corporate laws · companies act 2013 and the depositories act, 1996. case studies involving issues...

Corporate Laws(As per Choice based Credit System for All India Universities Syllabus)

DR. S.N. MAHESHWARI

Professor Emeritus & Academic AdvisorDelhi Institute of Advanced Studies, Delhi-110 085.

Formerly : Principal, Hindu College, Delhi University.Professor & Dean, Faculty of Commerce and Business Management, Goa University.

DR. SUNEEL K. MAHESHWARIProfessor

EBERLY College of Business and Information Technology,Indiana University of Pennsylvania, U.S.A.

Formerly : Professor, Division of Accountancy & Legal Environment,Marshall University, U.S.A.

MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNELUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR KOLKATA

© AuthorsNo part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of thepublisher.

First Edition : 2016

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PREFACE

To the First Edition

We are pleased to place before the esteemed readers a book on “Corporate Laws” as per choicebased credit system for All India Universities Syllabus.

The book has several distinctive features. These include the following:

Comprehensively covers the course content requirements of the students appearing in thepaper “Corporate Laws” at the undergraduate examinations of different Universities in India.

Written in simple and straight style. Gives a lucid explanation of the basic provisions of law with plenty of illustrations supported

by case laws. Incorporates at the end of each chapter: Objective type questions with short answers to enable the students to test their

understanding. Essay type questions for review, discussion and practice. Practical problems with short answers for sharpening the knowledge of students.

Broadly classified into Five Units, each covering a separate enactments and convenientlydivided into several concise but complete chapters covering specific topics.

Provides Learning Objectives at the beginning of each chapter to tell what the students willlearn after studying the chapter.

Defines Key Terms introduced, at the end of each chapter, for recapitulation and better graspover the subject.

Bound to prove a refreshing guide for business executives.We are confident that with all these PLUS features the readers will find the book extremely useful

and rewarding for them. Constructive and helpful suggestions for improvement in the book will begratefully acknowledged.

A-2/156, Paschim Vihar DR. S.N. MAHESHWARI

New Delhi DR. S.K. MAHESHWARI

SYLLABUS

Objective: The objective of the course is to impart basic knowledge of the provisions of theCompanies Act 2013 and the Depositories Act, 1996. Case studies involving issues in corporate lawsare required to be discussed.

Topics Coverage in the BookUnit Chapter(s)

UNIT I: Introduction 15 LecturesAdministration of Company Law [including National Company LawTribunal (NCLT), National Company Law Appellate Tribunal(NCLAT), Special Courts]; Characteristics of a Company; Types ofCompanies including One Person Company, Small Company, DormantCompany and Producer Company; Association Not for Profit;Formation of Company, Online Filing of Documents, Promoters, TheirLegal Position (As Per Companies Act, 2013).

I 1

UNIT II: Documents 15 LecturesMemorandum of Association,Articles of Association,GDR; Book Building;Issue, Allotment and Forfeiture of Shares, Transmission of Shares,Buyback and Provisions Regarding Buyback;Issue of Bonus Shares (As Per Companies Act, 2013).

IIIIIIII

IV

2345

8UNIT III: Management 15 LecturesClassification of Directors, Women Directors, Independent Director,Disqualifications, Director Identity Number (DIN); Appointment;Legal Positions, Powers and Duties; Removal of Directors; ManagingDirector, Meetings of Shareholders and Board;Types of Meeting, Meeting through Video Conferencing, e-Voting.Audit Committee, Nomination and Remuneration Committee,Stakeholders Relationship Committee, Corporate Social ResponsibilityCommittee. (As Per Companies Act, 2013).

III

IV

6&7

10

UNIT IV: Dividends, Accounts and Audit 15 LecturesProvisions Relating to Payment of Dividend,Provisions Relating to Books of Account, Provisions Relating to Audit,Auditors’ Appointment, Rotation of Auditors, Auditors’ Report.Winding Up – Concept and Modes of Winding Up.Insider Trading; Meaning and Legal Provisions;Whistle Blowing: Concept and Mechanism.

IVIV

IVIIIV

89

114

10UNIT V: Depositories Law 5 LecturesThe Depositories Act 1996 – Definition; Rights and Obligations ofDepositors, Participants Issuers and Beneficial Owners; Inquiry andInspections, Penalty.

V 12

CONTENTS

Unit I : Introduction1. Company and Its Forms 1 – 39

1.1 Administration of Company Law [including National Company Law Tribunal(NCLT), National Company Law Appellate Tribunal (NCLAT), SpecialCourts]

1.2 Characteristics of a Company1.3 Types of Companies Including One Person Company, Small Company,

Dormant Company and Producer Company; Association Not for Profit1.4 Formation of Company; Promoters, Their Legal Position (As Per Companies

Act, 2013)1.5 Online Filing of Documents

Unit II : Documents2. Memorandum of Association: Introduction 40 – 56

2.1 Meaning of Memorandum2.2 Clauses of Memorandum2.3 Form of Memorandum2.4 Alteration of Memorandum of Association2.5 Doctrine of Ultra Vires

3. Articles of Association 57 – 683.1 Meaning of Articles3.2 Form of Model Articles3.3 Contents of the Articles3.4 Binding Effects of Memorandum and Articles3.5 Alteration of Articles3.6 Distinction between Memorandum of Association and Articles of Association3.7 Constructive Notice of the Memorandum and Articles3.8 Doctrine of Indoor Management

4. Prospectus 69 – 884.1 Need and Meaning4.2 Requirements as to Prospectus4.3 Contents of Prospectus4.4 Effect of Omissions and Mis-statements in a Prospectus4.5 Deposits from Members or Public

4.6 Public Offer of Securities to be in Dematerialized Form4.7 Advertisement of the Prospectus4.8 Shelf Prospectus4.9 Red Herring Prospectus

4.10 Listing of Securities4.11 Book Building4.12 Credit Rating4.13 Insider Trading4.14 GDR

5. Issue, Allotment and Forfeiture of Shares 89 – 1195.1 Meaning of Share5.2 Nature of Share5.3 Kinds of Shares5.4 Share Capital5.5 Shareholders’ Voting Rights5.6 Commission on Issue of Shares and Debentures5.7 Purchase by Company of its Own Shares5.8 Loans by Company for Purchase of Own Shares5.9 Power of Company to Purchase (Buyback) Own Securities

5.10 Issue of Sweat Equity Shares5.11 Issue of Shares at Premium5.12 Prohibition on Issue of Shares at Discount5.13 Issue and Redemption of Preference Shares5.14 Further Issue of Capital5.15 Conversion of Loans into Capital5.16 Share Certificate5.17 Stocks5.18 Transfer of Shares5.19 Transfer of Security in Case of Listed Company5.20 Transfer When Company is Under Winding up5.21 Transmission of Shares5.22 Nomination of Shares5.23 Lien on Shares5.24 Forfeiture of Shares5.25 Surrender of Shares5.26 Dematerialization

Unit III : Management6. Managerial Personnel and their Remuneration 120 – 129

6.1 Meaning of Managerial Personnel6.2 Key Managerial Personnel6.3 Choice of the Managerial Personnel6.4 Overall Limit Managerial Remuneration6.5 Schedule V (Part II) Remuneration

7. Directors and Meetings of a Company 130 – 1887.1 Classification of Directors, Women Directors and Independent Director7.2 Appointment7.3 Number of Directors, Disqualification of Directors, Vacation of Office of Directors,

Removal of Directors and Director Identity Number (DIN)7.4 Powers and Duties of Directors7.5 Legal Positions of Directors7.6 Managing Director7.7 Whole-time Directors7.8 Managerial Remuneration7.9 Manager of Directors

7.10 Meetings of Shareholders and Types of Meeting7.11 Meeting of Directors7.12 Procedures and Requisites of a Valid General Meeting7.13 Meeting through Video Conferencing7.14 Voting by Electronic Means7.15 Resolution7.16 Minutes of Proceedings

Unit IV : Dividends, Accounts and Audit8. Dividends and Bonus 189 – 200

8.1 Dividends8.2 Interim Dividends8.3 Bonus Shares

9. Accounts and Audit 201 – 2239.1 Books of Account9.2 Statutory Books of Account and Statutory Registers9.3 Financial Statements9.4 National Financial Reporting Authority9.5 Corporate Social Responsibility

9.6 Internal Audit9.7 Audit and Auditors

10. Corporate Governance 224 – 23410.1 Concept of Corporate Governance10.2 Emergence of Corporate Governance10.3 Global Institution for Corporate Governance10.4 Companies Act and Corporate Governance10.5 Whistle-Blowing Policy

11. Winding Up 235 – 25811.1 Concept of Winding Up11.2 Modes of Winding Up11.3 Winding Up by the Tribunal11.4 Voluntary Winding Up

Unit V : The Depositories Law12. The Depositories Act 1996 259 – 272

12.1 Need for Depositories12.2 Meaning and Benefits of a Depository12.3 Scope and Application of the Act12.4 Definitions12.5 Certificate of Commencement of Business12.6 Rights and Obligations of Depositories and Participants12.7 Enquiry and Inspections

CONTENTS

Chapter No. Title Page No.

Unit I : Introduction

1 Company And Its Forms 1 – 39

Unit II : Documents

2 Memorandum of Association: Introduction 40 – 56

3 Articles of Association 57 – 68

4 Prospectus 69 – 88

5 Issue, Allotment and Forfeiture of Shares 89 – 119

Unit III : Management

6 Managerial Personnel and their Remuneration 120 – 129

7 Directors and Meetings of a Company 130 – 188

Unit IV : Dividends, Accounts and Audit

8 Dividends and Bonus 189 – 200

9 Accounts and Audit 201 – 223

10 Corporate Governance 224 – 234

11 Winding Up 235 – 258

Unit V : The Depositories Law

12 The Depositories Act 1996 259 – 272

– 40 –

Chapter MEMORANDUM OFASSOCIATION:INTRODUCTION

2

Learning ObjectivesAfter studying the chapter, you should be able to:

define Memorandum of Association; explain different clauses of Memorandum of Association; understand the procedure of alteration of Memorandum; and discuss the implications of Doctrine of Ultra-vires.

Structure2.1 Meaning of Memorandum2.2 Clauses of Memorandum2.3 Form of Memorandum2.4 Alteration of Memorandum of Association2.5 Doctrine of Ultra Vires

2.1 MEANING OF MEMORANDUMMemorandum of Association is the main document of the company, which defines its

constitution and objects and lays down the fundamental conditions upon which alone the company isallowed to be formed. It may rightly be termed as the charter or the constitution of the company sinceit governs the relationship of the company with outside world.

According to Section 2(56) of the Companies Act, Memorandum means, “Memorandum ofAssociation as originally framed or as altered from time to time in pursuance of any previouscompanies law or of this Act.” Any provisions contained in the Memorandum of Association will bevoid to the extent to which they are repugnant to the provisions of the Companies Act.

Memorandum of Association and Articles of Association shall, when registered, bind thecompany and the members thereof to the same extent as if they had respectively been signed andsealed by each member, and contained convenants on the part of each member to observe all (Sec. 10).

UNIT II: DOCUMENTS

41Memorandum of Association: Introduction

Memorandum of Association has a two-fold object. “The first is that the intending corporator,who contemplates the investment of his capital, shall know within what field it is to be put at risk. Thesecond is that anyone who shall deal with the company shall know, without reasonable doubt, whetherthe contractual relation into which he contemplates entering with the company is one relating to amatter within its corporate objects.”

A public document: Memorandum of Association is a public document, and therefore, everyperson who deals with the company is presumed to have sufficient knowledge of its contents. It is keptopen for public inspection.

2.2 CLAUSES OF MEMORANDUMMemorandum of Association must have the following clauses (Sec. 4):

1. Name Clause2. Situation Clause3. Objects Clause4. Liability Clause5. Capital Clause6. Association Clause or Subscription Clause.1. Name Clause: A company is a legal entity and it must have a name to establish its identity.

Name clause in the Memorandum of Association confers protection against subsequent companyregistration in the same or closely similar name. It secures to the company de facto monopoly ofcorporate trading under a particular name. A company can have any name except–

(a) a name which is identical with or which closely resembles the name of another company so asto deceive or mislead the prospective customer of one, trading with the other. A name can be‘calculated to deceive’ when it suggests that the corporation adopting it is in some way connected orassociated with the existing corporation.

(b) a name, which in the opinion of the Central Government is undesirable or will mislead thepublic and its use has been, therefore, prohibited by the Government under the Emblems and Names(Prevention of Improper Use) Act, 1950. Government has absolute power, not subject to any legalinterference, to reject any name.

(c) The last word of the name must be ‘limited’ in the case of public companies and ‘privatelimited’ in the case of private limited companies. It is not necessary that the word ‘company’ shouldform part of the name.

“One Person Company” shall be mentioned in brackets below the name of the company, if it is so.

Central Government may permit a company to be registered with limited liability without theaddition to its name words ‘limited’ or ‘private limited’ when an association is about to be registeredas a limited company (a) for promoting commerce, art, science, religion, charity or any other usefulobject, and (b) does not propose to pay dividends to its members but apply its profits or income, if any,in promoting its objects (Sec. 8). A body in respect of which a licence under this section is in forceshall not alter the provisions of its Memorandum with respect to its objects except with the previousapproval of the Central Government signified in writing.

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The name of every company together with the address of its Registered Office must be painted oraffixed outside the premises wherever its business is carried on, in a conspicuous position, in letterseasily legible in one of the local languages generally in use in that locality [Sec. 12(3) (a)].

The name of the company including the registered office and the Corporate Identity Numberalongwith telephone number, fax number, e-mail, website address, if any must also be mentioned in allletters, negotiable instruments, orders, receipts and other documents written or executed by thecompany [Sec. 12(3)].

Every company must have its name together with the address of its Registered Office engravedon its seal, if any, and have it mentioned on all official papers and publication [Sec. 12(3) (b)].

2. Situation Clause: Memorandum of Association must state the name of the State in which theregistered office of the company is to be situated. It will fix up the domicile of the company. Further,every company must have a registered office either from the day it begins to carry on business orwithin 15 day of its incorporation, whichever is earlier, to which all communication and notices maybe addressed. The company has to furnish to the Registrar verifications of its registered office within aperiod of 30 days of its incorporation, in the prescribed manner (Sec. 12). Registered office of acompany is the place of its residence for the purposes of delivering or addressing any communications,service of any notice or process of Court of Law and for determining the question of jurisdiction inany action against the company. It is the place where all the statutory books and registers of thecompany shall be maintained. Address of the registered office of the company need not be mentionedin the Memorandum of Association.

3. Objects Clause: It is the most important clause in the Memorandum of Association, which isusually drafted in the widest possible terms with extreme care. It defines and limits the scope of theoperations of the company. It explains to the members the scope of the activity of the company wheretheir capital will be employed. It gives protection to the shareholders by ensuring that the funds raisedby one undertaking are not going to be risked in another. The outside public dealing with the companyis informed of the extent of the powers of the company. A company can exercise only such powers asare either expressly stated therein or as may fairly be implied therefrom, including matters incidentalor consequential to the powers so conferred. The words “incidental or consequential to the powersconferred” do not add any more to the objects of the company, but cover operations of a similar natureto the business previously mentioned.

The objects of the company must be lawful and well defined. The memorandum should state theobjects of the company and not its powers. Words should be affirmative and not negative in theobjects clause.

According to Section 4(1) (c) the Memorandum of Association of every company must state thefollowing :

(i) The objects for which the company is proposed to be incorporated and(ii) any matter considered necessary in furtherance thereof.

4. Liability Clause: In the case of a company limited by shares or by guarantee, Memorandum ofAssociation must have a clause to the effect that the liability of the members is limited. It implies thata shareholder cannot be called upon to pay at any time amount more than the unpaid portion of theshares held by him.


The Memorandum of Association of a company limited by guarantee must further state that eachmember undertakes to contribute to the assets of the company if wound up while he is a member orwithin one year after he ceases to be so towards the debts and liabilities of the company as well as thecosts and expenses of winding up and for the adjustment of the right of the contributories amongthemselves not exceeding a specified amount [Sec. 4(1) (d)].

5. Capital Clause: Memorandum of Association of a company limited by shares must also statethe amount of share capital with which the company is to be registered and its division into shares of afixed amount. Each subscriber must take at least one share and write opposite his name the number ofshares he takes. The capital is not the debt of the company even to its shareholders.

6. Association Clause: Herein it is stated that the persons subscribing their signatures at the endof the Memorandum are desirous of forming themselves into an association in pursuance of theMemorandum. Memorandum of Association must be signed by seven or more persons in the case of apublic company and by two or more persons in the case of a private company. Signatures shall beattested by witnesses. There may be one witness for all the signatures but one subscriber cannot be awitness to the signatures of another. Full description, address, occupation, etc. of the subscribers andwitnesses must be written.

In the case of One Person Company (OPC), the name of the person, who in the event of death ofthe subscriber, shall become member of the company, has also to be mentioned.

2.3 FORM OF MEMORANDUMSection 4(6) of the Companies Act, specifies in Schedule 1 to the Companies Act, 2013, the form

of Memorandum applicable to a specific company is as under:

Schedule I

Sl. No. Table Class of Company1 A Company Ltd. by shares2 B Company Ltd. by Guarantee and not having share capital3 C Company Ltd. by Guarantee and having share capital4 D Unlimited Company not having share capital5 E An Unlimited Company and having share capital

Any provision in the memorandum or articles in the case of a company limited by guarantee andnot having share capital, purporting to give any person a right to participate in the divisible profits ofthe company otherwise than as a member shall be void.

2.4 ALTERATION OF MEMORANDUM OF ASSOCIATION‘Memorandum of Association’ is considered to be the constitution of the company, hence, there

are many restrictions on change of various clauses of Memorandum.

The term ‘alter’ or ‘alteration’ includes making of additions, omissions or substitutions. Hence,wide scope is available for making alterations to Memorandum.

There are separate requirements for alteration of each clause of memorandum. The requiredprocedure as specified for that clause has to be followed.

44 Corporate Laws

Alteration to be noted on every copy of Memorandum and Articles – The alteration inMemorandum and Articles must be noted in every copy of memorandum and articles issued by thecompany after the alteration of memorandum or articles. Normal practice is to paste the changed pages.If the changes are many, it may be advisable to get fresh copies printed.

Penalty for non-compliance can be ` 1,000 for every copy issued without such alteration(Section 15).

The legal provisions as to change of each clause of memorandum are being explained below.

1. Alteration of Name ClauseThe following are the basic provisions of The Companies Act, 2013 regarding change in the

name clause:

(i) Name of the company can be changed any time by passing a special resolution and gettingapproval of Central Government. [Section 13(2)]

(ii) The approval of Central Government for change of name shall be filed with Registrar ofCompanies who will issue a new Certificate of Incorporation. [Section 13(6)]

(iii) Permission of Central Government is not necessary for merely addition or deletion of words‘private’ in the name, when public company is converted to private company vice versa –[Section 13(2)]

(iv) If the name of the company has been changed, the former name should also be painted,affixed or printed for a period of two years after such change on the letter-heads, bill books,other official publications, promissory notes, bills of exchange of the company and alsooutside every office or place of business of the company [Section 12(3)]

(v) There is no change in constitution of the company by change of name. Hence, the companycontinues to exist as a distinct legal entity and suits filed in the earlier name will continue.

Directing a Company to Rectify Its Name

A company can be directed to change its name by Central Government in following twosituations:

(i) When name similar with name of other company – It may be possible throughinadvertence or otherwise, a company may be registered with a name (or change to a newname) which in the opinion of Central Government, is identical with or closely resembles thename of an existing company. In such case, Central Government can direct the company tochange the name, within three months from issue of such directions, after adopting anordinary resolution [Section 16(1) (a)]

(ii) Order on application by proprietor of registered trade mark – A registered proprietor of atrade mark may apply to Central Government stating that name of a registered company isidentical with or nearly resembles his registered trade mark. He may apply that name of theregistered company should be changed. Such application can be made only within three yearsfrom incorporation or registration of a company. Central Government can direct the companyto change the name. On issue of such directions, name should be changed within six monthsby passing an ordinary resolution – [Section 16(1) (b)].


Penalty for Non-Compliance

If the directions issued by Central Government are not complied with, the company is punishablewith fine upto ` 1,000 per day during which the default continues. Moreover, every officer who is indefault is punishable with fine of minimum ` 5,000 and maximum ` 1 lakh [Section 16(3)]

2. Alteration of Situation ClauseA Company can change its registered office as per the following prescribed procedures.

(i) Change within same village, town or city: Change from one premise to another within thesame city, town or village can be made simply by passing a resolution by Board of Directors.Notice of change has to be filed with ROC within 15 days of change, with prescribed fees –[Section 12(4) & (5)]. Default is punishable with fine which may extend upto ` 1,000 per daywhich during the default continues with maximum of ` 1 lakh [Section 12(8)].

(ii) Change of registered office within same State: Change of registered office from one town,city or village to another town, city or village in the same State can be made by passing aspecial resolution at general meeting of members.Change from jurisdiction of one ROC to another within same State: It may be possiblethat even when the change of registered office is within the same State, the office may shiftfrom jurisdiction of oneRegistrar to jurisdiction of another Registrar of Companies within the same State.In such case, the change of registered office will be effective only after such change isconfirmed by the Regional Director on an application by the Company in the prescribedmanner.Such confirmation will be given by Regional Director within 30 days from date of receipt ofapplication for such change. After the confirmation, the company will file a certified copy ofthe confirmation within sixty days from date of confirmation with the Registrar under whosejurisdiction the registered office is being shifted. The Registrar will issue fresh registrationcertificate within 30 days of filing the documents. [Section 12(6)]

(iii) Change of registered office from one State/Union territory to another State/Unionterritory: The change of registered office can take effect only after the special resolutionpassed by shareholders for change in registered office is approved by Central Government.[Section 13(4)].Application for change of registered office shall be disposed of by Central Government within60 days [Section 13(5)].The Registrar will register the document and then only the alteration becomes effective[Section 13(10)]Shifting of registered office to another State shall not be allowed if any inquiry, inspection orinvestigation has been initiated against the company or any prosecution is pending against thecompany.Certified copy of Central Government approving the alteration of memorandum and transferof registered office form one State to another shall be filed in prescribed form with fees withROC within 30 days.

46 Corporate Laws

Before granting approval for change of registered office from one State to other, the CentralGovernment may satisfy itself that (a) the alteration has the consent of the creditors,debenture holders and other persons concerned with the company or (b) that the sufficientprovision has been made by the company either for the due discharge of all its debts andobligations or that adequate security has been provided for such discharge–[Section 13(5)].It may be noted that Loss of Revenue to State is not sufficient cause for refusal of permissionto shift the registered office.

3. Alteration of Objects ClauseThe following are the legal provisions regarding change of the Objects Clause:

(i) Change in object clause can be effected simply by passing a special resolution in generalmeeting of members [Section 13(1)].The special resolution should be filed with ROC within prescribed period from the date ofresolution [Section 13(6)]. The Registrar will register the document and then only thealteration becomes effective [Section 13(10)].

(ii) Voting by Postal ballot in specified cases – In case of company having more than 200members, the resolution is required to be passes through Postal Ballot – [Section 110(1) (a)].

(iii) Special provision in case of listed company – If the listed company has raised money frompublic through prospectus and has unutilized amount out of money so raised, object clauseshall not be changed unless:(a) advertisement is published in English and vernacular newspaper at place of registered

office and also on website of company giving justification for such change and(b) dissenting shareholders are given opportunity to exit in accordance with regulations

specified by SEBI [Section 13(8)](iv) Remedy available to an aggrieved person:

Aggrieved person can have the following remedies:(a) He can make an application oppression for NCLT (presently CLB)(b) He can file a Writ petition in appropriate cases, if it can be justified that amendment is

against public interest.

4. Liability ClauseOrdinarily it cannot be altered so as to make the liability of the members unlimited. However,

with the authority of the Articles of Association, a company may pass a special resolution alteringliability clause of the Memorandum of Association so as to make the liability of the directors or of anyone director or manager unlimited. But, in such a case any person holding office as director ormanager before such alterations shall not be liable until the expiry of his present terms or unless he hasaccorded his consent to his liability becoming unlimited (Sec. 323 of the old Act). Alterations, whichare likely to impose additional liability on a member or which are likely to compel a member to buyadditional shares of the company after the date on which he became a member, cannot be made exceptwith the consent of the member concerned in writing. There is no provision in the New Act, in lieu ofSection 323 discussed above.


5. Capital ClauseAlterations in the capital clause of the Memorandum of Association may be of the following type :

(a) Alteration proper (Sec. 61).(b) Reduction of capital (Sec. 66).(c) Variation of the rights of the shareholders (Sec. 48).(d) Creation of Reserve Capital (Sec. 65).

(a) Alteration Proper: There is said to be alteration proper :

(i) When the company increases its authorised share capital by such amount as it thinksexpedient.

(ii) When the company consolidates or sub-divides the existing shares into shares of larger orsmaller denominations;

(iii) When the company converts the fully paid shares into stock or vice versa; and(iv) When the company decides to cancel its unissued shares.

A company can make these alterations by passing an ordinary resolution if it is authorised by theArticles of Association to do so. It does not require sanction of the National Company Law Tribunal.Such alterations must be notified and a copy of the resolution filed with the Registrar within thirtydays of the date of the passing of the resolution.

(b) Reduction of Capital: Reduction of capital by forfeiture or surrender of shares, bycancellation of unissued capital or by redemption of redeemable preference shares needs no sanctionof the National Company Law Tribunal (NCLT). Subject to the authority of the articles of association,capital in these cases, may be reduced by a resolution of the Board of Directors. But reduction ofcapital by any of the following methods needs elaborate procedure along with the sanction of theTribunal.

(i) By writing off the lost capital.(ii) By refunding surplus of the paid up capital.

(iii) By reducing the liability of the members for the uncalled capital.(iv) By any other method approved by the company.

A company can reduce its share capital by any of the above mentioned methods when each of thefollowing conditions is fulfilled :

(i) The Articles of Association of the company authorises such reduction. Power to reducecapital contained only in the Memorandum of Association will not be sufficient.

(ii) The company passes a special resolution referred to “as a resolution for reducing sharecapital.”

(iii) The company also obtains confirmation of the resolution by the NCLT.The National Company Law Tribunal, before sanctioning such a reduction of capital, would look

to the protection of the interests of the creditors and minority group of the shareholders. Creditors canobject to the reduction of share capital when (a) it is likely to diminish the liability of shareholders topay the uncalled capital, or (b) where the proposed reduction is likely to involve refund of the paid up

48 Corporate Laws

share capital to the shareholders. Interests of all those who object to the reduction will either besecured or they shall be paid off.

Reduction of the capital will not be effective until a copy of the resolution and sanction of thecourt is filed and registered with the Registrar within 30 days of the receipt of copy of NCLT order.The certificate of the Registrar about the registration of the order will be conclusive evidence of thevalidity of the reduction, even though it is subsequently found that the special resolution was notproperly passed. The Tribunal may, at its discretion, order the words ‘and reduced’ to be added to thename of the company for the period it prescribes. The Tribunal may also require the company topublish the reasons for the reduction of capital for the information of the public.

The Tribunal may pass an order for the purchase of some of its shares by the company and for theconsequent reduction of its share capital on an application of a member for redress, complaining eitherof the mismanagement of the company or oppression of the interests of the minority members.

Reduction of Capital and Diminution of CapitalReduction of capital is different from diminution of capital as explained below :

(i) Meaning: Reduction of capital may be a reduction in nominal capital, subscribed capital orpaid up capital, whereas diminution denotes a cancellation of that portion of the issued capitalwhich has not been subscribed.

(ii) Authorization: Both require authorization by Articles but reduction of capital can be effectedonly by a special resolution whereas diminution can be effected by an ordinary resolution.

(iii) Tribunal Confirmation: Reduction of capital needs confirmation by the National CompanyLaw Tribunal (NCLT) whereas diminution needs no such confirmation.

(iv) Words “And Reduced”: In case of reduction, NCLT may order the company to add thewords ‘and reduced’ after its name but no such order can be passed in case of diminution.

(v) Notice to Registrar: In both cases notice is to be given to the Registrar within 30 days fromthe date of cancellation or reduction. However, in the case of reduction more detailedprocedure regarding notice to the Registrar has been prescribed.

(c) Variation of the rights of the shareholders: A company may issue shares of differentclasses with different rights attached to them.

The rights attached to the shares of any class may be varied with the consent in writing of theholders of not less than three-fourth of the issued shares of that class or with the sanction of a specialresolution passed at a separate meeting of the holders of issued shares of that class—

(a) if provision with respect to such variation is contained in the memorandum or articles of thecompany, or

(b) in the absence of any such provision in the memorandum or articles, if such variation is notprohibited by the terms of the issue of the shares of that class (Sec. 48).

Dissenting members, holding not less than 10% of the issued shares of the class affected, maywithin 21 days after the passing of the resolution or consent given, apply to the National CompanyLaw Tribunal for the cancellation of the variation. If such an application is made the variation willhave no effect until it is confirmed by the Tribunal. The Tribunal will not confirm such resolution if itwill unfairly prejudice the interests of that class of shareholders which has moved that application.


Company must file a copy of the order of the Tribunal with the Registrar within 30 days after ithas been served on it (Sec. 48).

(d) Creation of reserve liability/capital: Reserve capital is the portion of the company’suncalled capital, which the company provides by special resolution, to be called up only in the eventof and for the purpose of the company’s winding up (Sec. 99). It cannot, by any other specialresolution, be converted into ordinary capital or changed without the permission of the NationalCompany Law Tribunal. Reserve capital cannot be cancelled on the reduction of capital.

Accordingly, to Section 65 of the Companies Act, 2013, an unlimited company having a sharecapital may, by a resolution for registration as a limited company under this Act, do either or both ofthe following things, namely-

(a) increase the nominal amount of its share capital by increasing the nominal account of each ofits shares, subject to the condition that no part of the increased capital shall be capable ofbeing called up except in the event and for the purposes of the company being wound up;

(b) provide that a specified portion of its uncalled share capital shall not be capable of beingcalled up except in the event and for the purposes of the company being wound up.

2.5 DOCTRINE OF ULTRA-VIRESMemorandum of Association of a company defines and confines the powers of a company. Any

act done contrary or in excess to the scope of the activity of the company will be ultra-vires thecompany, i.e., beyond the legal powers and authority of the company, and shall be wholly void and notbinding on the company. Acts ultra-vires the company can neither be legalised nor ratified even withthe unanimous consent of all the members of the company. This doctrine tries to protect the interest ofthe investors and creditors.

Acts of a company may also be ultra-vires the Articles or ultra-vires the powers of the directors.Acts ultra-vires the Articles can be ratified and made binding upon the company by altering theArticles by a special resolution at a general meeting. Alteration of Articles with retrospective effect, ifto the benefit of the company, shall be valid. If an act is beyond the scope of the powers of thedirectors, i.e., ultra-vires the directors, it can be ratified by the general body of the shareholders.

The application of the Doctrine of Ultra-vires was explained in details by the House of Lords inAshbury Railway Carriage Co. Ltd. v. Riche. The Memorandum of Association of this companydefined its objects as “to make and sell, or lend on hire railway carriages and wagons and all kinds ofrailway plants etc...to carry on the business of mechanical engineers and general contractors...”. Thecompany entered into a contract with M/s. Riche, a firm of railway contractors, to finance theconstruction of a railway line in Belgium. On repudiation of his contract by the company on theground of its being ultra-vires, Riche brought an action for damages for breach of contract on theground that the words “general contractors” gave power to the company to enter into such a contractand, therefore, it was well within the powers of the company.

The House of Lords held the contract as ultra vires the company and, therefore, declared it nulland void. Lord Cairns, L.C. observed : “The term ‘general contractors’ must be taken to indicate themaking generally of such contracts as are connected, with the business of mechanical engineers. If theterm ‘general contractors’ is not so interpreted, it would authorise the making of contracts of any andevery description, such as for instance of fire and marine insurance and the memorandum in place of

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specifying the particular kind of business would virtually point to the carrying on the business of anykind whatsoever and would, therefore, be altogether unmeaning. Hence the contract was entirelybeyond the objects in the “memorandum of association.”

The doctrine was further confirmed in the case of Re. German Date Coffee Co.

The memorandum of this company stated that it was formed for working a German patent whichwould be granted for manufacturing coffee from dates; for obtaining other patents for improvementsand extensions of the said invention; and to acquire and purchase any other invention for similarpurposes. The company could not get the intended German patent but purchased a Swedish patent andstarted making and selling coffee from dates. On a petition by the two shareholders the court held thatit would be just and equitable to wind up the company since the main object for which the companywas established had become impossible.

However, the doctrine of ultra-vires should not be unreasonably understood and applied. It doesnot restrain a company from doing such things which are reasonably fair and incidental to its objectsor which it is authorised to do under the Companies Act.

Examples. (i) A, a chemical manufacturer, distributed £ 1,000,000 to universities and scientificinstitutions for furtherance of scientific education and research. It was held that distribution was intravires since it was conductive to the continued growth of the company as chemical manufacturers.

(ii) A company was authorised to keep boats for the purpose of a ferry. It used them for excursiontrips to the sea when they were otherwise unemployed. The act was held to be intra vires.

(iii) Payments to widows of ex-employees have been held to be intra vires since such paymentsencouraged persons to enter the employment of the company. Similarly, ex-gratia payments toworkers have also been held to be intra vires since they encourage the workers to work hard.

Effects of ultra-vi res transactions: Following will be the effects of ultra-vires transactions:

1. Injunction: Any member of the company can bring injunction against the company torestrain it from doing ultra-vires acts.

2. Personal liability of directors: The directors of the company are personally liable to makegood those funds of the company which have been used for ultra-vires purposes. Thedirectors in their turn can recover the money from persons who have received the paymentwith the knowledge that the payments to them were ultra-vires.

3. Contracts void: Any contract which is ultra vires the company will be void and of no effectwhatsoever. However, if the contract is only ultra-vires the powers of the directors but notultra-vires the company, it may ratify such a contract in the general meeting and thereby bebound by it. In case the company does not ratify the contract, the director can be heldpersonally liable by the third parties for breach of implied warranty of authority.

4. Indirect effects: The ultra-vires transactions may have certain indirect effects. They are asfollows:(i) Ultra-vires acquisition of assets: If a company acquires some property on account of an

ultra-vires transaction and uses the property to pay its own debts, the supplier of theproperty will, on account of principle of subrogation, step into the shoes of the creditorswhose claims have been paid off by the company and acquire their rights against thecompany.


(ii) Restitution and subrogation: If the property acquired by the company on account of anultra-vires transaction exists in specie or if it can be traced, the person handing it over canrecover it from the company.

(iii) Ultra-vires lending of money: If the money has been lent on behalf of the company, andthe lending is ultravires, the company can sue for the recovery of the money since “theonly objection to his loan is that it was made without authority. But the borrower cannotset up as a defence to an action that the person who lent him the money, and to whom hehad made a promise to repay that money, had no authority to lend him that money.”

5. Ultra-vires torts: In order to make the company liable for the torts of its employees, it willhave to be proved that:(i) the tort was committed in the course of an activity which falls within the purview of the

company’s memorandum, and(ii) the tort was committed by the employee in the course of his employment.

KEY TERMS Doctrine of Ultra-vires: A doctrine declaring that any act contrary or in excess of the scope

of the activity of the company will be null and void and not binding on the company. Memorandum of Association: A document confining and defining the scope of activities of

the company and framed in pursuance of the Companies Act.

TEST QUESTIONSObjective Type: Test Your Understanding

I. State whether each of the following statements is True or False1. Every company is required to have its own Memorandum of Association.2. Memorandum of Association contains the rules regarding internal management of the

company.3. Alteration in Memorandum always requires the consent of the court.4. A company can always have a name of its choice.5. Reserve capital cannot be converted into ordinary capital without the permission of the

NCLT.6. The change in registered office of the company from one state to another requires the

confirmation from court.7. The liability of members of the company is always limited.8. Memorandum of Association is the Charter of the company.

[Ans. 1. True, 2. False, 3. False, 4. False, 5. True, 6. False, 7. False, 8. True.]II. Select the most appropriate answer

1. Memorandum governs relationship of the company __________.(a) with the outside world(b) with the shareholders(c) with other companies

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2. Memorandum of Association contains __________.(a) the exact address of the registered office(b) the name of the state in which the company will have its registered office(c) the name of the country in which the company will have its registered office

3. Writing off lost capital is one of the ways in which the share capital can be __________.(a) altered(b) reduced(c) converted into reserve capital.

4. The association clause of a public company has to be signed by __________.(a) 10 persons(b) 12 persons(c) 7 persons

5. Alteration of objects clause of Memorandum of Association of a Company requires__________.(a) Special resolution(b) Approval of Registrar of Companies(c) Approval of Company Law Board(d) Special resolution and opportunity to exit to the dissenting shareholders

6. Change of registered office of a company from one city to another city in the same Statebut falling under the jurisdiction of two Registrars of Companies is required to beapproved by the __________.(a) Central Government(b) Registrar of Companies(c) Regional Director(d) Company Law Board

[Ans. 1. (a), 2. (b), 3. (b), 4. (c), 5. (d), 6. (c).]Essay Type: For Review, Discussion and Practice

1. “The Memorandum of Association is the charter of a company and defines the limitations onthe powers of the company.” Comment.

2. Discuss the Doctrine of Ultra-vires with reference to the Memorandum of Association of alimited company.

3. State the provisions of the Companies Act relating to alteration of ‘objects of clause’ of theMemorandum of Association.Is it essential for a company to get the approval of the Company Law Board for this purpose?

4. What is Memorandum of Association? Explain the law relating to alteration of objects clause.5. Write short note on ‘Reduction of Share Capital’.6. Describe the liability of a company and its agents for ultra-vires transactions.


7. Explain the importance of registered office of a company. State the legal requirements underthe Companies Act, 1956 for the transfer of registered office of a company from one State toanother.

8. Distinguish between ‘Reduction of Share Capital’ and ‘Diminution of Share Capital’.9. The Directors of “Sunrise Computers Ltd.” desire to change the Company’s name to “Royal

Computers Ltd.” and seek your advice. Explain the procedure to be followed for the saidpurpose, under the Companies Act, 1956.

10. XY Ltd. has its registered office at Mumbai in the State of Maharashtra. For betteradministrative conveniences the company wants to shift its registered office from Mumbai toPune (State of Maharashtra). What formalities the company has to comply with under theProvisions of the Companies Act, 1956 for shifting its registered office as stated above?Explain.

11. The Directors of Mars India Ltd. desire to alter capital clause of Memorandum of Associationof their company. Advise them, under the provisions of the Companies Act, 1956 about theways in which the said clause may be altered and procedure to be followed for the saidalteration.

12. Explain the doctrine of ‘Ultra-vires’. What are the legal effects of ultra-vires transactionsunder the Companies Act?

13. State the purposes for which the object clause of the Memorandum of Association of a PublicLimited Company, registered under the Companies Act, can be altered.

14. The registered office of India Software Limited is situated in Mumbai. The company desiresto shift the registered office to Pune. As the advisor of the company what steps would youadvise for shifting of the company’s registered office from Mumbai to Pune under theprovisions of the Companies Act?

15. Write a short note on “Doctrine of ultra-vires”.16. What are the steps necessary for alteration of object clauses of the Memorandum of

Association.17. Explain the objects clause of Memorandum of Association.18. Explain “Memorandum of Association”.19. “A Company can be registered with liability without the word ‘limited’ with its name.” State

with reasons whether the statement is correct or incorrect.20. What is the importance of registered office of a company? State the procedure for shifting the

registered office of a company one State to another State contained in the Companies Act.21. Discuss the provisions relating to alteration of name clause of a company.22. Discuss the statutory provisions regarding reduction of share capital.23. Explain the provisions of law and procedure relating to alteration of object clause stated in the

Memorandum of Association of a company under the Companies Act.

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PRACTICAL PROBLEMS1. A.B. Limited was registered with the Registrar of Companies, Calcutta on 15 January 2005.

The Registrar of Companies, Bombay also registered on 15th May 1995 a company with thesame name. On coming to know of this, the first registered company wants to prevent thecompany subsequently from continuing with the same name. Advise suitably.[Ans. The second registered company is advised to change its name. In case it does not do so,the first registered company may approach Central Government and the Central Governmentmay direct it to change its name.]

2. A telephone company did not have the powers to lay telephone lines in a particular area as perits memorandum. The company laid down the lines and a miscreant B cut them down. Can thecompany sue B for damages done to the wires?[Ans. The fact that the company cannot lay telephone lines will not prevent the company fromsuing from damages.]

3. The memorandum of association of a company formed to improve and encourage thebreeding of poultry contained a provision that no remuneration should be paid to the membersof the governing body of the company. But the company owing to increase in the businesspassed a special resolution providing for equitable remuneration to such members for theservices rendered. Can this alteration of the memorandum be confirmed. If so state why andby whom?[Ans. The NCLT can confirm this alteration. Facts similar to the case of Re. Scientific PoultryBreeder‘s Association Ltd. (1933).]

4. The plaintiff carried on business under the name of Buttercup Dairy Company Limited aswholesale provision merchant in Maharashtra and the defendant was incorporated with itsregistered office at Calcutta with the main object of manufacturing and selling margarineunder the name “Buttercup Magarine Co. Ltd.” after ascertaining that there was no similarname in the register of Companies kept by the Registrar. What relief, if any, can the formercompany get?[Ans. The second company can be asked to change its name u/ s 16 of the Companies Act.Under general law also the plaintiff can bring an injunction for preventing the secondcompany to use similar name.]

5. A public company has two classes of shares, namely, equity shares and 9% non-cumulativepreference shares. It wishes to change the rights regarding the preference shares to 7%cumulative preference shares. There is no provision in the Memorandum or Articles ofAssociation regarding such variation. Advise the company if the holders of 15% of preferenceshares are opposed to this.[Ans. In case the dissenting shareholders challenge the variation and apply to the NCL, thevariation proposed shall not be effective unless it is confirmed by the NCL.]

6. (a) The Board of directors of X Ltd. decides to change the place of its registered office fromthe state of Maharashtra to the State of Karnataka. Discuss the procedure prescribed under theCompanies Act referring to the statutory provisions and rules framed thereunder.(b) The State of Maharashtra, however, opposes the above petition for change, inter alia, onthe grounds that (i) it would affect adversely the general economy of the State; and (ii) there


are arrears of sales tax dues of over ` 5 lakhs from the company. Discuss the validity of thesegrounds referring to case law.[Ans. (b) The State of Maharashtra cannot oppose the change on the ground of adverse effectson the State economy. It cannot also object to the change on the ground of arrears of sales taxif the company can furnish bank guarantee and satisfy the demand. A similar decision wasgiven in the case of Minerva Mills Limited v. Government of Maharashtra [(1975) 45 Comp.Cas. 1 (Bom.)]

7. A company is authorised by the objects clause in its memorandum to run hotels only. Withoutany amendment of the objects clause, the directors want to buy some buses and a cinematheatre for the facility and entertainment of the occupants of the hotel. Some shareholdersvehemently object to the company going into other business. Advise the company.[Ans. The dissenting shareholders will have to be given the option to exit as per theRegulations Specified by SEBI]

8. A registered company, Safe Products Limited, has its registered office at Delhi. Due to somereasons favourable to the company, it wishes to change its domicile clause and to have itsregistered office at Rangoon. Can the company’s this wish be carried out?[Ans. Special resolution of members and approval of Central Government required.)

9. M/s India Computers Ltd. was registered as a Public Company on 1st July 2005 in the State ofMaharashtra. Another company by name M/ s All India Computers Ltd. was registered inDelhi on 15 July 2005. The promoters of India Computers Ltd. Have failed to persuade themanagement of All India Computers Ltd. to change the company’s name, as it closelyresembles with the name of the first registered company.Advise the Management of India Computers Ltd. about the remedies available to them underthe provisions of the Companies Act.[Ans. The promoters of India Computer Ltd. can approach the Central Government underSection 16 of the Companies Act, 1956 for rectification of the name of the companyregistered subsequently. The Central Government can direct the second registered companyfor correction.]

10. The principal business of XYZ Company Ltd. was the acquisition of vacant plots of land andto erect the houses. In the course of transacting the business, the Chairman of the Companyacquired the knowledge of arranging finance for the development of land. The XYZ companyintroduced a financier to another company ABC Ltd. and received an agreed fee of ` 2 lakhsfor arranging the finance. The Memorandum of Association of the company authorizes thecompany to carry on any other trade or business, which can in the opinion of the board ofdirectors, be advantageously carried on by the company in connection with the company’sgeneral business. Referring to the provisions of the Companies Act, examine the validity ofthe contract carried out by XYZ Company Ltd. with ABC Ltd.[Ans. Since the directors honestly believed that the transaction could be advantageouslycarried on an for furtherance of the company’s main objects, therefore, it was not ultra-vires.]

11. The objects clause of the Memorandum of Association of LSR Private Ltd., Lucknowauthorized to do trading in fruits and vegetables. The company, however, entered into aPartnership with Mr. J and traded in steel and incurred liabilities to Mr. J. The company,

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subsequently refused to admit the liability to J on the ground that the deal was ‘Ultra-vires’the company. Examine the validity of the company’s refusal to admit the liability to J. Givereasons in support of your answer.[Ans. Mr. J cannot enforce the agreement or liability against M/s LSR Pvt. Ltd. and should beadvised accordingly.]

12. Decide, under the Companies Act, whether Mr. Prabhu can incorporate a new company a newcompany using the phrase “Electoral Trust” with the name of the company.[Ans. Mr. Prabhu can incorporate a new company using the phrase “Electoral Trust” with thename of the company by complying with the provisions of the Circular No. 12/2013 dated28.6.2013 issued by Ministry of Corporate Affairs.]