets of the company in the event of its being wound up. charge means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage. Control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner. Expert includes an engineer, a valuer, a Chartered Accountant, a Company Secretary, a Cost Accountant and any other person who has the power or authority to issue a certificate in pursuance of any law for the time being in force. Government company means any company in which not less than 51% of the paid- up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary company of such a Government company. 5.9 LEARNING ACTIVITY 1. Parag Constructions Limited is a leading infrastructure company. One of the directors of the company Mr. Parag has been signing all construction contracts on behalf of company for many years. All the parties who ever deal with the company know Mr. Parag very well. Company has got a very important construction contract from a renowned software company. Parag constructions will do construction for this site in partnership with a local contractor Firozbhai. Mr. Parag signed partnership deed with Firozbhai on behalf of company because 65 CU IDOL SELF LEARNING MATERIAL (SLM)
he has an implied authority. Later in a dispute company denied to accept liability as a partner. Can the company deny its liability as a partner? ___________________________________________________________________________ ___________________________________________________________________________ 2. Shri Laxmi Electricals Ltd. (S) is a company in which Hanuman power suppliers Limited (H) is holding 60% of its paid-up share capital. One of the shareholder of H made a charitable trust and donated his 10% shares in H and ` 50 crores to the trust. He appoints S as the trustee. All the assets of the trust are held in the name of S. Can a subsidiary hold shares in its holding company in this way? ___________________________________________________________________________ ___________________________________________________________________________ 5.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Who is a promoter? 2. What is meant by section 8 company? 3. what is the minimum number of members requirement in various types of companies. 4. What do you mean by registering a company? 5. What is CIN number? Long Questions 1. Write the steps for formation of OPC. 2. Discuss the steps to form a Section 8 company. 3. Discuss about the effect of registration. 4. how are companies classified for the purpose of formation and members. 5. Discuss about the role of Promoters in a company. B. Multiple Choice Questions 1.Persons who initiate promotion of a company are known as _______ a. Promoter b. Share holder c. Director d. Member 66 CU IDOL SELF LEARNING MATERIAL (SLM)
2. _________ of the Companies Act, 2013 deals with the basic requirement with respect to the constitution of the company. a. Section 8 b. Section 3 c. Section 25 d. Section 2 3. ______ or more persons, where the company to be formed is to be a public company a. 1 b. 2 c. 10 d. 7 4. _________ of the Companies Act, 2013 provides for the procedure to be followed for incorporation of a company. a. Section 3 b. Section 8 c. Section 7 d. Section 2 5. The Registrar shall allot to the company a ______, which shall be a distinct identity for the company, and which shall also be included in the certificate a. CIN b. DIN c. PAN d. TAN Answers 67 1-a, 2-b, 3-d, 4-c, 5-a CU IDOL SELF LEARNING MATERIAL (SLM)
5.11 REFERENCES Textbooks/ReferenceBooks T1 Kapoor, N.D.; Elements of Company Law; Himalayan Publishing House, Mumbai.T2Kuchhal, M.C. :Company Law Avtar Singh,Company Law, EasternBook Company,Lucknow R1 Pathak AkhileshwarGarg, Chawla, Sareen, Mercantile Law, Kalyani Publication,NewDelhi. SecuritiesContracts(Regulation)Act,1956 R2SinghAvtar:CompanyLaw; EasternBookCo.,Lucknow. 68 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 6 – MEMORANDUM OF ASSOCIATION STRUCTURE 6.0 Learning objectives 6.1 Introduction 6.2 Memorandum of Association 6.3 Doctrine of Ultra vires 6.4 Procedure of alteration of memorandum 6.5 Summary 6.6 Keywords 6.7 Learning activity 6.8 Unit end questions 6.9 References 6.0 LEARNING OBJECTIVES After studying this unit, the student will be able to Understand the importance of MoA Appreciate the concept of doctrine of ultra vires Analyse the procedures for alteration of memorandum Differentiate between MoA and AoA 6.1 INTRODUCTION The Memorandum of Association of company is in fact its charter; it defines its constitution and the scope of the powers of the company with which it has been established under the Act. It is the very foundation on which the whole edifice of the company is built. 6.2MEMORANDUM OF ASSOCIATION The Memorandum of Association of company is in fact its charter; it defines its constitution and the scope of the powers of the company with which it has been established under the Act. It is the very foundation on which the whole edifice of the company is built. As per Section 4(1), the memorandum of a limited company must state the following:
(a) the name of the company with “Limited” as its last word in the case of a public limited company; and “Private Limited” as its last words in the case of a private limited company; (Name Clause) This shall not apply in case of companies registered under section 8. Similarly, in case of Government companies the name of the company shall end with the words “Limited”. This is as per the exemptions to Government Companies under Section 462 of Companies Act, 2013 vide notification dated June 5, 2013. (b) the State in which the registered office of the company is to be situated; (Situation Clause) (c) the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof;(objects clause) Provided that nothing in this clause shall apply to a company registered under section 8; (d) the liability of members of the company, whether limited or unlimited, and also state,— (Liability Clause) (i) in the case of a company limited by shares, that liability of its members is limited to the amount unpaid, if any, on the shares held by them; and (ii) in the case of a company limited by guarantee, the amount up to which each member undertakes to contribute— (A) to the assets of the company in the event of its being wound-up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member, as the case may be and (B) to the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories among themselves. (e) in the case of a company having a share capital,— (Capital Clause) (i) the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe which shall not be less than one share per subscriber: and (ii) the number of shares each subscriber to the memorandum intends to take, indicated opposite his name. (f) in the case of a One Person Company, the name of the person who, in the event of the death of the subscriber, shall become the member of the company. According to section 4(7), any provision in the memorandum or articles, in the case of a company limited by guarantee and not having a share capital, purporting to give any person a 70 CU IDOL SELF LEARNING MATERIAL (SLM)
right to participate in the divisible profits of the company otherwise than as a member, shall be void. 6.3 DOCTRINE OF ULTRAVIRES The meaning of the term ultra vires is simply “beyond (their) powers”. The legal phrase “ultra vires” is applicable only to acts done in excess of the legal powers of the doers. This presupposes that the powers are in their nature limited. To an ordinary citizen, the law permits whatever does the law not expressly forbid. It is only when the law has called into existence a person for a particular purpose or has recognised its existence- such as in the case of a limited company - that the power is limited to the authority delegated expressly or by implication and to the objects for which it was created. In the case of such a creation, the ordinary law applicable to an individual is somewhat reversed, whatever is not permitted expressly or by implication, by the constituting instrument, is prohibited not by any express prohibition of the legislature, but by the doctrine of ultra vires. It is a fundamental rule of Company Law that the objects of a company as stated in its memorandum can be departed from only to the extent permitted by the Act - thus far and no further [Ashbury Railway Company Ltd. vs. Riche]. In consequence, any act done or a contract made by the company which travels beyond the powers not only of the directors but also of the company is wholly void and inoperative in law and is therefore not binding on the company. On this account, a company can be restrained from employing its fund for purposes other than those sanctioned by the memorandum. Likewise, it can be restrained from carrying on a trade different from the one it is authorised to carry on. The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires transaction, nor can it sue on it. Since the memorandum is a “public document”, it is open to public inspection. Therefore, when one deals with a company, one is deemed to know about the powers of the company. If in spite of this you enter into a transaction which is ultra vires the company, you cannot enforce it against the company. For example, if you have supplied goods or performed service on such a contract or lent money, you cannot obtain payment or recover the money lent. But if the money advanced to the company has not been expended, the lender may stop the company from parting with it by means of an injunction; this is because the company does not become the owner of the money, which is ultra vires the company. As the lender remains the owner, he can take back the property in specie. If the ultra vires loan has been utilised in meeting lawful debt of the company, then the lender steps into the shoes of the debtor paid off and consequently he would be entitled to recover his loan to that extent from the company. An act which is ultra vires the company being void cannot be ratified by the shareholders of the company. Sometimes, act which is ultra vires can be regularised by ratifying it subsequently. For instance, if the act is ultra vires the power of the directors, the shareholders can ratify it; if it is ultra vires the articles of the company, the company can alter the articles; 71 CU IDOL SELF LEARNING MATERIAL (SLM)
if the act is within the power of the company but is done irregularly, shareholder can validate it. 6.4 PROCEDURE OF ALTERATION OF MEMORANDUM Section 13 of the Companies Act, 2013 provides the provisions that deal with the alteration of the memorandum. These provisions are:- 1. Alteration by special resolution: Company may alter the provisions of its memorandum with the approval of the members by a special resolution. 2. Name Change of the company – Any change in the name of a company shall be effected only with the approval of Central Government in writing. However, no such approval shall be necessary where the change in the name of the company is only the deletion there from, or addition thereto, of the word “Private”, consequent on the conversion of any one class of companies to another class. 3. Entry in register of companies: On any change in the name of a company, the Registrar shall enter the new name in the register of companies in place of the old name and issue a fresh certificate of incorporation with the new name and the change in the name shall be complete and effective only on the issue of such a certificate 4. Change in the registered office: The alteration of the memorandum relating to the place of the registered office from one State to another shall not have any effect unless it is approved by the Central Government on an application in such form and manner as may be prescribed. 5. Disposal of the application of change of place of the registered office: The Central Government shall dispose of the application of change of place of the registered office within a period of sixty days. Before passing of order, the Central Government may satisfy itself that- • The alteration has the consent of the creditors, debenture-holders and other persons concerned with the company, or • That the sufficient provision has been made by the company either for the due discharge of all its debts and obligations, or adequate security has been provided for such discharge. 6. Filing with Registrar: A company shall, in relation to any alteration of its memorandum, file with the Registrar— • the special resolution passed by the company under sub-section (1) of Section 13; • the approval of the Central Government under sub-section (2), if the alteration involves any change in the name of the company. 7. Filing of the certified copy of the order with the registrar of the states: Where an alteration of the memorandum results in the transfer of the registered office of a company from one State to another, a certified copy of the order of the Central Government approving the 72 CU IDOL SELF LEARNING MATERIAL (SLM)
alteration shall be filed by the company with the Registrar of each of the States within such time and in such manner as may be prescribed, who shall register the same. 8. Issue of fresh certificate of incorporation: The Registrar of the State where the registered office is being shifted to, shall issue afresh certificate of incorporation indicating the alteration. 9. Change in the object of the company: A company, which has raised money from public through prospectus and still has any unutilised amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution through postal ballot is passed by the company and— • the details, in respect to of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating there in the justification for such change. • the dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with regulations to be specified by the Securities and Exchange Board. 10. Registrar to certify the registration on the alteration of the objects: The Registrar shall register any alteration of the memorandum with respect to the objects of the company and certify the registration within a period of thirty days from the date of filing of the special resolution. 11. Alteration to be registered: No alteration made under this section shall have any effect until it has been registered in accordance with the provisions of this section. 12. Only member have a right to participate in the divisible profits of the company: Any alteration of the memorandum, in the case of a company limited by guarantee and not having a share capital, intending to give any person a right to participate in the divisible profits of the company otherwise than as a member, shall be void. Restriction in alteration of memorandum Rule 29 provides that the change of name shall not be allowed to a company which has not filed its annual returns or financial statements due for filing with the Registrar or which has defaulted in repayment of matured deposits or debentures or interest thereon. An application shall be filed in Form No. INC-24 along with the fee for change in the name of the company and a new certificate of incorporation in Form No. INC-25 shall be issued to the company consequent upon the change. 73 CU IDOL SELF LEARNING MATERIAL (SLM)
6.5SUMMARY The Memorandum of Association of company is in fact its charter; it defines its constitution and the scope of the powers of the company with which it has been established under the Act. It is the very foundation on which the whole edifice of the company is built. According to section 4(7), any provision in the memorandum or articles, in the case of a company limited by guarantee and not having a share capital, purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member, shall be void. The meaning of the term ultra vires is simply “beyond (their) powers”. The legal phrase “ultra vires” is applicable only to acts done in excess of the legal powers of the doers. This presupposes that the powers are in their nature limited. To an ordinary citizen, the law permits whatever does the law not expressly forbid. It is a fundamental rule of Company Law that the objects of a company as stated in its memorandum can be departed from only to the extent permitted by the Act - thus far and no further. The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires transaction, nor can it sue on it. Since the memorandum is a “public document”, it is open to public inspection. 6.6KEYWORDS Unlimited company means a company not having any limit on the liability of its members. Tribunal means the National Company Law Tribunal constituted under section 408. Turnover means the gross amount of revenue recognised in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year. Voting right means the right of a member of a company to vote in any meeting of the company or by means of postal ballot. Share means a share in the share capital of a company and includes stock. 6.7LEARNING ACTIVITY 1. Alfa school started imparting education on 1st April 2010, with the sole objective of providing education to children of weaker society either free of cost or at a very nominal fee depending upon the financial condition of their parents. However, on 30th March 2020, it came to the knowledge of the Central Government that the said school was operating by violating the objects of its objective clause due to which it was granted the status of a section 74 CU IDOL SELF LEARNING MATERIAL (SLM)
8 company under the Companies Act, 2013. Describe what powers can be exercised by the Central Government against the Alfa School, in such a case? ___________________________________________________________________________ ___________________________________________________________________________ 2. The object clause of the Memorandum of Vivek Industries Limited., empowers it to carry on real-estate business and any other business that is allied to it. Due to a downward trend in real-estate business, the management of the company has decided to take up the business of Food processing activity. The company wants to alter its Memorandum, so as to include the Food Processing Business in its objects clause. Examine whether the company can make such change as per the provisions of the Companies Act, 2013? ___________________________________________________________________________ ___________________________________________________________________________ 6.8UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Write short notes on Memorandum of Association. 2. what is integrated process of incorporation. 3. What is doctrine of ultra vires. 4. Can memorandum be altered? 5. List the various clauses in the memorandum of the company. Long Questions 1. Discuss about the doctrine of Ultra vires. 2. What are the documents to be submitted to Registrar of Companies for incorporation of a company? 3. In which manner the memorandum and Articles are to be signed on behalf of the company. 4. Discuss the procedure for alteration of memorandum. 5. What is the effect of memorandum and articles of the company on their registration? B. Multiple Choice Questions 1. Which one of the following is not the content of the Memorandum of Association? a. Name clause 75 CU IDOL SELF LEARNING MATERIAL (SLM)
b. Registered office clause c. Objects clause d. Board of Directors clause. 2. An Act is said to be ultra vires a company when it is beyond the powers. a. Of the Company b. Of the Directors c. Of the Directors but not the company d. Conferred on the company by the Articles of Association. 3. Turquand Rule is related to: a. Doctrine of ultra vires b. Doctrine of constructive notice c. Doctrine of indoor management d. Doctrine of subrogation 4. The minimum number of members in a private company and public company are a. Three and Seven respectively b. Two and seven respectively c. Two and nine respectively d. None of these 5. Only a natural person who is an Indian citizen and who has stayed in India for a period of at least _____ days during the immediately preceding financial year shall be eligible to incorporate an OPC. a. 180 days b. 181 days c. 120 days d. 183 days Answers 76 CU IDOL SELF LEARNING MATERIAL (SLM)
1-d, 2-a, 3-c, 4-b, 5-c 6.9REFERENCES Textbooks/ReferenceBooks T1 Kapoor, N.D.; Elements of Company Law; Himalayan Publishing House, Mumbai.T2Kuchhal, M.C. :Company Law Avtar Singh,Company Law, EasternBook Company,Lucknow R1 Pathak AkhileshwarGarg, Chawla, Sareen, Mercantile Law, Kalyani Publication,NewDelhi. SecuritiesContracts(Regulation)Act,1956 R2SinghAvtar:CompanyLaw; EasternBookCo.,Lucknow. 77 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 7 - ARTICLES OF ASSOCIATION STRUCTURE 7.0 Learning Objectives 7.1 Introduction 7.2 AOA – section 5 7.3 Doctrine of indoor management 7.4 Act to override memorandum, articles, etc 7.5 Alteration of articles 7.6 Difference between MOA and AOA 7.7 Summary 7.8 Keywords 7.9 Learning Activity 7.10Unit end questions 7.11 References 7.0 LEARNING OBJECTIVES After studying this unit, the student will be able to Understand the concept of articles Appreciate the necessity of articles in a company Differentiate between MoA and AoA Analyse the doctrine of indoor management 7.1 INTRODUCTION As per Section 2(5) ―articles means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act. Actually, article of association of a company contains internal rules and regulations of the company. 7.2 AOA - SECTION 5 Section 5 of the Companies Act, 2013 seeks to provide the contents and model of articles of association. The section lays the following law—
(1) Contains regulations: The articles of a company shall contain the regulations for management of the company. (2) Inclusion of matters: The articles shall also contain such matters, as are prescribed under the rules. However, a company may also include such additional matters in its articles as may be considered necessary for its management. (3) Entrenchment: Usually an article of association may be altered by passing special resolution but entrenchment makes it more difficult to change it. So, entrenchment means making something more protective. Contain provisions for entrenchment: The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with. Manner of inclusion of the entrenchment provision: The provisions for entrenchment shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company. Notice to the registrar of the entrenchment provision: Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed. (4) Forms of articles: The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such company. (5) Model articles: A company may adopt all or any of the regulations contained in the model articles applicable to such company. (6) Company registered after the commencement of this Act: In case of any company, which is registered after the commencement of this Act, in so far as the registered articles of such company do not exclude or modify the regulations contained in the model articles applicable to such company, those regulations shall, so far as applicable, be the regulations of that company in the same manner and to the extent as if they were contained in the duly registered articles of the company. (7) Section not apply on company registered under any previous company law: Nothing in this section shall apply to the articles of a company registered under any previous company law, unless amended under this Act. 79 CU IDOL SELF LEARNING MATERIAL (SLM)
7.3 DOCTRINE OF INDOOR MANAGEMENT According to this doctrine, persons dealing with the company cannot be assumed to have knowledge of internal problems of the company. He can simply assume that all the required things were get done properly in the company. Stakeholders need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone through all these proceedings in a regular manner. The doctrine helps protect external members from the company and states that the people are entitled to presume that internal proceedings are as per documents submitted with the Registrar of Companies. The doctrine of indoor management evolved around 150 years ago in the context of the doctrine of constructive notice. The role of doctrine of indoor management is opposed to the role of doctrine of constructive notice. Whereas the doctrine of constructive notice protects a company against outsiders, the doctrine of indoor management protects outsiders against the actions of a company. This doctrine also is a possible safeguard against the possibility of abusing the doctrine of constructive notice. Basis for Doctrine of Indoor Management 1. What happens internal to a company is not a matter of public knowledge. An outsider can only presume the intentions of a company, but not know the information he/she is not privy to. 2. If not for the doctrine, the company could escape creditors by denying the authority of officials to act on its behalf. Exceptions to Doctrine of Indoor Management (Applicability of doctrine of constructive notice) Knowledge of irregularity: In case this ‘outsider’ has actual knowledge of irregularity within the company, the benefit under the rule of indoor management would no longer be available. In fact, he/she may well be considered part of the irregularity. 80 CU IDOL SELF LEARNING MATERIAL (SLM)
Negligence: If with a minimum of effort, the irregularities within a company could be discovered, the benefit of the rule of indoor management would not apply. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing with the company does not make proper inquiry. Forgery: The rule does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers. 7.4 ACT TO OVERRIDE MEMORANDUM, ARTICLES, ETC. [SECTION 6] According to section 6 of the Act, ‘Save as otherwise expressly provided in this Act— (a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its Board of Directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and (b) Any provision contained in the memorandum, articles, agreement or resolution shall, to the extent to which it is repugnant (in conflict) to the provisions of this Act, become or be void, as the case may be.’ In simple words, the provisions of this Act shall have overriding effect. But keep in mind that this section starts with “Save as otherwise ….”. It means that if any other section of the Act says that article is superior then we will treat it accordingly. 7.5 ALTERATION OF ARTICLES [SECTION 14] Section 14 of the Companies Act, 2013, vests companies with power to alter or add to its articles. A company cannot divest itself of these powers [Andrews vs. Gas Meter Co. [1897] 1 Ch. 161]. Matters as to which the memorandum is silent can be dealt with by the alteration of article. Section 14 of the Companies Act, 2013 vests companies with power to alter or add to its articles. The law with respect to alteration of articles is as follows: (1) Alteration by special resolution: Subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution alter its articles. (2) Alteration to include conversion of companies: Alteration of articles include alterations having the effect of conversion of— 81 CU IDOL SELF LEARNING MATERIAL (SLM)
(a) a private company into a public company; or (b) a public company into a private company. Even where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, then such company shall, as from the date of such alteration, cease to be a private company. Provided further that any alteration having the effect of conversion of a public company into a private company shall not be valid unless it is approved by an order of the Central Government on an application made in such form and manner as may be prescribed. Provided also that any application pending before the Tribunal, as on the date of commencement of the Companies (Amendment) Ordinance, 2019, shall be disposed of by the Tribunal in accordance with the provisions applicable to it before such commencement. (3) Filing of alteration with the registrar: Every alteration of the articles and a copy of the order of the Central Government approving the alteration, shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days in such manner as may be prescribed, who shall register the same. (4) Any alteration made shall be valid: Any alteration of the articles registered as above shall, subject to the provisions of this Act, be valid as if it were originally contained in the articles. II. Alteration noted in every copy: Every alteration made in articles of a company shall be noted in every copy of the articles, as the case may be. If a company makes any default in complying with the stated provisions, the company and every officer who is in default shall be liable to a penalty of one thousand rupees for every copy of the articles issued without such alteration. [Section 15] 7.6 DIFFERENCE BETWEEN MOA AND AOA Points of Differences MoA AoA Meaning It is the constitution or It sets out the rules and charter or supreme document regulations for company’s of the company management, that’s why a subsidiary document of the company Define It defines powers, objectives It defines rights, powers, 82 CU IDOL SELF LEARNING MATERIAL (SLM)
and limits of the company as duties as well as liabilities a whole attached with the members of such company, for e.g. of Directors Types of Information Powers and objects of the Rules of the company contained company Status Subordinate to the Subordinate to MoA Companies Act Relationship It connects outsiders with It connects the members of Retrospective Effect company the organization with organization itself Can’t be amended Can be amended Includes Total six clauses namely It includes such rules as per “Name, Situation, Object, the needs and choices of the company Liability, Capital, Subscription” Registration Mandatory for all types of A public company limited by companies shares can adopt ‘Table A’ instead of Articles Compulsory filing during Yes No Registration Alteration Cumbersome as compared to Easy to alter as just requires latter as here, apart from to pass a special resolution passing special resolution at here AGM, it also required appropriate approval of Central Government or 83 CU IDOL SELF LEARNING MATERIAL (SLM)
NCLT, as the case may be Ultra Vires Act All activities undertaken Though activities done Status beyond AoA are void, but Prevail beyond MoA are ultra vires the same can be ratified latter Powers per se and can’t be ratified by the members of the company It is superior as compared to It is a subsidiary document of AoA, and therefore a the company, and that’s why fundamental document runs complementary to the MoA If there’s a conflict between It won’t prevail over MoA, MoA&Aoa, then MoA will and rather is governed by prevail, and that’s why it is MoA not governed by AoA MoA can’t give or provide AoA on the other hand are such powers to the company not only subsidiary to the that are in reality not present provisions of 2013 Act, but or prescribe or governed by also by the rules and by-laws the provisions of the prescribed under MoA too. Companies Act 7.7SUMMARY As per Section 2(5) ―articles means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act. Section 5 of the Companies Act, 2013 seeks to provide the contents and model of articles of association According to the doctrine of indoor management, persons dealing with the company cannot be assumed to have knowledge of internal problems of the company. He can simply assume that all the required things were get done properly in the company. 84 CU IDOL SELF LEARNING MATERIAL (SLM)
The doctrine of indoor management evolved around 150 years ago in the context of the doctrine of constructive notice. The provisions of this Act shall have overriding effect. But keep in mind that this section starts with “Save as otherwise ….”. It means that if any other section of the Act says that article is superior then we will treat it accordingly. 7.8KEYWORDS MOA: Memorandum of Association AOA: Articles of Association Doctrine of Constructive Notice: The doctrine of constructive notice as according to the companies law is a doctrine where all persons dealing with a company are deemed to have knowledge of articles of association and memorandum of association of the companies. Doctrine of Indoor Management: The doctrine of indoor management, also known as Turquand rule is a 150-year-old concept, which protects the outsiders against the actions done by the company. Any person who enters into a contract with the company shall ensure that the transaction is authorised by the articles and memorandum of the company. There is no requirement to look into the internal irregularities, and even if there are any irregularities, the company shall be held liable since the person has acted on the grounds of good faith. 7.9LEARNING ACTIVITY 1. Explain in the light of the provisions of the Companies Act, 2013, the circumstances under which a subsidiary company can become a member of its holding company. ___________________________________________________________________________ ___________________________________________________________________________ 2. Yadav dairy products Private limited has registered its articles along with memorandum at the time of registration of company in December 2019. Now directors of the company are of the view that provisions of articles regarding forfeiture of shares should not be changed except by a resolution of 90% majority. While as per section 14 of the Companies Act, 2013 articles may be changed by passing a special resolution only. One of the directors said that they cannot make a provision against the Companies Act. You are required to advise the company on this matter. ___________________________________________________________________________ ___________________________________________________________________________ 85 CU IDOL SELF LEARNING MATERIAL (SLM)
7.10UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What do you mean by articles. 2. What is meant by Doctrine of indoor management. 3. Can act override articles. Comment 4. What alterations can be done in articles. 5. What is the basis for indoor management. Long Questions 1. Discuss the procedure for alteration of articles. 2. Discuss about doctrine of indoor management 3. What is meant by doctrine of Constructive notice. how is it related to indoor management? 4. What is the importance of articles of a company 5. How is Articles different from memorandum. B. Multiple Choice Questions 1. The doctrine which advocates the fact that company cannot act beyond the scope of its memorandum of association is: a. Doctrine of constructive notice b. Doctrine of indoor management c. Doctrine of ultra vires d. Doctrine of intra vires 2. The Doctrine of indoor management is a protection that is available to: a. Shareholders b. Outsiders who deal with the company c. Board of Directors d. Creditors 86 CU IDOL SELF LEARNING MATERIAL (SLM)
3. XYZ Limited is having 15% share capital held by X Limited and 50% held by Central Government and 10% held by State Government and 25% held by other people then that company will be _________ . a. Government Company b. Private Company c. Public Company d. Dormant company 4. _______ of the Companies Act, 2013, vests companies with power to alter or add to its articles a. Section 14 b. Section 12 c. Section 8 d. Section 100 5. _______ of the Companies Act, 2013 seeks to provide the contents and model of articles of association. a. Section 2 b. Section 4 c. Section 5 d. Section 6 Answers 1-c, 2-b, 3-a, 4-a, 5-c 7.11REFERENCES Textbooks/ReferenceBooks T1 Kapoor, N.D.; Elements of Company Law; Himalayan Publishing House, Mumbai.T2Kuchhal, M.C. :Company Law Avtar Singh,Company Law, EasternBook Company,Lucknow R1 Pathak Akhileshwar Garg, Chawla, Sareen, Mercantile Law, Kalyani Publication,NewDelhi. SecuritiesContracts(Regulation)Act,1956 87 CU IDOL SELF LEARNING MATERIAL (SLM)
R2SinghAvtar:CompanyLaw; EasternBookCo.,Lucknow. 88 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 8 - PROSPECTUS STRUCTURE 8.0 Learning objectives 8.1 Introduction 8.2 Shelf Prospectus 8.3 Red herring Prospectus 8.4 Abridged Prospectus 8.5 Offer for sale – deemed prospectus 8.6 Prohibition toissue the shares at discount 8.7 Summary 8.8 Keywords 8.9 Learning Activity 8.10 Unit end questions 8.11 References 8.0 LEARNING OBJECTIVES After studying this unit, the student will be able to Understand the various types of prospectus Appreciate the concept of Offer for sale Differentiate between shelf prospectus and red herring prospectus Analyse the use of abridged prospectus 8.1 INTRODUCTION In general parlance prospectus refers to an information booklet or offer document on the basis of which an investor invests in the securities of an issuer company. It has been defined under section 2(70) so as to mean any document described or issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate. Red herring Prospectus under Explanation to section 32 has been referred to mean a prospectus which does not include complete particulars of the quantum or price of the securities included therein. 89 CU IDOL SELF LEARNING MATERIAL (SLM)
Shelf Prospectus under Explanation to section 31 has been referred to mean a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus. The definition clarifies that any notice, circular, advertisement or any other document inviting offers from public for the subscription or purchase of securities shall be included in the definition of Prospectus. Matters to be stated in the prospectus According to Section 26(1),every Prospectus shall state such information and set out such reports on financial information as may be specified by the Securities and Exchange Board in consultation with the Central Government: Provided that until the Securities and Exchange Board specifies the information and reports on financial information under this sub-section, the regulations made by the Securities and Exchange Board under the Securities and Exchange Board of India Act, 1992, in respect of such financial information or reports on financial information shall apply. 90 CU IDOL SELF LEARNING MATERIAL (SLM)
8.2 SHELF PROSPECTUS Shelf Prospectus means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus. In simple terms Shelf Prospectus is a single prospectus for multiple public. Issuer is permitted to offer and sell securities to the public without a separate prospectus for each act of offering for a certain period. Under the Act any class or classes of companies, as the Securities and Exchange Board (SEBI) may provide by regulations in this behalf, may file a shelf prospectus with the Registrar. Such prospectus is to be submitted at the stage of the first offer of securities which shall indicate a period not exceeding one year as the period of validity of such prospectus. The validity period shall commence from the date of opening of the first offer of securities under that prospectus, and in respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required. An information memorandum is required to be filed by a company filing a shelf prospectus which shall contain all material facts relating to • new charges created, • changes in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities and the succeeding offer of securities and • such other changes as may be prescribed, with the Registrar within the prescribed time, prior to the issue of a second or subsequent offer of securities under the shelf prospectus. According to Rule 10 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the information memorandum shall be prepared in Form PAS-2 and filed with the Registrar along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 within one month prior to the issue of a second or subsequent offer of securities under the shelf prospectus. The section also provides a benefitting provision for the investors, the proviso provides that where a company or any other person has received applications for the allotment of securities along with advance payments of subscription before the making of any such change, the company or other person shall intimate the changes to such applicants and if they express a desire to withdraw their application, the company or other person shall refund all the monies received as subscription within fifteen days thereof. 8.3 RED HERRING PROSPECTUS Red herring Prospectus means a prospectus which does not include complete particulars of the quantum or price of the securities included therein. In simple terms a red herring prospectus contains most of the information pertaining to the company’s operations and 91 CU IDOL SELF LEARNING MATERIAL (SLM)
prospects, but does not include key details of the issue such as its price and the number of shares offered. According to section 32 a company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus. Such company proposing to issue a red herring prospectus shall file it with the Registrar at least three days prior to the opening of the subscription list and the offer. A red herring prospectus shall carry the same obligations as are applicable to prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus. Upon the closing of the offer of securities under this section, the prospectus stating therein the total capital raised, whether by way of debt or share capital, and the closing price of the securities and any other details as are not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board. 8.4 ABRIDGED PROSPECTUS According to section 2(1) of the Act “abridged prospectus” means a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations in this behalf. Section 33 of the Act provides that no form of application for the purchase of any of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus. A copy of the prospectus shall, on a request being made by any person before the closing of the subscription list and the offer, be furnished to him. Nothing aforesaid shall apply if it is shown that the form of application was issued— (a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities; or (b) in relation to securities which were not offered to the public. The penal provisions provide that a company which makes any default in complying with the provisions shall be liable to a penalty of fifty thousand rupees for each default. 8.5 OFFER FOR SALE -DEEMED PROSPECTUS Public Offer includes or an offer for sale (OFS) of securities to the public by an existing shareholder, through issue of a prospectus. Under section 25 of the Act where a company allots or agrees to allot any securities of the company with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company. In simple terms any document by which the offer 92 CU IDOL SELF LEARNING MATERIAL (SLM)
or sale of shares or debentures to public is made shall for all purposes be treated as prospectus. The document “Offer for sale” is an invitation to the general public to purchase the shares of a company through an intermediary, such as an issuing house or a merchant bank. A company may allot or agree to allot any shares or debentures to an “Issue house” without there being any intention on the part of the company to make shares or debentures available directly to the public through issue of prospectus. The issue house in turn makes an “Offer for sale” to the public. All enactments and rules of law as to the contents of prospectus and as to liability in respect of misstatements, in and omissions from, prospectus, or otherwise relating to prospectus, shall apply to such Offer for sale. Following additional information to the matters required to be stated in a prospectus: (a) the net amount of the consideration received or to be received by the company in respect of the securities to which the offer relates; and (b) the time and place at which the contract where under the said securities have been or are to be allotted may be inspected. According to the section in order to construe “Offer for Sale” either of the following conditions needs to be fulfilled: (a) “Offer for sale” to the public was made within six months after the allotment or agreement to allot; or (b) at the date when the offer was made, the whole consideration to be received by the company in respect of the securities had not been received by it. As for the signing of the Prospectus the section provides that where a person making an offer to which this section relates is a company or a firm, it shall be sufficient if the Offer document is signed on behalf of the company by two directors of the company and in case of a firm by not less than one-half of the partners in the firm, as the case may be. Offer of sale of shares by certain members of a company Section 28 of the Act permits certain members of a company, in consultation with Board of directors, to offer, in accordance with the provisions of any law for the time being in force, the whole or a part of their holdings of shares to the public. The document by which the offer of sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company. All laws and rules made hereunder as to the contents of the prospectus and as to liability in respect of misstatements in and omission from prospectus or otherwise relating to prospectus shall apply as if this is a prospectus issued by the company. 93 CU IDOL SELF LEARNING MATERIAL (SLM)
The section lays that the members, whether individuals or bodies corporate or both, whose shares are proposed to be offered to the public, shall collectively authorise the company, whose share were offered for sale to the public, to take all actions in respect of offer of sale for and on their behalf and they shall reimburse the company all expenses incurred by it on this matter. The rules in this context provide that the provisions of Part I of Chapter III namely “Prospectus and Allotment of Securities” and rules made there under shall be applicable to an offer of sale referred to in section 28 except for the following, namely:- (a) the provisions relating to minimum subscription. (b) the provisions for minimum application value. (c) the provisions requiring any statement to be made by the Board of directors in respect of the utilization of money; and (d) any other provision or information which cannot be compiled or gathered by the offeror, with detailed justifications for not being able to comply with such provisions. Further the rules provide that such offer document or prospectus issued under the section shall disclose the name of the entity bearing the cost of making the offer for sale along with reasons. Issue of Securities at a Premium A company may issue securities at a premium when it is able to sell them at a price above par or above nominal value. The Companies Act, 2013, does not stipulate any conditions or restrictions regulating the issue of securities by a company at a premium. However, the Companies Act does impose conditions regulating the utilization of the amount of premium collected on securities. Share Premium to be transferred to ‘Securities Premium Account’ Section 52(1) states that when a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account” and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company. Utilisation of Securities premium In accordance with the provisions of Section 52(2) of the Act, the securities premium can be utilised only for: (A) Issuing fully paid bonus shares to members. (b) writing off the balance of the preliminary expenses of the company. 94 CU IDOL SELF LEARNING MATERIAL (SLM)
(c) Writing off commission paid, or discount allowed, or the expenses incurred on issue of shares or debentures of the company; (d) for providing for the premium payable on redemption of any redeemable preference shares or debentures of the company; or (e) for the purchase of its own shares or other securities under section 68. Section 52(3) further states that the securities premium account may, notwithstanding anything contained in sub-sections (1) and (2), be applied by such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133,– (a) in paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or (b) In writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company; or (c) for the purchase of its own shares or other securities under section 68. Firstly, the premium cannot be treated as profit and as such the amount of premium is not available for distribution as dividend. Secondly, the amount of premium whether received in cash or in kind must be kept in a separate account, known as the “Securities Premium Account”. Thirdly, the amount of premium is to be maintained with the same sanctity as the share capital. Where a company issues shares at a premium, even though the consideration may be other than cash, a sum equal to the amount or value of the premium must be transferred to the securities premium account. [Head (Henry) & Co. Ltd. v. Ropner Holding Ltd. (1951) 2 All ER 994: (152) Ch 124 (Ch D)]. Any premium paid does not give the shareholder any preferential rights in case of a winding up. Monies in the securities premium account cannot be treated as free reserves, as they are in the nature of capital reserve [See Departmental Circular No. 3/77 dated 15.4.1977]. 8.6 PROHIBITION TO ISSUE THE SHARES AT DISCOUNT Section 53 states that except as provided in section 54 (i.e. issue of sweat equity shares), a company shall not issue shares at a discount. Any share issued by a company at a discount shall be void. A company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the Reserve Bank of India under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949. 95 CU IDOL SELF LEARNING MATERIAL (SLM)
Where any company fails to comply with the provisions of this section, such company and every officer who is in default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at a discount or five lakh rupees, whichever is less, and the company shall also be liable to refund all monies received with interest at the rate of twelve per cent. Per annum from the date of issue of such shares to the persons to whom such shares have been issued. 8.7 SUMMARY Prospectus refers to an information booklet or offer document on the basis of which an investor invests in the securities of an issuer company. Red herring prospectus mean a prospectus which does not include complete particulars of the quantum or price of the securities included therein. According to section 32 a company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus. Such company proposing to issue a red herring prospectus shall file it with the Registrar at least three days prior to the opening of the subscription list and the offer. According to section 2(1) of the Act “abridged prospectus” means a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations in this behalf. Under section 25 of the Act where a company allots or agrees to allot any securities of the company with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company. In simple terms any document by which the offer or sale of shares or debentures to public is made shall for all purposes be treated as prospectus. 8.8 KEYWORDS Prospectus means any document described or issued as a prospectus and includes a red herring prospectus or shelf prospectus or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate. Register of companies means the register of companies maintained by the Registrar on paper or in any electronic mode under this Act. Registrar means a Registrar, an Additional Registrar, a Joint Registrar, a Deputy Registrar or an Assistant Registrar, having the duty of registering companies and discharging various functions under this Act. Financial year, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of 96 CU IDOL SELF LEARNING MATERIAL (SLM)
the following year, in respect whereof financial statement of the company or body corporate is made up: 8.9 LEARNING ACTIVITY 1. What is a Shelf-Prospectus? State the important provisions relating to the issuance of Shelf-Prospectus under the provisions of the Companies Act, 2013 and the Companies (Prospectus and Allotment of securities) Rules, 2014. ___________________________________________________________________________ ___________________________________________________________________________ 2. The Board of Directors of Chandra Mechanical Toys Limited proposes to issue a prospectus inviting offers from the public for subscribing to the equity shares of the Company. State the reports which shall be included in the prospectus for the purposes of providing financial information under the provisions of the Companies Act, 2013. ___________________________________________________________________________ ___________________________________________________________________________ 8.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Prospectus and its types. 2. Define shelf Prospectus. 3. What is meant by red herring prospectus. 4. What is offer for sale. 5. What is meant by Abridged prospectus. Long Questions 1. What are the information to be stated in a prospectus? 2. Write notes on – Shelf prospectus and Red herring prospectus. 3. What is the liability for misstatement in the prospectus? 4. Explain the provisions relating to pay commission in connection with the subscription to the securities, by a company. 5. What are the attachments to be made along with the Annual Return in Form PAS – 3 B. Multiple Choice Questions 97 CU IDOL SELF LEARNING MATERIAL (SLM)
1. The prospectus shall contain a report by a Chartered Accountant upon the profits or losses for each of _______ financial years immediately preceding the date of issue of prospectus. a. 3 b. 7 c. 5 d. 6 2. The promoters of every public company making a public offer of any convertible securities may hold such securities only in __________ form. a. Electronic form b. Dematerialised form c. Printed form d. Written form 3. A company filing a Shelf prospectus is required to file an Information Memorandum in Form No. ______ with the Registrar within _____ prior to the issue of second or subsequent offer of securities under the issue of Shelf prospectus. a. 26AS, 12 months b. Form 16, 3 months c. PAS 2, one month d. PAS 2, three months 4. The Information Memorandum shall be deemed to be a _______. a. Prospectus b. Notice c. Application d. Allotment 5. _________ is a prospectus which does not include complete particulars of the quantum or price of the securities included therein. a. Shelf prospectus 98 CU IDOL SELF LEARNING MATERIAL (SLM)
b. Abridged Prospectus c. Offer for sale d. Red herring Prospectus Answers 1-c, 2-b, 3-c, 4-a, 5-d 8.11 REFERENCES Textbooks/ReferenceBooks T1 Kapoor, N.D.; Elements of Company Law; Himalayan Publishing House, Mumbai.T2Kuchhal, M.C. :Company Law Avtar Singh,Company Law, EasternBook Company,Lucknow R1 Pathak Akhileshwar Garg, Chawla, Sareen, Mercantile Law, Kalyani Publication,NewDelhi. SecuritiesContracts(Regulation)Act,1956 R2SinghAvtar:CompanyLaw; EasternBookCo.,Lucknow. 99 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 9 –SHARE CAPITAL 100 STRUCTURE 9.0 Learning objectives 9.1 Introduction 9.2 Share 9.3 Ways for raising share capital 9.4 Kinds of share capital 9.5 Issue of sweat equity shares 9.6Bonus shares and rights shares 9.7Issue of employees stock options 9.8Voting rights 9.9Preferential offer 9.10Alteration of share capital 9.11 Reduction of share capital 9.12 Liability of the member 9.13 Further issue of share capital 9.14 Securities premium account 9.15 Prohibition on issue of shares at discount 9.16 Preference share capital 9.17 Summary 9.18 Keywords 9.19 Learning Activity 9.20 Unit end Questions 9.21 References 9.0 LEARNING OBJECTIVES After studying this unit, the student will be able to Understand the meaning and types of share capital Explain the various share capital types for a newly formed company CU IDOL SELF LEARNING MATERIAL (SLM)
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