Class 2, MBL

Aditya Kamath BA. LLM.

Person competent to contract- need not be beneficiary- eg. Trustee, agent etc. Partnerships/HUF cannot- will be deemed individual members. A person becomes a subscriber by signing the memorandum as a subscriber, at the place intended for that purpose. Arthanari Transport Pvt. Ltd. v. K.P. Sami Gowaden [35 Comp.cases 930] Signature on all pages.

Pre- Incorporation Contracts Do not bind the company as it has not come into existence as yet, hence how can one represent that which does not exist? A new contract must be entered after company is incorporated. Even so, the law of restitution , being one of equity would apply. Promoters will be held personally liable. Kelner v Baxter, Seth Sobhagmal Lodha,v. Edward Mills Co. Ltd held company not liable. Newborne v Sensolid (Great Britain) Ltd. According to Sec.19(e) of the Specific Relief Act, specific performance can be enforced against a company where its promoters have before its incorporation entered into a contract for the purpose of the company and such contract is warranted by terms of incorporation. Normally included in Articles so as to make valid.

Step 1: Name and Approval 4 names- end with Private Limited or Limited based on the type- ROC will reply in 7 days as to availability 3-4 weeks to incorporate thereafter- MOA, AOA to be filled with other required docs and registration fee which is based on Share capital stated in MOA. Certificate of incorporation issued thereafter- conclusive proof of formalities of Act being fulfilled. Mossa Gulam Arif v. Ibrahim Gulam Arif (ILF40 Cal.1)- two minors subscribed to memorandum- inc challenged- could not reopen. Pvt. Ltd may commence business immediately. Public Ltd. may now issue prospectus to ROC or statement in lieu if not inviting public investment- certificate of commencement will be issued.

Private Limited Company: What they are and their nature: (a) restricts the right to transfer its shares; (b) limits the number of members (exclusive of persons who are or have been in the employment of the company) to fifty; and (c) prohibits any invitation to the public to subscribe for any shares or debentures of the company. (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their 32 relatives. In case of Private Company inviting or accepting deposits from public, it will become a Public Company. Section 43 and a deemed Public Limited Company.

i) ii) iii)

Public Companies: Anything that is not private is public. Differences between Public and Private: Share Capital, Members, Prospectus, directors, meetings, Statutory and Registered Companies- LIC. Limited Liability Companies: Companies Limited by Shares. Companies Limited by Guarantee. Companies Limited by Guarantee with Share Capital. Associations not for Profit. Section 25 of the Act- Can be registered- limit liability but use profits for other purposes- Trusts included.

Government company means any company in which not less than fifty-one percent of the paid-up share capital is held by the Central Government, or by any State Government or Governments or partly by one or more State Governments and includes a company which is the subsidiary of a company thus defined A public company which is wholly owned & controlled by the State is known as a public corporation. Som Prakash Rekhi v. Union of India [(1981) 1 SCC 449].- Becomes the state if its functions are such.

Section 2(28) defines the memorandum thus: Memorandum means the memorandum of association of a company as originally framed or as altered from time to time Sections 13 to 15 explain the details of the form and contents of the MOA . The clauses of the memorandum 1. The name clause.The various contents of the memorandum are essentially called 'clauses'. Every memorandum must state the name of the company with which it is to be registered. The name must exactly be the same name as has been made available by the Registrar, with the word 'Limited' as the last word in the case of a public limited company and the words 'Private Limited' as the last words in the case of a private limited company. ALTERATION- May be ordered by the Central Govt, may be done Suo moto by Company after approval of the Central Govt.

2. The objects clause.According to this section, the objects as stated in the memorandum, should be divided into three groups under three distinct headings, namely: A. Main objects (to be pursued by the company on its incorporation); B. Objects incidental or ancillary to the attainment of the main objects; C. Other objects. Cotman V. Brougham [(1918) A.C. 514], :gives protection to subscribers who learn from it the purposes to which their money can be applied. In the second place it gives protection to persons who deal with the company and who can infer from it the extent of the companys powers Attorney General v. G.E. Rly.Co.[1980]S.A.C. 473 that a company may do anything which is incidental to and consequential upon the objects specified and such act will not be held ultra vires. Doctrine of Ultra Vires: Ashbury Rly. Carriage & iron Company v.Riche[1875] LR 7 HL 653.- Mechanical Engineers and General Contractors- contract for financing building of Railway. Lakshmanaswami Mudaliar v. L.I.C AIR 1963 SC 1185: LIC took over company, no more had any business of its own, hence donation ultra vires. Belhouse Ltd v. City Wall Properties Ltd [(1966)36 Comp. Cases 779] In this case, the object clause included the power to carry on any other trade or business whatsoever, which can, in the opinion of Board of Directors, be advantageously carried on by the Company.

1. The ultra vires transactions are null and void ab initio 2. Any member can get an order of Injunction from the court in case he finds that the company is about to undertake an ultra vires act. 3. It is the duty of the director to ensure that the corporate capital is used only for the legitimate business of the company, In case of such capital being diverted, the directors are personally liable to replace it. The directors and other officers are personally accountable to third parties in case of ultra vires transactions. 4. Where a companys money has been used ultra vires to acquire some property, the companys right over such property is held secured. Can Share Holders Ratify an Ultra Vires Act? - Ashbury Railway Carriage & Iron Co. Ltd v Riche (1875) LR 7 HL 653.- NO

Alteration of Objects Clause Section 17(1) has laid down seven grounds which may be invoked by a company to amend its object clause. The grounds are: 1. to carry on its business more economically or more efficiently; 2. to attain its main purposes by new or improved means; 3. to enlarge or change the area of its operations; 4. to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company; 5. to restrict or abandon any of the objects specified in the memorandum; 6. to sell or dispose of the whole, or any part of the undertaking or any of the undertakings of the company; 7. To amalgamate with any other company or body of persons.

3. The Registered office Clause: -- Every Company must have a registered office which establishes its domicile. The notice of the exact address of the registered office must be given to the ROC in Form No. 18 within 30 days from the date of incorporation. 4. The liability clause.The memorandum of a company, should state that the liability of the members of the company is limited. In addition, the memorandum of a company limited by guarantee should also state that each member would undertake to contribute 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. 5. The capital clause.The memorandum of a company having a share capital (including a guarantee company having a share capital but excluding an unlimited company) should state the total amount of the share capital with which the company is to be registered and its division in different classes or kinds of capital the number of shares of each kind and the face value of each share.

6. The association and subscription clause.The memorandum of every company should declare the intention of the subscribers to the memorandum for associating themselves with the company and agreeing to take up the shares in the company, in the number stated against the respective promoter's name, not being less than one. The total number of shares agreed to be taken up by all the subscribers should also be stated.

They prescribe the rules and regulations for a company for governing its day-to-day administration; they are the rules for the internal management of the company. Mandatory for Private Limited and Unlimited companies to register with MOA. The status of the articles was aptly described by Lord Cairns LC in Ashbury Railway Carriage & Iron Co. Ltd. v Riche2 thus: "The memorandum is, as it were, the area beyond which the actions of the company cannot go; inside that area the shareholders may make such regulations for their own government as they think fit". The articles cannot, thus, override the memorandum and neither the memorandum nor the articles shall override the Act. Re New British Iron Co, Exp Beckwith (1898) 1 Ch 324; Borland's Trustee v Steel Brothers & Co Ltd (1901) 1 Ch 279. Article are a contract between the company and its members. They also govern th relation between members inter se.

Status of MOA and AOA: Now it is settled law that they are contractual terms between the company and its members in respect of maters relating to Membership Rights only. In Eley v. Positive Life Assurance Co. Ltd. [(1876)1 EX.D 88] the articles of a company provided that one E should be the solicitor of the company. The company refused to appoint him. Held, he could not claim damages for breach of contract for the following reasons: (1) There was no specific contract between the parties, express or implied. (2) E could not rely upon the relevant provisions in the articles because those provisions did not affect him in his capacity as a member. Binding force of MOA and AOA: 1. Upon the company and its members: Binding as far as membership rights go- Hickman v Kent or Romney Marsh Sheep Breeders Association [(1915)1 Ch.881],- Arbitration clause- suit files- held no jurisdiction. 2. Between members themselves- Binding.

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Between Company and outsiders: Normally do not act as a contract unless parties have transacted based on the ArticlesExample Salary of MD fixed in Articles.

Alteration of Articles: Section 31- by special resolution as long as not opposed any provision of the ACT and memorandum. Must also be bona fide and in the interest of the company. Alteration may also be retrospective: Sidebotton v Kershaw Lees & Co. Ltd [(1920)1 Ch. 154- Directors allowed to buy out shares of members who engaged in competitive business. State of Karnataka v. Mysore Coffee Curing Works Ltd. [(1984)55 Comp. cas.70].- power to nominate three Directors and another as Chairman of the Board.

DOCTORINE OF CONSTRUCTIVE NOTICE: The articles of association of a company are its Magna Carta. Each shareholder is irrefutably attributed with notice of the purport and content of the articles. Even if disputed, the shareholder is presumed to have constructive knowledge of the same

A person dealing with a company must be taken to have read the Companies Act and the articles of the company he is dealing with, and will be deemed to have had constructive notice of their contents. Kotla Venkatswamy v.Chinta Ramamurthy [AIR 1934, Mad. 579] all documents to be signed by MD, Working Director and Secretary- only last two signed Mortgage deed, held not valid and outsider cannot claim.

Doctrine of Indoor Management (Turquand Rule) : Royal Bank v Turquand [(1856) 119 ER 886]. Directors could borrow subject to resolution at a general meeting- Shareholders claimed no such meeting- court said meeting presumed. Sri Kishan Rathi v. Mondal Bros & Co Ltd [AIR 1967 Cal 75]- need not and cannot, and is not obliged, in my view, to look further in the internal management of the company and embark on an investigation.

1.

EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT: Knowledge of Irregularity: Howard v. Patent Ivory Manufacturing Co [(1888) 38 Ch D 156], the directors issue of debentures to themselves- assent of general meeting needed, not obtained. Hely-Hutchinson v. Brayhead Ltd [(1967) 2 All ER 14]- new Director- Contract for Indemnity with director that company and himself held out to be authorised to do so though not- company liable.

2.

Suspension of irregularity: Anand Bihari Lal v. Dinshaw & Co [AIR 1942 Oudh 417]- the plaintiff accepted a transfer of the defendant companys property, from the company accountant who had no authority to transfer.

3. No knowledge of Articles: Rama Corporation v Proved Tin and General Investment Co.[1952] 1 All.ER 554 Director no power to delegate, borrow- plaintiff did not refer to Artcles at all, held no IM was possible.

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Forgery- Ruben v. Great Fingal Consolidated [(1906) AC 439], Forged Share certificate issued by secretary- with signatures of two directors and seal of co.

5. Acts outside apparent authority: Anand Behari Lal v Dinshaw& Co . [AIR 1942 Oudh 417],