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NOTES ON Paper Code : K-4001

Subject : Company Law

Class : LL.B. 2nd Yr (IV SEMESTER)
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COMPANY LAW

Important Questions on Company Law

1. What do you mean by Company? Explain the Advantages and
Disadvantages of Incorporation of a Company.
2. Distinction between Company and Partnership.
3. When can Corporate Veil of a Company be Lifted?
4. Is company a citizen?
5. Explain the Procedure for Registration of a Company.
6. Write a Note on Certificate of Incorporation (sec 34 and 35)
7. What do you mean by Memorandum of Association ? Explain the
Importance of Memorandum of Association.
8. Explain the Procedure for Alteration of Memorandum of Association.
9. What do you mean byArticles of Association.
10.Difference between Articles of Association and Memorandum of
Association.
11.Explain the Doctrine of Ultra-vires.
12.Explain the Doctrine of Constructive Notice.
13.Explain the Doctrine of Indoor Management.

OR Explain the Rule laid down in Royal British Bank v. Turquand.

14.What is Prospectus.
15. Promoters.
16.Directors- Powers, Duties and Position.
17.Quorum (Section 174).
18.Kinds of Companies.
19.Government Company.
20.Conversion of a Private Company into a Public Company.
21.What are the Advantages of a Private Company?
22.Dividends.
23.Debentures.
24.What are the Kinds of Share Capital?
25.Allotment of Shares.
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Company:
A company, in common parlance, means a group of persons associated
together for the attainment of a common end, social or economic. It has
“no strictly technical or legal meaning.”

According to sec. 3 (1) (ii) of the Companies Act, 1956 a company

means a company formed and registered under the Companies Act, 1956
or any of the preceding Acts. Thus, a Company comes into existence only
by registration under the Act, which can be termed as incorporation.

Advantages of incorporation

Incorporation offers certain advantages to a company as compared with

all other kinds of business organizations. They are

1) Independent corporate existence- the outstanding feature of a

company is its independent corporate existence. By registration under the
Companies Act, a company becomes vested with corporate personality,
which is independent of, and distinct from its members. A company is a
legal person. The decision of the House of Lords in Salomon v. Salomon
& Co. Ltd. (1897 AC 22) is an authority on this principle:

One S incorporated a company to take over his personal business of

manufacturing shoes and boots. The seven subscribers to the memorandum
were all his family members, each taking only one share. The Board of
Directors composed of S as managing director and his four sons. The
business was transferred to the company at 40,000 pounds. S took 20,000
shares of 1 pound each n debentures worth 10,000 pounds. Within a year
the company came to be wound up and the state if affairs was like this:
Assets- 6,000 pounds; Liabilities- Debenture creditors-10,000 pounds,
Unsecured creditors- 7,000 pounds.

It was argued on behalf of the unsecured creditors that, though the co

was incorporated, it never had an independent existence. It was S himself
trading under another name, but the House of Lords held Salomon & Co.
Ltd. must be regarded as a separate person from S.

2) Limited liability- limitation of liability is another major advantage

of incorporation. The company, being a separate entity, leading its own
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business life, the members are not liable for its debts. The liability of
members is limited by shares; each member is bound to pay the nominal
value of shares held by them and his liability ends there.

3) Perpetual succession- An incorporated company never dies.

Members may come and go, but the company will go on forever. During
the war all the members of a private company, while in general meeting,
were killed by a bomb. But the company survived, not even a hydrogen
bomb could have destroyed it (K/9 Meat Supplies (Guildford) Ltd., Re,
1966 (3) All E.R. 320).

4) Common seal- Since a company has no physical existence, it

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

5) Transferable shares- when joint stock companies were

established the great object was that the shares should be capable of being
easily transferred. Sec 82 gives expression to this principle by providing
that “the shares or other interest of any member shall be movable property,
transferable in the manner provided by the articles of the company.”

6) Separate property- The property of an incorporated company is

vested in the corporate body. The company is capable of holding and
enjoying property in its own name. No members, not even all the members,
can claim ownership of any asset of company‟s assets.

7) Capacity for suits- A company can sue and be sued in its own
name. The names of managerial members need not be impleaded.

8) Professional management- A company is capable of attracting

professional managers. It is due to the fact that being attached to the
management of the company gives them the status of business or executive
class.
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Disadvantages of incorporation

1) Lifting of corporate veil- though for all purposes of law a company

is regarded as a separate entity it is sometimes necessary to look at the
persons behind the corporate veil.

a) Determination of character- The House of Lords in Daimler

Co Ltd. v. Continental Tyre and Rubber Co., held that a
company though registered in England would assume an enemy
character if the persons in de facto control of the company are
residents of an enemy country.

b) For benefit of revenue- The separate existence of a company

may be disregarded when the only purpose for which it appears
to have been formed is the evasion of taxes. –
Sir Dinshaw Maneckjee, Re / Commissioner of Income Tax
v. Meenakshi Mills Ltd.

c) Fraud or improper conduct- In Gilford Motor Co v. Horne, a

company was restrained from acting when its principal
shareholder was bound by a restraint covenant and had
incorporated a company only to escape the restraint.

d) Agency or Trust or Government company- The separate

existence of a company may be ignored when it is being used as
an agent or trustee. In State of UP v. Renusagar Power Co, it
was held that a power generating unit created by a company for
its exclusive supply was not regarded as a separate entity for the
purpose of excise.

e) Under statutory provisions- The Act sometimes imposes

personal liability on persons behind the veil in some instances
like, where business is carried on beyond six months after the
knowledge that the membership of company has gone below
statutory minimum(sec 45), when contract is made by
misdescribing the name of the company(sec 147), when business
is carried on only to defraud creditors(sec 542).

2) Formality and expense- Incorporation is a very expensive affair. It

requires a number of formalities to be complied with both as to the
formation and administration of affairs.
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3) Company not a citizen- In State Trading Corporation of India v.

CTO, the SC held that a company though a legal person is not a citizen
neither under the provisions of the Constitution nor under the
Citizenship Act.

Definition of the Company : A company have been defined in the

Companies Act 1956, “a company is formed and registered under this

Act”.

 In common law, “A company is a legal personal and legal identity”.

 In a practical way a company means, A company Registered by

certain person under companies Act. Two or more person who are

desires of carrying a joint business enterprises have the choice of

either forming a company or a partnership is a suitable device for a

small scale business which can be financed and managed by a small

group of partners. But where the enterprise is required a rather greater

mobilization of capital which the resources of law person can not

provide the formation is the company only the choice.

Kinds of the company : The companies act 1956 provides for two basic

types of the companies.

i) Private company

ii) Public Company

iii) One man company

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Distinction between Public and Private Company : The main points of

difference between a public company and a private company may be stated

as under :

i) The minimum number of person required to form a public company is

seven and in case of a private company it is two.

ii) There is no limit to maximum number of member in the case of a

public company. But the membership of a private company should not

exceed fifty.

iii) There is no restriction on transfer of shares in case of a public

company. But a private company having a share capital must have in

its Article restriction on the right to transfer shares.

iv) A public company can freely float shares and debenture in the market

and invite to public to invest in its share capital but a private company

can not do so.

Company and Partnership :

The main points of distinction between a company and a partnership

firm are as follows :

i) A company is a legal and distinct person but the partnership firm is

not distinct.

ii) In a partnership, the property of the firm is the property of the

individual members who are collectively entitled to it. But in the

company the property belongs to the company and not the members.
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iii) The creditors of a partnership firm are creditors of individuals

partners and a decree against the firm can be executed against the

partners jointly but the creditors of a company can proceed only

against the company and not against its member.

iv) Partners are the agent of the firm, but member of a company are not

its agent.

v) A partner cannot contract with his firm of which he is a partner,

whereas a member of a company can contract with a company of

which he is a share holder.

vi) A partner cannot transfer his share and make transferee a member of

the firm without the consent of other partners, whereas the shares of a

company can ordinarily be transferred without the consent of other

share holders.

vii) A partner‟s liability is always unlimited, whereas the liability of a

shareholder of a company is limited.

viii) A company has a perpetual succession, on the other hand a

partnership has not a perpetual succession. It is dissolved on death or

insolvent of a partner.

ix) A company is legally bound to have its account audited annually by a

chartered accountant whereas the accounts of a partnership firm are

audited at the discretion of partners.

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Commencement of Business (Sec. 149) : A private can commence its

business from the date of incorporation but in the case of public comp a

few certificate for the commencement of Business as to obtained. This

becomes necessary where a company issued prospectus inviting the public

to subscribility the share of the company.

The Amendment act 1965 introduced certain new condition for the

commencement of the business by a company it has added 2 new sub-

section – Sec. 149.

1. Main objects

2. Other objects

Main objects : This will state the main object of the company and the

incidental to the main objects.

Other objects : This will include the other object not mentioned in the

above.

In both the above case their must have been fielded with the Register

a declaration by the secretary of the director that the requirement as to the

Resolution been complied with (i) Memorandum of association, (ii) Article

of association

The agreement if any which the company prepossess to enter into

with any individual for his appointment of manager or whole time directors

or managers. The document for registration must be supported by a

declaration stating that all the requirement of the … related to Registration

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have been complied with the declaration must be signed by an advocate of

the supreme court or high court or chartered accountant whole time

practice in India who is engaged in the Information the company or person

made in the Article as a directive manager secretary of the company when

the requisite document are presented for the registration of the company

may however, accept the declaration as sufficient evidence of comp. he

then Registered the comp and the name of the place of the company in the

Restart of the companies.

A certificate of incorporation is issued by the Register which

certificate (under his hand the company is incorporated).

Certificate of Incorporation : The certificate of incorporation brings the

company into existence as legal person upon its issue the company is born

from the da… incorporation such of the subscriber of the memorandum

other person as may from time to time be the member the company capable

truth with of exercise all the

Memorandum of Association : Contents of Memorandum –

i) Name clause

ii) Registered office clause

iii) Object clause

iv) Liability clause

v) Capital clause

vi) Association clause (added by Amendment of 2013)

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Name clause : The first clause of memorandum is required to state the

name of proposed company a company being a legal person must have its

name to establish its identity. The name of corporation is personal

existence. Any suitable name may be subject to the following restrictions.

Legal Requirements as to name

Resembling name not allowed : in the first place no company can be

registered with the name which in the opinion of central government is

undesirable.

i) Name is desirable if there is previously registered company wearing

that name.

ii) The name is undesirable if it is identical with or two reasonable a

registered trademark or trade mark which is the subject of an

application of Registered on another person under the traders Act

1999, the central government may consult the Registration of the

trademark act before declaring a name be undesirable.

Case :

Motor manufacturer traders Ltd. V/s Motors Manufacturer & trades

Mutual Insurance Ltd.

The plaintiff company was incorporated in 1992 under the name

Society of Motor Manufacturer traders Ltd. in 1929 the defendant society

were incorporated under the name Motor manufacturer and traders mutual

insurance company Ltd. The plaintiff company brought an action to

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restrain huge of this name. It was held that the defended company name

could not be regarded is one “calculated to deceive” the defended company

was an insurance company and the plaintiff society was the manufacturer –

trade protection society (Lorrenze justice) do not think that the defendant

company is liable to have its business unless change its name.

Change of name : A company may change its name by passing a special

resolution and with the approval of a central government dignity in writing

but if a company has been Registered with the name which subsequently

appear to be undesirable or resembling the name of another company it

may change it name by passing an ordinary resolution and with the

approval of central government in such case the central government may

also within 12 months of Registration direct the company to retify its

name. If the direction is issued the company must change its name within 3

months from the date of direction. This is known as rectification of name.

ii) Registered office clause : According to section 12 of the Companies

Act 2013 the Memorandum of every company must state. The state in

which registered office is to be situated the company is required to have

such office from the date in which the company begins to carry on business

within 30 days after Incorporation which ever earlier. All communication

and notices to the compare addressed to its Registered office. Notice the

situation of the registered office and ever change in their must be given

within 30 days after the date of incorporation.

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Change of Registered office : Shifting of registered office from one place

to another place within local limit of the same city, town or village does

not require any Resolution of the company and the Resolution of the court

will be sufficient for this purpose shifting of the Registered office from one

city or town, and village to another city, town village within the same state

required the special Resolution of the company.

(iii) Objects clause : The memorandum must contained the object for

which the proposed company is formed the object. It must be divided into

2 such clauses

(a) Main object

(b) Other object

(c) State to which object extent

(a) Main object : This clause state the main object of the company to be

persue the company on its incorporation and object in… to the attainment

of the main object

(b) Other object : This clause state the other object of the company not

included in the above clause. The subscriber of the memorandum may

choose any object for the company subject and restrication that the object

should not infring should not be against the general law and the provision

of the company act.

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(c) State to which object extent (Added by Amendment 20) : The non

trading company whose objects are not confined to one state to have the

state in their object clause the states to whose territories the object extends.

Purpose of object clause : The importance of object clause lies in the f..

that it determines the purpose and the capacity of the company beside its

sphere of the activities. The object clause of a company serves 3 distinct

purposes.

(i) It enables the subscriber to know the use to which their investment

money is put and thus extend protection to shareholders.

(ii) It also extends certain degree of protection to creditors also, in as

much as the company can no spends its capital of any activities which

are not within the preview of object clause.

(iii) The object clause also serves the public interest as the company can

not diversify its activities beyond those specified in the object clause.

Doctrine of “Ultra vires”

The doctrine of ultra vires implies that the company confine its

activities within its states objects. Thus meant to restrict the power of the

company to beyond its object clause an act which is ultra vire is void and

does not bind the company. It therefore follows that neither the company

nor the other contract can sue each other for ultravires act.
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Case : Ashbury Railway Carriage and Iron Company vs. Riche

Facts : IN Ashbury Railway Carriage and Iron Comp. Vs Riche the

doctrine of the ultra vires is well illustrated. This case in the memorandum

of association the estaled that the company was established to sell land or

higher Railway carriage and weagons all kinds of Railway plants and to

carry on business of mechanical engineers and general contractor. The

company entered into a contract with riche a firm of Railway contractor to

finance to construction of Railway line in Belgium. The contact however

repudiated the contract on the ground to it was ultravires. Riche brought a

suit for danger and breach of contract against the company the of Lord

however ruled the contract was ultravire and therefore, null and void. The

contract was entitled beyond the objects in the memorandum of

association. If so it was thereby placed beyond the powers the company to

make the contract.

Limited Liability : In case of company whose main liability is limited of

shares and liability the memorandum must contain a clause that the

liability is limited by shares no member can be called upon to pay more

than the unpaid value of the shares held by him. In case his show are fully

paid he shall not be required to pay any more even if the company owes

huge debts to its creditors.

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A member of company limited by guarantee not having share capital

can not be called upon to contribute. An amount more than his guarantee in

the event of liquidation of the company.

A company can not alter its liability clause so as to enhance the

liability of its member or compelling them to take further shares such

attraction would be void in law.

Capital clause : The capital clause in the Memorandum estate the amount

of the nominal or authority capital with which the company proposed to be

registered and the value of the shares into which it is divided. There is not

limited to the amount of capital which the company may have or to the fixe

value of each individual share.

Association clause : There must be the subscriber with having the one

writers.

ARTICLES OF ASSOCIATION

Article of Association : Article of association are the internal association

which govern the internal affair of the company as against the article the

memorandum of the company contain the fundamental condition for

guidance benefit the creditors and outsiders also shareholders. The article

being meant for regulation the internal affair of the company.

Definition and Nature of the Article of Association : is define in sec.

2(5) of the companies Act 20… “Article means the article of association of
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the company as originally framed or as altered as time to tin or applied in

presence of any previous company law or as this act”.

Thus, it would be seeing that the article of company are its by laws or

rules and Regulation which governs its internal affairs and the conduct its

business. They are of vital importance to the … in as much as they deal

with the right of the men of the company they are subordinate to and

controlled by the memorandum.

Registration of Article (Sec. 7) of the Companies 2013 provides that, A

public company provide its share may registered its article association

signed by same subscriber as those of memorandum.

The article of the private company must incorporate the three

restrictions:

i) Restrict the Right to transfer its shares

ii) Accept in case of one person comp. limits the no. its members 200

iii) Prohibit invitation to the public to subscribe for a securities of the

company

Distinction between Memorandum and Article of Association

The memorandum and articles both are the important documents of a

company. They are of vital importance not only for the incorporation of the

company but all for its managements and expansion of business activity

though article have always been held subordination to the memorandum

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both are intimately. This is because the purpose of memorandum is to state

object for which the company has been incorporate. Article provide the

manner in which the company to carry on its business.

The memorandum defines the area beyond which action of the

company can not go inside the area the shareholders may make the

Regulations for the own governance as they think fit.

The main points of distinction between Memorandum and ar.. are as

follows:

1. Contents : Memorandum is the charter of the co which define the

fundmental condition and objective for which it is incorporated.

Article of association on the other hand contains the internal rule

and regulations framed by the company to govern its internal management.

(ii) Relationship : Memorandum determines objects sco. And extent of the

activities of the company. Article are the laws of the company which

prescribed regulation by which the management of affairs of the company

is to be carried out.

(iii) Registration : Every joint stock company must get its memorandum

dully registered under the act. But in case of article company may adopted

the model specified in payable of schedule. I so as to avoid the formalities

of Registration.

(iv) Alteration: Clauses of memorandum can no easily be altered. The

company has to pass a special Resolution and seek confirmation of the

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company to board for making alteration in its memorandum in.. of article

of association members have a right to alter the articles simply by special

resolution and there is no need to obtain the conformation of the company

can board.

Ultravires Act : Any act done by the company beyond the scope of its

memorandum shall be ultravires, being void and same can not be ratified.

Even by un animus vote of all the share holders. But the act of Board of

directors beyond the articles may be ratified by the shareholders.

Legal effects of the Article of Association

i. The members bound to the company

ii. The company bound to its members

iii. The members of the company are bound interse.

(i) The article and memorandum constitute a contract who is binding on its

members in there, regulation to the capacity as members is bound to the

company by the provision of the article.

(ii) Company bound its members – just as members bound to the company,

the company is equally bound to its members since the article constitute a

control between the company and its members it therefore follows that a

member can bring an action against the company for violation of any of the

provision of article.
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(iii) Binding effect of article between the members interse. Each members,

thus a shareholder may sue, in his own name to restrain another or others

from during fraudulent or ultravires act.

Doctrine of the constructive notice of memorandum and Article

When any person deal with the any company then this person has

been knowledge about the Article of association of the company. Then the

company registered by the Registrar of the company. When all things are

clear then it is called the const notice.

Doctrine of Indoor Management

Royal British Bank Vs Tarquand

It is Tarquand Rule

The memorandum and article of the company become public

documents. They are registered by the Registrar the company. Therefore,

any person intending to deal the company any person may have assist to

this documents and obtain copies thereof, thus he will deal to have

constructive notice of the contents of Memorandum and article there is an

exception to the Rule and constructive not.

This exception is known as doctrine of indoor management. In the

case of Royal British of Bank vs targuand was renunciated.

In this case the directors of a Banking company were authorized by

the article to borrow on bond sum of mney has should from time to time by

Resolution of the company in the general meeting be authoried to borrow

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the directors gain bond to targuand without the authority of any such

resolution. It was held that the targuand could sue the company on the

strength of the bond as he was entitle to assume that the necessary

ressalution has been passed Lord Howthely outsider are bound to know the

external position of the company but are not bound to know its indoor

management.

PROSPECTUS

Definition of the Prospectus :

Sec. 2(70) of this Act 2013 define prospectus. It means any

document described or issued as a prospect or any notice or cercullor,

advertisement or other document inviting offer from the public for the

subscription purchase of any securities of a body corporate.

The essential ingredients of a prospectus are :

i) There must be an invitation offering to the public

ii) The invitation must be made by or on behalf of the company

iii) The invitation must be “to subscribe or purchase”

iv) The invitation may relates to shares or debentures.

Case

Pramatha Nath Sanyal Vs. Kali Kumar Dutt – The company inserted

and advertisement in a newspaper stating, “some shares are still available

for sale according to the terms of the prospectus which can be obtained

Application”. It was held that the advertisement constitute a prospectus as

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it invited the public to purchase sheet the directors were therefore,

penalized for not complying with the requirements of filling copy thereof

with the Registar of companies under sec. 27(a) of the company Act, 2013.

Contents of Prospectus : The prospectus must contain a statement that a

copy has deliver for Registration indicating the requisite documents

delivered therewith. It must be issued with 90 days of its registration. The

matter to be stated the prospectus are as follows :

(i) The main object of the company including the data about the

signatories to the memorandum of association of the company.

(ii) The number and classes of shares and the interest of shareholder in

the property and profit of the company.

(iii) Name addresses, description and occupation of the directors. The

qualifications shares, if any, held the directors and the term of their

appointment. Remuneration and compensation for loss of office etc.

(iv) The time of the opening of the subscription list.

(v) The amount payable an application and allotment of share and if any

prospectus are issued within two years, the details of the shares

subscriber for an allotted.

(vi) Particulars of any option to subscribe the shares or debentures

including the time for exercise or option price to be payed and the

consideration given for option and the person entitle to the option.
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(vii) Particulars of shares and debentures issued as fully or partly paid up

in the proceedings 2 years otherwise the in case.

(viii) The name of the under writers if any and the opinion the directors

that the resources of the under writers are sufficient to discharge

their obligations.

(ix) The amount or rate of underwriting commission

(x) The amount or estimate or preliminary expenses and the expenses of

the issue by whom paid or payee.

(xi) The amount paid or benefit given within 2 preceding years to the

promoters of the company.

(xii) The name and address of the auditors of the company.

(xiii) Particulars as to interest of every directors or pronounciation in the

promotions or property of the company within 2 years of date of

prospectus.

(xiv) Where the shares are of more then class, rights of voting and the

rights as to capital and attached to the classes of shares.

(xv) In case of existing companies, the length of time due which the

company has been carrying on its business, the comp. Proposes to

acquire a business which had been carried on for less than 3 years,

the length time during which such business has been carried out.

Dividend

Definition of the Dividend

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Dividend, denotes this profit earn by the company which is

distributed among its shareholders at a pre-determine rate generally

dividend for definition period but the company may also incidently

distributed its profit among the shareholders case of bond dividend.

The term dividend has been define in sec. 2(35) of the Companies

Act, 2013. And it means that distributable not profit of the company which

remains in balance after making all deduction which the directors can

legally distributed among the shareholder the company.

“Sir, B. Fry Justice”

In Rechelsed water walls company and metropolitan water Walt

observe that the dividend measure the right of shareholder to receive

adequate porsaction of profit of the undertaking.

Lord Justice fletcher Moulton : In Respanish Prospecting Comp. Ltd.

has define profit and held that profit indicates to business position of

interprice between to specify date the increase of interprice the period of

these day would be its profit.

On declaration by the court of directors of the company a copy there

of has to file with the Register along with the financial report in which the

exit amount stated by the company.

Rule regarding dividend :

Sec. 133 of the companies Act, 2013 provides that the dividend is to

be paid only of the profit of the company. It may be paid either object or a
 25

warrant. Where the dividend check or warrant is sent to the post director,

Registered, address of the shareholder and title to payment. When dividend

is either no paid in respect those of has not been posted within time

prescribed. Therefore, it would be an offence under sec.-1 of the

Companies Act, 2013.

Dividend

Rule regarding dividend : A dividend one declare debt payable by the

company to shareholders.

Penalty for failure to distribute dividend (Sec. 127) : Any default

incomplaies with these provisions shall be punishable under sec. 127 with

imprisonment for a term upto 2 years, and also a fine of not leave than one

thousand rupees for every day which defa… continuous and the ocmp.

Shall be laible to pay si… interest 18% p.a. during the period for which

such default continuous.

Unpaid dividend Account (Sec. 124) : Where dividend has been declared

by the company but has not been paid or claim from the date of declaration

to any share-holder entitle to the pay of dividend the comp. shall within 7

days of the date of expiry of the set period of 30 days transfer total amount

of dividend which remains unpaid or unclaimed to special account open by

the in that behalf of any schedule bank to be called unpaid dividend

account.
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Within 90 days of making any transfer of amount, the unpaid

dividend account prepare a statement of full detail to shareholders and

place it on website the comp. or any other website approved by the

Delhi High Court in M.S. Bharat Fund Ltd. Vs Register Companies

Observe that where the company has failed to open special dividend

account within 42 days after the declaration of dividend as required by sec.

129 of the Company act and not issued the dividend warrant it should serve

it so called notice, the liability of the company for this default shall extend.

It fine of 5 thousand rupees per day until the default continuous.

Debentures

The word “debenture” is derived from the latin word debere which

means “to borrow”. A debenture is thus a certificate of loan issued by a

company to the holder of the debenture, it is undoubtedly a kind of

security.

Definition of the debenture : The term debenture has been defined in sec.

2(30) of the companies act 2013 which says “debenture include debenture

stock bond and any other securities of a comp. whether constituted a

charge on the company assets or not.

According to Topham : “debenture is a document given by a company as

an evidence of a debenture to the holder usually arising out of a loan and

more commonly secured by a charge”.

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According to Palmer : “debenture as” an instrument under seal

evidencing a debt, the essence of being the admission of indebtedness”.

Case : Laxman Bharamji Vs Emperor (AIR 1946)

The Bombay High Court observed that debentures not indicate the

security against the loan taken by the company and contain the condition

of repayment rate of interest payable to the holder. They may even create a

charge on the company‟s property but it is not always necessarily so

briefly speak debentures are the acknowledgement of debt the pro… to

return it.

Case : United Dominion Trust Ltd. vs. Kirkwood (1966)

Receipt or a certificate for a deposit made with a when the deposit

was repayable at a fixed period after it was made was held to be a

debenture.

Characteristics of Debentures :

(i) Debentures are generally issued in series but a sign. Debenture may

be issued in case of sole lander of company.

(ii) Debenture is usually in the form of a certificate issued under the seal

of the company.

(iii) Debenture is an acknowledgement of indebtedness. It usually

provides for the payment of a specified suc.. at a specified date.

However a company may issued perpetual debenture wherein no

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specific date of repayment may be stated, further, section 71 of the

Companies Act 2013 provides that debentures are not invalid simply

because they are made irredeemable of redeemable only to the

happing of a contingency, however, remote or the expiration of a

period however long.

(iv) Debentures generally creates a charge on the undebenture of the

company or on some its assets, this is, however not an essential

characteristic and a debenture create no charge is also perfectly

legal.

(v) The holder of debentures is the creditors of the and not its member.

(vi) A debenture carries no voting right at any timing of the company.

Kinds of Debentures

(i) Registered and Bearer debentures : Debentures may either be

registered or they may be bearer debentures. Registered debenture are

payable to a registered holder are transferable the same manner as shares.

The bearer debentures on the other hand, are payable to bearer and

transferable like a negotiable instrument by me delivery. The person to

whom a bearer debenture is transfer become a “holder in due course” and

is entitled to recover the principal sum and the

Redeemable and Irredeemable debentures : debentures may either be

redeemable or they may be irredeemable.

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Redeemable debnetures are issued on the term that the company is

bound to repay the amount of debenture at a fixed date, or upon demand

after notice or under a system of periodical drawings redeemable debenture

may be re-issued unless the article prohibit their re-issue.

An irredeemable debentures is also known as a perpetuate debenture

and no time is fixed for the company to repay the loan although, it may

choose to pay it back any time it likes, all the debentures whether

redeemable or irredeemable, become payable in the event of winding up of

the company.

(iii) Secured or unsecured debentures : When debentures are secured by

a mortgage charge on the property of the company they are called secure

debentures but when they are not so secured, they are called unsecured or

naked debenture containing a mere promise to pay.

(iv) Convertible debentures : A convertible debenture contain an option

entitling the holder to convert whole or part of his debt, on certain dates or

during certain period, into shares of the comp. at stated rates of interest

sec. 62(B) of Companies Act 2013 permit the conversion or convertible

debentures into shares by special resolution of the company and approval

of the central government.

CHARGES
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A charge may be defined as a security given for security loans or

debentures by a mortgage on the assets of a company the power of a

company to borrow money also includes power to give security generally

the debenture and the other borrowing of a company are secured by a

charge on its assits. A „charge‟ is created when a property whether existing

or future, is agreed to be made available as a security for the re-payment of

debt. However, the creditors gets no legal right over the property so

charged but only gets a right to have the security made available by an

order of the court in the event of non payment of debt.

Kinds of Charges

(i) Fixed specified charge

(ii) Floating charge

Fixed or specific charge : A charge is fixed or specific when it is made a

specifically to cover assets which are ascertainable and definite at the time

of creating the charge e.g. land, building, heavy machinery etc. a fixed

charge is therefore against security of certain ascertainable specific

property. The company‟s right to dispose off the property is temporarily

suspended during the period it is charged or encumbered. In the event of

winding of a company, a debenture holder or a creditor secured by a fixed

or specific charge shall placed in the highest class of creditors.

(ii) Floating charge : A floating charge, on the other is not attached to any

definite properties but covers property which is of a fluctuating nature such

 31

as stock in trade. It is an equitable charge or the assets for the time being of

a going concern.

Reconstruction and Amalgamation

Reconstruction : The term „Reconstruction‟ has not been defined in the

act but the court have interpreted the term in various ways. Thus in Hooper

vs. Western Countries Company – It has been said that, “by Reconstruction

is meant the formation of a real company to take over to assets of the old

one with the idea that substantiate the same business shall be carried on by

the same person.

Defining Reconstruction “Hornby” : There is reconstruction of a

company when the company‟s business and undertaking are transferred to

another company formed for that purpose. Reconstruction of a company

implies reconstruction of company‟s financial structure with or without its

dissolution. It may includes the reduction of claim of both the shareholders

and the creditors against the company. The underlying objects of

Reconstruction may be –

(a) Simplification of the capital structure

(b) Reduction of fixed charge

(c) Elimination of past losses

(d) Adjustment of arrears of cumulative dividend

(e) Raising of company‟s working capital

Kinds of Reconstruciton : It may be of two types –

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(i) External Reconstruction

(ii) Internal Reconstruction

External Reconstruction : In case of external reconstruction, the existing

company dissolves and a new company is formed to take over the business

of the existing company which is in batter financial position, the vendor

comp. goes into liquidation after selling its business of the new comp. thus

external reconstruction involves transfer of business to transferee company

by transfer company such a transfer of business has two fold effect.

(i) Acquisition of the transferred assets and liability by transferee comp.

(ii) Disposition thereof by the transferor comp. according the transferee

company passes the formation entires and the therefore comp

records the dissolution entries.

Internal Reconstruction : In the case of Internal reconstruction, the capita

structure of the company is recognized to infuse new life in the company it

permits the continuance of existing company and therefore, involves no

creation a dissolution whatever, it simply reorganizes the company‟s

existing financial structure without effect and transfer of business. Internal

reconstruction inc both alteration and reduction of share capital.

(i) Increase of share capital by issue of new shares.

(ii) Consolidation or sub-division of the existing share into shares of

larger or smaller denomination

(iii) Conversion of fully paid shares into stock

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(iv) Cancellation of unissued shares: on the other financial reduction of

capital may be caused by

(a) Writing off lasts capital

(b) Refund or surplus

(c) Reducing liability of members for uncalled capital

Amalgamation

Amalgamation has been defined in the Sec. 232 of the companies Act

2013. Amalgamation of one company with another in order to facilitate

reconstruction of the amalgamating companies. In other word,

amalgamation take place when two or more companies are joined to form a

third entity or one is absorbed or blended one another. The new company

which comes in into existence as a result of amalgamation assumes all the

property rights, powers and subject to all the duties and obligations of both

the constituent companies. Amalgamation means the merger of all the

companies in one running company, amalgamation does not require the

sanction of the tribunal, but if one of the companies is in the process of

liquidation and other companies are parties to the composition scheme

either as debtors or as creditors their amalgamation requires the sanction of

the tribunal.

Case

(i) Re South African Supply Co. (1904)

(ii) In Re Reliance Jute Industries Ltd. (1983)

 34

The court interpreted amalgamation to connote blending of two or more

undertaking into one undertaking, the shareholders of each blending

company becoming substantial the shareholders in the company which

holds the blended undertakings.

Purpose of amalgamation or Reconstruciton

To extend the scope of operation of the company : The shares are fully

paid-up and the company desires to raise further capital, the shareholders

in the old comp. may be issues only partly paid shares in the new company

so that we calling up uncalled amount, the company would have the

necessary funds to carry on its business.

(ii) For the purpose of reorganization : This usually mean the alteration

or modification of the structure of shareholders or creditors or both.

(iii) To Restructure capital in accordance with the act : The companies

act person a public comp. to have only two types of shares

(a) Equity shares

(b) Preference shares

Therefore the companies having other types of shares such as deferred

shares etc. are obliged to alter their capital structure by the scheme of

reconstruction to fall in line with the requirements of the companies act.

COMPANY DIRECTORS

Company directors has been define in Sec. 149 of the Companies Act.
 35

Directors- Powers, Duties and Position:

A company in the eyes of the law is an artificial person. It has no

physical existence. It has neither soul nor a body of its own. As such, it
cannot act in its own person.

The directors are the brain of a company. They occupy a pivotal

position in the structure of the company. They are in fact the mainspring of
the company.

Definition

„Director‟ includes any person occupying the position of director, by

whatever name called. The important factor to determine whether a person
is or not a director is to refer to the nature of the office and its duties. Thus
a director may be defined as a person having control over the direction,
conduct, management or superintendence of the affairs of the company.

Only individuals can be directors-no body corporate, association or firm

can be appointed director of a company. Only an individual can be so
appointed.

Position of directors

1. Directors as agents-a company, as an artificial person, acts through

directors who are elected representatives of the shareholders. They
are, in the eyes of the law, agents of the company for which they act-
Ferguson v Wilson. The general principles of the law of principal
and agent regulate in most respects the relationship between the
company and its directors.
2. Directors as servants-they are not servants of the company. A
director may, however, become a servant in a different capacity. For
example, the creator and controller of an air farming company was
 36

also working as its pilot. He died in an accident. His widow was

allowed workman‟s compensation –Lee v Lee’s Farming Ltd.
3. Directors as officers- a director is an officer of the company. As
such they are liable to certain penalties if the provisions of the
Companies Act are not strictly complied with.
4. Director as trustees-

(a) Directors as trustees of the company’s money and property in the

sense that they must account for all the company‟s money and
property over which they exercise control.

Directors are, however, not trustees in the real sense of the world
because they are not vested with the ownership of the company‟s
property. It is only as regards some of their obligations to the
company and certain powers that they are regarded as trustees of the
company.

(b) Directors as trustees of the power entrusted to them in the sense

that they must exercise their powers honestly and in the
interest of the company and the shareholders and not in their own
interest.

Trustees of the company-directors are trustees for the company and not for
the third party who have made contracts with the company or for the
individual shareholders.

Quasi-trustees-directors are only quasi-trustees because-

(i) they are not vested with ownership of the company‟s

property

(ii) their functions are not the same as those of trustees

(iii) their duties of care are not as onerous as those of trustees.

Powers of directors

General Powers of the Board (Section 291)

The powers of the Board of directors are co-extensive with those of the
company. This proposition is, however, subject to two conditions:
 37

First, the Board shall not do any act which is to be done by the company in
general meeting

Second, the Board shall exercise its powers subject to the provisions
contained in the Companies Act, or in the Memorandum or the Articles of
the company or in any regulations made by the company in general
meeting.

Powers to be exercised at Board meetings (Section 292)

The Board of directors of a company shall exercise the following powers

on behalf of the company by means of resolutions passed at the meetings
of the Board, viz, the power to-

(a) make calls on shareholders in respect of money unpaid on their

shares

(b) issue debentures

(c) borrow money otherwise than on debentures

(d) invest the funds of the company

(e) make loans

Powers to be exercised with the approval of company in general meeting

(a) sale or lease of the company‟s undertaking

(b) extension of the time for payment of a debt due by a director

(c) investment of compensation received on acquisition of the

company‟s assets in securities other than trust securities

(d) borrowing of money beyond the paid-up capital of the company

(e) contributions to any charitable fund beyond Rs.50,000 in one

financial year or 5% of the average et profits during the preceding
three financial years, whichever is greater.
 38

Duties of the Directors

1. Fiduciary duties-as fiduciaries, the directors must-

(a) exercise their powers honestly and bona fide for the benefit of the
company as a whole; and

(b) not place themselves in a position in which there is a conflict

between their duties to the company and their personal interests.
They must not make any secret profit out of their position. If they
do, they have to account for it to the company.

2. Duties of care, skill and diligence- directors should carry out their
duties with reasonable care and exercise such degree of skill and
diligence as is reasonably expected of persons of their knowledge
and status. He is not bound to bring any special qualifications to his
office.

Standard of care-the standard of care, skill and diligence depends upon the
nature of the company‟s business and circumstances of the case. They are
various standards of the care depending upon:

(a) the type and nature of work

(b) division of powers between directors and other officers

(c) general usages and customs in that type of business; and

(d) whether directors work gratuitously or remuneratively

3. Duty to disclose interest-where a director is personally interested in

a transaction of the company, he is required to disclose his interest
to the board. An interested director is neither to vote on the matter of
his interest nor his presence shall count for the purposes of quorum.
4. Duty to attend board meetings-the Act only says that the office of a
director is automatically vacated if he fails to attend three
consecutive meetings of the board or all meetings for a period of 3
months, whichever is longer. Moreover, a director‟s habitual
absence may become evidence of negligence.
5. Duty not to delegate- a director should not delegate his functions to
another person. But delegation of functions may be made to the
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extent to which it is authorized by the Act or the constitution of the

company.

Quorum (Section 174).

„Quorum‟ means the minimum number of members who must be

present in order to constitute a valid meeting and transact busies thereat.
The quorum is generally fixed by the Articles. If the Articles of a company
do not provide for a large quorum, the following rules apply:

1.) Quorum for public company-5 members personally present

Quorum for other companies-2

For the purpose of quorum a person may be counted as 2 or more members

if he holds shares in different capacities.

2. if within half an hour a quorum is not present, the meeting, if called

upon the requisition of members, shall stand dissolved. In any other case, it
shall stand adjourned to the same day, place and time in the next week.
The Board of Directors may adjourn the meeting to be convened on any
particular day, time and place to b fixed on the date of the meeting itself or
at least before the commencement of the same in the next week. Where the
Board of directors fails to do so, the meeting stands statutorily adjourned to
the same day in the next week.

The Articles may provide for a large quorum-The Articles cannot

provide for a quorum smaller than the statutory minimum. For the purpose
of quorum, only members present in person and not proxies are to be
counted.

Allotment of Shares.(M)

The capital of company is divided into certain indivisible units of a fixed

amount. These units are called shares. „Share‟ means share in the share
capital of a company.
 40

A share has been defined as “an interest having a money value and made
up of diverse rights specified under the Articles of Association”- Commr of
Income Tax v Standard Vaccum Oil Co. Ltd

A share is evidenced by a share certificate. A share certificate is issued by

a company under its common seal.

Each share is to be distinguished by appropriate number (Section

83). Each share in a company having share capital is distinguished by its
appropriate number.

General principles

An effective allotment has to comply with the requirements of the law of

contract relating to acceptance of an offer.

1. Allotment by proper authority-an allotment must be made by a

resolution of the board of directors. “Allotment is a duty primarily
falling upon the directors.”, and this duty cannot be delegated except in
accordance with the provisions of the articles.
2. Within reasonable time-allotment must be made within a reasonable
period of time, otherwise the application lapses. What is reasonable
time must remain a question of fact in each case. The interval of about
six months between application and allotment has been held to be
reasonable. On the expiry of reasonable time Section 6 of the Contract
Act applies and the application must be deemed to have been revoked.
3. Must be communicated-the allotment must be communicated to the
applicant. Posting of a properly addressed and stamped letter of
allotment is a sufficient communication even if the letter is delayed or
lost in the course of post. Household Fire & Carriage Accident
Insurance Co. v Grant is the leading authority.
4. Absolute and unconditional-allotment must be absolute and in
accordance with the terms and conditions of the applicant, if any. Thus
where a person applied for 400 shares on the condition that he would
be appointed cashier of a new branch of the company. He was not
bound by any allotment unless he was so appointed.

A condition which is to operate subsequently to allotment will not

affect its validity. An applicant to whom shares were allotted on the
condition that he would pay for them only when the company paid
 41

dividends was held to be bound even though the company had gone
into liquidation before paying any dividend.

The applicant must promptly reject the allotment when shares have
been allotted to him without his condition being fulfilled. An
acquiescence on his part would amount to a waiver of the condition.

Reduction of Capital.(M)

The law regards the capital of a country as something sacred. The general
principle of law founded on principles of public policy and rigidly enforced
by Courts is that no action resulting in a reduction of capital of a company
should be permitted unless the reduction is effected-

(a) under statutory authority or by forfeiture

(b) in strict accordance with the procedure, if any, laid down in that
behalf in the Articles of Association. Any reduction of capital
contrary to this principle is illegal and ultra vires.

Reduction of capital with the consent of the court

1. It may extinguish or reduce the liability on any of its shares in respect

of share capital not paid-up
2. It may, either with or without extinguishing or reducing liability on any
of its shares, cancel any paid-up share capital which is lost, or is
unrepresented by available assets.
3. It may, either with or without extinguishing or reducing liability on any
of its shares, pay off any paid-up share capital which is in excess of the
wants of the company.

Procedure for reduction of share capital

1. Special resolution-Section 100- a company shall first pass a special

resolution for reduction of capital. Power to reduce capital must be
 42

granted in the Articles of the company. If the Articles do not grant such
power, they may be altered by a special resolution giving such power.
2. Application to the Court-Section 101-the company shall then apply to
the Court by petition for an order confirming the reduction.
3. Registration of order of Court with Registrar-Section 103- the order
of the Court confirming the reduction shall be produced before the
Registrar and a certified copy thereof shall be filed with him for
registration. With such a copy shall also be filed a minute, showing
with respect to the share capital of the company as altered by the order.

Reduction of capital without the sanction of the Court

1. Forfeiture of shares-the company may, if authorized by its Articles,

forfeit shares for non-payment of calls. This results in reduction of
capital if the forfeited shares are not re-issued
2. Surrender of shares-the company may accept surrender of partly paid
shares to save it from going through the formalities of forfeiture.
3. Cancellation of shares-the company may, if so authorized by its
Articles, cancel shares which have not been taken or agreed to be taken
by any person and diminish the amount of its share capital by the
amount of the shares so cancelled.
4. Purchase of the shares by the company under Section 402(b)-the
Court may order the purchase of the shares of any members of the
company by the company.
5. Redemption of redeemable shares-the company may redeem
redeemable preference shares in accordance with the provisions of
Section 80
6. Buy-back of shares-a company may purchase its own shares, subject
to fulfillment of conditions laid down in Section 79-A (2),purchase its
own shares.