corporate personality
A Corporation is a fake individual appreciating in law jobs to have commitments and holding property.
The people shaping the corpus of the organization are called its individuals. The juristic character of
organizations pre-assumes the presence of the following conditions:

There should be a gathering or assemblage of individuals related for a specific reason.

There should be organs through which the company capacities,

The organizations are ascribed will (enmity) by lawful fiction.

The privileges of organizations are unimaginable, similar to the right of holding property or arranging it
off, right of sue, right of going into contracts and so on. They are likewise responsible for their
demonstrations and demonstrations of specialists acted in their name. In the milestone instance of The
Citizen’s Life Assurance Company v. Brown (1904)AC426 the Privy Council has decided that corporations
may likewise be expected to take responsibility for their demonstrations suggesting malignant aim. Along
these lines, it is expressed that ‘artificial’, ‘conventional’ or ‘ juristic’ people, are such masses of property
or gatherings of individuals that according to the law are fit for rights and liabilities, that is, to which the
law gives recognition.

Comprehensively Corporate Personality is of two sorts –

1. Corporation Aggregate

2. Corporation Sole

1. Corporation Aggregate
There are a number of individuals where we make a section outside individuals which means making a
group as a solitary unit. In basic words, company total is a gathering or relationship of individuals joined
for specific interests. It was at first made by the Royal Charter in England later it was enrolled under the
organizations’ act.

The organization is fundamentally made by advertisers. Production of the organization incorporates

different exercises like enrollment of organizations, arrangement of the directorate, making an outline
and so forth. At long last when the entire system of enlistment is finished then the organization is
treated as a legitimate character.

Such an organization is framed by various people who as investors of the organization contribute or
guarantee to add to the capital of the organization for the assistance of normal target. The property of
the organization is treated as unmistakable from its individuals if there should be an occurrence of death
and bankruptcy of individuals if it doesn’t influence the organization, it might keep on prospering the
business. The organization has separate legitimate substance and restricted obligation.

On account of Salmon v. Salmon that a corporate body has its own reality or character independent and
unmistakable from its individuals and thus an investor can’t be expected to take responsibility for the
demonstrations of the organization despite the fact that he holds the whole offer capital.

On account of Tata Engineering and Locomotive Company Ltd. V. Province of Bihar the Court noticed the
organization in law is equivalent to a characteristic individual and has its very own legitimate element’.
The substance of the enterprise is totally isolated from that of its investors and its resources are discrete
from those of its investors.

Utility of Corporation Aggregate

The different purposes which counterfeit enterprise total might advance and protect may momentarily
be expressed as follows-

Help and aid the administration of the country through Municipal partnerships, Local Bodies,
Panchayats, Welfare Organizations. and so forth

Promote demonstrable skills through foundations, schools giving specialized, logical, designing, clinical
law, and other particular courses.

Preserve and advance strict amicability by comprising strict trusts, sheets, learning focuses, altruistic
homes, etc.

Advancement of logical and imaginative fever through suitable trusts, associations, establishments, and
so on

General public help, through Medical clinics, Trusts, halfway houses, salvage homes, etc.

Promote exchange, trade, and enterprises through Corporate houses, Public area utility foundations,
Private business houses, etc.

2. Corporation sole
An organization sole is a legitimate substance consisting of a single sole in a corporate office, involved by
a single (sole) regular individual. The most remarkable illustration of partnership sole is the crown (in
England) It basically implies that there is a solitary individual who is represented and viewed by law as a
legitimate individual.

Single individual in his legitimate limit has a few rights and obligations while holding the workplace or
capacity. The fundamental point of organization sole is to guarantee the coherence of an office so the
inhabitant can gain property to serve his replacements or he might agree to tie or help them and can sue
for wounds to the property while it was in the possession of his archetype.
Holders of public office are referred to by law as enterprises. The principal trademark is its consistent
element supplied with a limit with respect to perpetual length.

Model
In India, different workplaces like the Prime Minister Office, Governor of Reserve bank of India, The State
Bank of India, The Post Master General, the General Manager of the rail line, the Registrar of Supreme
Court, Comptroller and Auditor-General of India and so forth are made under various sculptures are the
instances of enterprise sole.

Case: Govid Menon v. Association of India

The Supreme Court called attention to the fundamental attribute of company sole. The court noticed the
partnership sole isn’t invested with a different lawful character. It is made out of one individual who is
joined by law. a similar individual has a double person one is normal and the other is corporate sole.
“There are restricted qualities of organization sole” this view was perceived for the situation Power v.
Bank.

Theories of Corporate Personality

Different Jurists gave various perspectives and conclusions with respect to the idea of corporate
character. Changes have happened in the perspectives occasionally. However, there are various
hypotheses to clarify the idea of a corporate character yet none of them is supposed to be prevailing.
Comprehensively we have talked about five speculations of corporate character.

Fiction Theory
The law specialists who gave this hypothesis were Savigny, Salmond, Holland they expressed a
partnership with an imaginary characters. Company is treated as not quite the same as its individuals
The imaginary character is quality to the need for shaping an individual association existing without
anyone else and overseeing for its recipients ‘The persona ficta’- Savigny gave the term juridical
individual.

Partnership as an elite making of law having no presence separated from its individual individuals who
structure the corporate gathering and whose acts by fiction, are credited to the corporate substance. The
Fiction hypothesis along these lines expresses that fuse is an invented expansion of character depending
on the motivation behind working with managing property claimed by a huge assortment of individuals.(
regular) this hypothesis neglects to answer the acceptably the obligation of the corporation.
Realistic Theory
The hypothesis was given by Johannes Althusious, Gierke in German and Maitland in England. As per this
hypothesis, it declines the fiction hypothesis. The practical hypothesis keeps up with that an organization
has a genuine clairvoyant character perceived and not made by the law. There is a genuine part in the
partnership. The desire of many is not quite the same as the desire of a person. A company subsequently
has genuine presence, regardless of the reality if it is perceived by the state.

The significant contrast between the fiction hypothesis and the pragmatist hypothesis lies in the way
that the previous rejects that the corporate character has any presence past what the state decides to
give it, the last hold that a company is a portrayal of actual real factors which the law perceives. On
account of dalme co. restricted v. mainland tire the choice was made on the practical hypothesis where
there was the upliftment of corporate cover.

Bracket Theory
The section hypothesis was given by Ihering. The section hypothesis of the character of the enterprise
keeps up with the individuals from the organization itself essentially according to the perspective
comfort. The genuine idea of enterprise and its individuals are kept in section.

According to this hypothesis, juristic character is just an image to work with the working of the corporate
bodies. Just the individuals from the company are people in a genuine sense and a section is put around
them to show that they were treated as one single unit when they structure themselves into a
partnership.

Concession Theory
Given by Savigny, Salmond and sketchy the concession hypothesis of the character of the partnership
which is a family to fiction hypothesis not indistinguishable says that lawful character can adhere to from
law alone. It is by elegance or concession alone that the legitimate character is in all actuality, made or
perceived.

According to this hypothesis, the juristic character is a concession allowed to an organization by the
state. It is completely at the prudence of the state to perceive if it is a juristic individual. This hypothesis
is not quite the same as the fiction hypothesis in however much it underlines the optional force of the
state in the issue of perceiving the corporate character of the partnership. A few pundits consider this
hypothesis perilous in view of its over-accentuation on State caution in the issue of perceiving
organizations that are non-living elements. This choice might prompt discretionary caution.

Purpose Theory
The principle ramifications of this hypothesis are that law ensures certain reasons and expected to be
possessed by juristic people doesn’t have a place with everything except it has a place for a reason and
that is the fundamental reality about it. All juristic or fake individuals are only legitimate gadgets for
securing or offering impact to some genuine reason.

The beginning of this hypothesis has been brought back from German law for example ‘establishments’
which were treated as juristic people. An establishment is analogous to trust for explicit beneficent
reasons like engendering of schooling, grants and so forth In the milestone instance of M.C Mehta v.
Association of India set out the boundaries as to corporate risk of perilous ventures and brought the
private area inside the ambit of Article 12 of the Constitution, emphasizing the need to develop new
procedure for corporate responsibility of public and private endeavours for heartbreaking gas spillages
or ecological corruption causing wellbeing dangers and immense harm to the property.

There was an earnest requirement for the foundation of Environmental Courts (for example Green
Tribunals) with proficient specialists from Lego-climate cum biology area and severe activity was justified
against the failing corporate bodies, what’s more, businesses for abusing the natural laws.

Conclusion
In this article, we have attempted to cover the significance of Corporate Personality and its inclination.
Fundamentally there are two sorts of companies for example Corporation Aggregate and Corporation
Sole. Corporation Aggregate it’s a relationship of numerous people or gatherings. It very well might be
undetectable, godlike and it might rest just in intention and think of law.

It has no spirit nor is it dependent upon the stupidities of the body. The demise or indebtedness of
individuals doesn’t influence the organization. Corporation Sole is a fused series of progressive people.
The point of corporate total and enterprise sole is the same. In enterprise sole a solitary individual
holding a public office, in this way that with singular passing his property and right doesn’t quench yet
they are vested in the individual who succeeds him.

Many Jurists have communicated clashing perspectives in regards to the specific idea of corporate
character. The perspectives discover articulation through various hypotheses of corporate character
which they have changed every now and then. However there are a few speculations of corporate
character, yet none of them can be supposed to be prevailing.
In this article, we have talked about momentarily five hypotheses of corporate character specifically
Fiction hypothesis, Realist Theory, Bracket hypothesis, Concession hypothesis, Purpose hypothesis. The
speculation of legitimate character is neither completely fictitious nor entirely genuine; it is somewhat
fictitious and genuine.

Kinds of Company
According to Sec. 2 (20) of The Companies Act, 2013, a “company” means a company incorporated under
The Companies Act, 2013 or under any previous company law. The Indian Companies Act, 2013 has
replaced the Indian Companies Act, 1956. The Companies Act, 2013 makes the provisions to govern all
listed and unlisted companies in the country. The Companies Act 2013 implemented many new sections
and repealed the relevant corresponding sections of the Companies Act 1956. This is a landmark
legislation with far-reaching consequences on all companies incorporated in India.

It is needless to say that we have a multitude of companies of various kinds. From corporate companies
to one person company, we have so many kinds of companies. Mainly these companies can be classified
on the basis of size of the company, number of members, control, liability and manner of access to
capital. This article shall be talking in-depth about all such, and various other kinds of companies too.

Classification of companies:

On the basis of size or number of members in a

company:

Private Company:
According to section 2(68) of the Companies Act, 2013 (as amended in 2015), “private company” is
essentially defined as a company having a minimum paid-up share capital as may be prescribed, and
which by its articles, restricts the right to transfer its shares. A private company must add the word
“Private” in its name. It can have a maximum of 200 members.
Public Company
Section 2(71) of the Companies Act, 2013 (as amended in 2015), defines a “public company”. A public
company must have a minimum of seven members and there is no restriction on the maximum number
of members. A public company having limited liability must add the word “Limited” at the end of name.
The shares of a public company are freely transferable.

One Person Company:

The Companies Act, 2013 also provides for a new type of business entity in the form of a company in
which only one person makes the entire company. It is like a one man- army. Under section 2(62), One
Person Company (OPC) means a company which has only one person as a member.

On the basis of control, we find the following two

main types of companies:

Holding Company:
Such type of company directly or indirectly, via another company, either holds more than half of the
equity share capital of another company or controls the composition of the Board of Directors of
another company.

A company can become the holding company of another company in any of the following ways:

1. by holding more than 50% of the issued equity capital of the company,
2. by holding more than 50% of the voting rights in the company,
3. by holding the right to appoint the majority of the directors of the company.

Subsidiary Company:
A company, which operates its business under the control of another (holding) company, is known as a
subsidiary company. Examples are Tata Capital, a wholly-owned subsidiary of Tata Sons Limited.
On the Basis of Ownership, companies can be
divided into two categories:

Government Company:
“Government company”under Section 2(45) of the Companies Act, 2013 is essentially defined as, that
company in which equal to or more than 51% of the paid-up share capital is held by the Central
Government, or by any State Government or Governments (more than one state’s government), or
partly by the Central Government and partly by one or more State Governments, and includes the
company, which is a subsidiary company of such a Government company.

A government company gives its annual reports which have to be tabled in both houses of the
Parliament and state legislature, as per the nature of ownership.

Some examples of government company are National Thermal Power Corporation Limited (NTPC),
Bharat Heavy Electricals Limited (BHEL), etc.

Non-Government Company:
All other companies, except the Government Companies, are known as Non-Government Companies.
They do not possess the features of a government company as stated above.

The Doctrine of Ultra Vires

Background: MoA of any company is the basic charter of that company. It is a binding document that
narrates about the scope of that company, about which it’s written.

Ultra vires in literal sense is a Latin phrase, which means “beyond the powers”. In the legal sense, the
“Doctrine of Ultra Vires” is a fundamental rule of the Company Law. It states that the affairs of a
company has to be in accordance with the clauses mentioned in the Memorandum of Association and
can’t contravene its provisions.

Therefore, any act or contract is said to be void and illegal if the company is doing the act, attempts to
function beyond its powers, as prescribed by its MoA. So, it can be stated that for any contract or any act
to not fall under this criteria, has to work under the MoA.
It is noteworthy that a company can’t be bound by means of an ultra vires contract.

Estoppel, acquiescence, lapse of time, delay, or ratification cannot make it ‘Intra Vires’ (an act done
under proper authority, is intra vires).

An act being ultra vires the directors of a company, but intra vires the company itself, can be done if
members of the company, pass a resolution to ratify it. Also, an act being ultra vires the AoA of a
company, can be ratified by a special resolution at a general meeting.

The Disadvantage to this doctrine

This doctrine stops the company from changing its activities in a direction agreed by all members, which
if done would be profitable to the company. This is because clauses of the MoA don’t allow the company
to go in that direction.

If any Act done by the directors, on behalf of the company, contravenes the clauses of MoA, the MoA
can be amended, by virtue of passing a resolution, pursuant to which the aforesaid Act will become intra
vires, vis-a-vis MoA. This defeats the whole purpose of having such a Doctrine, as then any act can be
done, no matter what, since the clauses of the MoA can be amended anytime in order to make any
action legal.

Advantages of private company

 A private limited company enjoys the following advantages:

Ease of formation:
A private company can be formed merely by two persons. It can start its business just after incorporation
and doesn’t have to wait for the certificate of commencement of business.
Greater flexibility:
There are comparatively lesser legal formalities which are to be performed by a private company as
compared to the public company. It also enjoys special exemptions and privileges under the company
law. Thus it can be concluded that there is a greater flexibility of operations in a private company.

Quick decisions:
In a private company, lesser number of people are to be consulted. The core
people of the company who are to make decisions have a closer relationship (so
to say) and thus a better mutual understanding hence, obtaining consent is
usually not a problem therefore it makes the process of making decisions faster.

Secrecy:
A private company is not required to publish its accounts or file several docu-
ments. Therefore, it is in a much better position than a public company when it
comes to the maintenance of business secrets.

Continuity of policy:
Same core people (having close relations) continue to manage the affairs of a
private company. Due to their close relations, the continuity of policy can be
maintained, as there is a mutual trust and a low dispute- attitude.

Personal touch:
There is comparatively, a greater personal touch with employees and customers in a private company.
There is also a comparatively greater incentive to work hard and for taking initiative in the management
of business.

When private limited company becomes a

public limited company
The private limited company is usually preferred by businessmen because of all the special privileges it
enjoys. In private limited company, the capital is derived from close friends, relatives and known persons
and not from the public. Therefore, the Companies Act, 1956 does not impose stringent rules and
regulations on private limited companies when compared to Public limited companies. However, in
certain circumstances, a private limited would become a public company.

They are:

1. Conversion by default
2. Conversion by operation of law
3. Conversion by choice or by option

Conversion by default
A private company:

1. Restricts the right to transfer shares,

2. Limits the maximum number of members to 50,
3. Prohibits inviting the public for subscription of shares or debentures.

Upon the violation of any of these terms, a private company would become a public Company by default.

Conversion by operation of law: Deemed Public

Company
A private company is converted into a public company (by the operation of
law):

When equal to or more than 25% of the paid-up share capital of a private
company is held by one or more public companies,

When the average of total turnover of a private company is more than or equal
to Rs.25 crores for three consecutive years,

When the private company holds more than 25% of the paid-up share capital of
a public company.

When the private company invites, accepts or renews the deposits from the
public.
Conversion by Choice or Option
If desired, then out of its own free will, a private company, can get itself
converted into a public company. Generally, when private companies want to
expand and therefore require more capital resources, the private companies  by
themselves can convert themselves into public companies.

By becoming public companies, they (the private companies) can issue shares

or debentures to the public and hence can get the amount of capital required.
In India, many organizations which have commenced their operations as private
companies, got themselves converted into public limited companies in order to
expand and diversify.

Any private company which desires to get converted into a public company has
to make the necessary changes in its  Articles and follow the below mentioned
steps:

1. It should call for a general meeting and therein pass a special

resolution by following proper protocols, hence alter the Articles.
2. The copy of the resolution along with amended Articles is to be then
filed with the registrar within 30 days of passing the special resolution.
3. The number of members should be increased to 7.
4. The company has to apply to the registrar, in order to obtain a fresh
certificate of incorporation wherein the word ‘Private’ is deleted from
its name.

Conversion of public into a private company

Certain pre-requisites for filing an application for

conversion from Public to Private Company :

Limit of Shareholders:
Although no limit for maximum strength of Shareholders in a Public Limited
Company is there, however, post-conversion into Private Limited Company, it
becomes mandatory to ensure that the maximum strength doesn’t cross the
threshold of 200 shareholders.

Non-invitation of funds from Public:

Post conversion, no funds/capital should be raised from the  general public,
either through the issuance of prospectus or any other means.

Non- listing of Company:

Prior to conversion, it must be assured that the company was never listed on
Stock Exchange and if it all it was listed, all necessary procedures were
complied for delisting of the shares in accordance with the applicable e- laws, as
prescribed by the Securities Exchange Board of India (“SEBI”).

Procedure for conversion of public limited

company to private limited company:

Steps for Conversion

Step 1
The first step is to hold a meeting of the Board of Directors (“BOD”) of the
Company for the following purposes:

 For considering the reason of conversion and suitable alterations in the

Memorandum of Association (“MOA”) and Articles of Associations
(“AOA”) of the Company reflecting the changes arising due to
conversion;
 To provide authorization for filing the necessary application for
conversion with the adjudicating authority.
Step 2
Next step essentially is to hold a General Meeting of Shareholders of the
Company for obtaining their consent to the said conversion and the necessary
alterations in the MOA and AOA, by means of passing a special resolution.

Step 3
To fill the  prescribed e-form with Registrar of Companies (“ROC”) within 30
days of the passing of the aforesaid special resolution.

Step 4
To file an application for conversion to the adjudicating authority within 60 days
from the date of passing special resolution in the General Meeting of
Shareholders. However, before proceeding with filing of the application, the
company must at least 21 days before the date of filing application with RD,
advertise notice of conversion both English and other regional newspaper widely
circulating in the state wherein the Registered office of the Company is situated.

Step 5
The Company must serve individual notice of conversion to each of its Creditors
by registered post. Further, the Company must also serve individual notice of
the conversion to both; the RD and ROC or any other authority which regulates
the Company by registered post.

Step 6
Post the necessary publications and serving of notice of conversion, the
company shall within 60 days file the Application for conversion with Regional
Directorate (“RD”) in the prescribed e- form, from the date of passing special
resolution along with the following documents:

1. The Draft copy of altered MoA and AoA of the Company and copy of the
Minutes of General Meeting of Shareholders wherein the said
conversion was approved by the Shareholders;
2. Copy of board resolution giving the authorization to file such an
application with RD;
 3. Prescribed declarations from Directors/KMP (key management
personnel) of the Company with respect to restriction of total number
of members to 200, non-acceptance of deposits in violation of the law
and various other matters as elucidated under the relevant section of
the Act;
4. list of creditors drawn not older than 30 days from the date of filing
Application supported by an Affidavit which duly verifies the said list.

Step 7

In case no objections are received, then the RD shall pass an order duly
approving the application within 30 days from the date when the application
was received.

Step 8
On the receipt of order, the same is to be filed with the ROC in the prescribed e-
form within 15 days from the date of order. ROC will then close the former
registration and issue a fresh certificate of incorporation, thereby evidencing the
conversion from Public Limited Company to Private Limited Company.

Step 9
The Company has to now apply for conversion in the database of all tax
authorities i.e. PAN/TAN, and all other registrations. The company has to ensure
that the letterheads, invoices, name plate, and/or any other correspondences
are amended/altered and undertake the necessary updation of bank records.

Foreign companies
A foreign company, as per The Companies Act, 2013 means a company or a
corporate body which is incorporated outside India which either has a place of
business in India whether by itself or through an agent, either physically or
through an electronic mode and conduct any business activity in India in any
other manner.”
Accounts of foreign company
Section 381 of The Companies Act, 2013 states the rules or instructions about
how a foreign company’s accounts are to be handled. It states that:

1. Every foreign company must, in every calendar year;

(a) make a balance sheet and profit and loss account in such a form which
contains all such particulars and includes or has annexed or attached thereto
such documents as may be prescribed,

(b) must deliver a copy of those documents to the Registrar, provided that the
Central Government may, by notification, direct that, in case of any foreign
company or class of foreign companies, the requirements of above- pointer “a”
wouldn’t apply, or would apply subject to such exceptions and modifications as
may be specified in that notification.

2. If any document as is mentioned in Section 381(1) of The Companies

Act, 2013 is not in the English language, there shall be annexed to it, a
certified translation thereof in the English language.
3. Every foreign company shall send to the Registrar along with the
documents required to be delivered to him under sub-section (1), a
copy of a list in the prescribed form of all places of business
established by the company in India as at the date w.r.t. reference to
which the balance sheet referred to in sub-section (1) is made out.

 Prospectus of company
Types of Prospectus under the Companies Act, 2013
There are mainly four types of a prospectus, as discussed in The Companies
Act, 2013, which are as under:

1. Abridged Prospectus: Mentioned in Section 2(1) of the Act,

2. Deemed Prospectus: Mentioned in Section 25(1) of the Act,
3. Shelf Prospectus: Mentioned in Section 31 of the Act
4. Red Herring Prospectus: Mentioned in Section 32 of the Act.
Matters which must be stated in a prospectus
 We find the matters which must be stated in a company’s prospectus,
under the Companies Act, 2013, under which;
 Every prospectus which is issued by or on behalf of a company must be
dated and that date would, unless the contrary is proved, be regarded
as the date of its publication.
 It shall state such information and set out such reports on financial
information as may be specified by the Securities and Exchange Board
of India in consultation with the Central Government.
 Every director or proposed director his agent must sign a copy of the
prospectus and that copy of prospectus must be delivered to the
registrar on or before the date of publication.
 It is important that every prospectus that is issued to the public should
mention that a copy of the prospectus along with the specified
documents have been filed with the registrar.
 If the prospectus has a statement which is made by an expert, then
that expert must not be engaged, interested in the formation or
promotion or in the management of the company. A written consent of
the expert should also be obtained before issuing the prospectus with
the statement.
 It is important to note that a prospectus must not be issued more than
90 days after the date on which a copy of that prospectus is delivered
for registration. If a prospectus is issued it will be deemed to be a
prospectus whose copy has not been delivered to the registrar.
 A prospectus should make a declaration pertaining to the compliance of
the provisions of the Act. The declaration should also state that nothing
contained in the prospectus is in contravention of the provisions of the
Companies Act, Securities Contracts (Regulation) Act, 1956 and
Securities Exchange Board of India Act, 1992.
 A company can vary the terms of a contract, which are referred to in
the prospectus or objects for which the prospectus was issued,
provided the approval of an authority which is given by the company in
general meeting by way of special resolution is obtained.

Offer of Indian Depository Receipts

(Section- 390):
The Central government makes the rules for: 
 1. The offer of the Indian Depository Receipt;
2. The requirement of disclosure in prospectus or letter of offer issued in
connection with Indian Depository Receipt;
3. The manner in which Indian Depository Receipt shall be dealt with in a
depository mode and by custodian and underwriters; and
4. The manner of sale, transfer or transmission of Indian Depository
Receipts,
by a company either incorporated, or which is to be incorporated outside India,
whether the company has or has not been established or, will or will not
establish any place of business in India.

Government Companies
A “Government company” is defined under Section 2(45) of the Companies Act,
2013 as “any company in which not less than 51% of the paid-up share capital
is held by the Central Government, or any State Government or Governments,
or partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary company of such a
Government company”.

Government Company is that company or an organization in which at least 51%

of the paid-up share capital is held by the central or state government or partly
by both central and state government. Examples for government companies are
Steel Authority of India Limited, Bharat Heavy Electricals Limited, etc.

Features of a Government Company

There are several features of a government company which are helpful in
increasing the potential and efficiency of the company to a great extent.

Separate legal entity

Perhaps one of the most important features of a government company is that a
government company is a separate legal entity, which helps a government
company in dealing with many legal aspects. One main legal aspect is the non-
dependence on any other body, in legal terms as it is a separate entity in itself,
this makes the system more fluent and better efficient.
Incorporation under The Companies Act 1956 & 2013
A government company is incorporated under “The Companies Act, 1956 &
2013”. This gives government company boundaries to work under and hence it
profits the end-users of the services, as there are lesser chances of fraud or
improper working. Also, the employees get better working conditions and are
not exploited, as they have Law as their back- up, to protect them.

Management as per provisions of The Companies Act

Management, in a government company, is governed and regulated by the
provisions of The Companies Act. This makes sure that employees are not
exploited and overburdened. This further ensures the smooth functioning of the
company.

Appointment of employees
The appointment of employees is governed by MoA and AoA (Memorandum of
Association and Articles of Association). This ensures a fair appointment on the
basis of meritocracy and people don’t misuse their contacts and enter
government company.

Fund Raising
A government company gets its funding from the government and other private
shareholdings. The company can also raise money from the capital market.
Hence, a government company has several fund raising mechanisms, which
helps it to be financially less burdened as finances in a government company
can be raised with a lot of ways.

Limitations of a Government Company

 Government company usually has to face a lot of government
interference and has the involvement of too many government officials.
Hence, it has to go through lots of checks in order to make a stable
decision. Governmental decisions are usually late as they follow an
elaborate procedure before actual implementation.
  These companies evade all constitutional responsibilities of not
answering to the parliament because these companies are financed by
the government.
 The efficient operations of these companies are hampered, as the
board of such companies comprises mainly of politicians and civil
servants, who have special emphasis and interest in pleasing their
political party’s co-workers or owners and are less concentrated on
growth and development of the company. They (politicians and civil
servants) essentially are focussed on their promotions which
essentially is in the hands of their seniors, hence they keep on pleasing
their seniors. In order to please their seniors, they usually make wrong
decisions too.

Holding company and subsidiary company

Section 2 (46) of The Companies Act, 2013 defines holding company as,
“Holding company, in relation to one or more other companies, means a
company of which such companies are subsidiary companies”.

According to Section 2 (87) of The Companies Act, 2013;

“Subsidiary company or subsidiary in with respect to any other company (that is

to say the holding company), means a company in which, either the holding
company controls the composition of the Board of Directors or
exercises/controls more than half of the total share capital either on its own or
together with one or more than one of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed

shall not have layers of subsidiaries beyond such numbers as may be
prescribed.

Further Explanation

 The composition of a company‘s Board of Directors would be deemed

to be controlled by another company if that other company by the
exercise of some power exercisable by it at its discretion can appoint or
remove all or a majority of the directors;
 The expression “company” includes any body corporate;
 ”Layer” in relation to a holding company means its subsidiary or
subsidiaries”
What Is a Subsidiary company ?
A subsidiary company is that company which is both owned and controlled by
another company. The owning company is called a parent company or a holding
company.

The parent of a subsidiary company may be the sole owner or one of several
owners, of the company. If a parent company or holding company owns the full
other company, that company is called a “wholly-owned subsidiary.”

There is a difference between a parent company and a holding company, in

terms of operations. A holding company has no operations of its own and it
owns a controlling share of stock and holds assets of subsidiary companies.

A parent company is simply a company that runs a business and owns another
business — the subsidiary. The parent company has its own operations , and
the subsidiary may carry on a related business. For example, the subsidiary
might own and manage property assets of the parent company, to separate the
liability from those assets. 

Holding company and subsidiary has certain

common grounds on which they share
relationship, such as;

Consolidated Balance Sheet

It is the accounting relationship between the holding company and the
subsidiary company, which shows the combined assets and liabilities of both
companies. The consolidated balance sheet shows the financial status of the
entire business enterprise, which includes the parent company and all of its
subsidiaries.

Management and Control

The autonomy of a subsidiary company may seem to be merely theoretical.
Besides the majority stockholding, the holding company also controls important
business operations of a subsidiary. For example, the holding company takes
the charge of preparing the by-laws which governs the subsidiary, especially for
matters pertaining to hiring and appointing the senior management employees.

Responsibility
The subsidiary and holding companies are two separate legal entities; any of
them may be sued by other companies or any of these companies may sue
others. However, the parent company has the responsibility of acting in the best
interest of the subsidiary by making the most favourable decisions which affect
the management and finances of the subsidiary company. The holding company
may be found guilty in a court, for breach of fiduciary duty, if it does not fulfil
its responsibilities. The holding company and the subsidiary company are
perceived to be one and the same if the holding company fails to fulfil its
fiduciary duties to the subsidiary company.

Investment in holding company

A subsidiary company can’t hold shares in its holding company. Any company
can, neither by itself nor through its nominees, hold any shares in its holding
company and no holding company shall allot or transfer its shares to any of its
subsidiary companies and any such allotment or transfer of shares of a holding
company to its subsidiary company would be void:

Provided that nothing in this subsection shall apply to a case;

(a) where the subsidiary company holds such shares as the legal representative
of a deceased member of the holding company; or

(b) where the subsidiary company holds such shares as a trustee; or

(c) where the subsidiary company is a shareholder even before it became a

subsidiary company of the holding company:

Illegal associations
Illegal associations are taken care of by section 464 of The Companies Act,
2013. This section states that no company, association or partnership consisting
of more than 50 people be formed in order to carry on any business for gain
unless it is registered under The Indian Companies Act. It may also be
registered under some other Indian law too. For example, a limited liability
partnership, which is formed for carrying on business for gain by professionals,
registered under the Limited Liability Partnership Act, 2008 is a legal body
corporate. There is no limit to the maximum number of members in such a
limited liability partnership. The objective of such associations must be to carry
on a business for gain. Section 464 doesn’t apply to Non- Profit- Organizations
or Charitable Associations because the objective is not earning profit.

Rules for counting the number of people

 A person, either natural or artificial (an artificial person is an entity
created by law and given certain legal rights and duties of a human
being. It can be real or imaginary and for the purpose of legal
reasoning, is treated more or less as a human being. For example,
corporation, company, etc.), would be treated as one person.
Therefore, a company is treated as a single person.
 Similarly, a joint Hindu Family managed by Karta is also treated as a
single person.
 If two or more joint hindu families form an association, all the adult
members of the family would be taken into consideration while
counting the number of members.
 It is also important to note that any partnership firm is not a separate
legal entity. All the partners would be treated as different persons.
 If two or more persons hold a share jointly, they would be treated as
one single person.

Consequences of an Illegal Association;

No Legal Existence:
Any Illegal association cannot enter into binding contracts. Neither the
association nor the members can file a suit against a third-party who has
contracted with it. One member cannot sue other member in respect of any
matter connected with the association. Further, a member cannot file a suit
against the association.
Unlimited Personal Liability of the Members:
The liability of the members is unlimited. Every member of such an association
is personally liable for all the liabilities incurred in the business. The third party
can take action against the members. If the number of members in an illegal
association comes within the statutory limit, the illegal association would not
become legal merely by virtue of such reduction.

Case Law
In Badri Prasad v. Nagarmal, the Supreme Court held that in the case of an
illegal association no relief will be granted to its associates or members as the
contractual relationship on which it is founded is illegal (ab – initio), but
subscribers will be entitled to sue for recovery of their subscriptions.

Conclusion
We, hence, saw different kinds of companies and their functions. We saw that
each one is important and is one of a kind. Every company is important for
Global development. We can hereby conclude that The Companies Act, 2013 is
extremely important as it gives a boundary to companies because of which their
legal scope remains defined. This defined scope, ultimately helps the end-users
as the companies have a legal framework under which they are bound to work.
Hence, these companies remain under a certain boundary wall and hence they
don’t misuse their power. Thus it helps in many ways like the employees get
protected in terms of their labour rights, the end-users get good quality
products and the society as a whole face comparatively less company-related
fraudulent issues because the law has got it all in its hands. The companies Act
of 2013, replacing The Company law of 1956, has given wonderful amendments
which have improved the “quality of this law” to a great level.

Companies Act is required because it provides for class action suits for
shareholders which means that The Companies Act, 2013 narrates concept of
class actions suits in order to make shareholders and other stakeholders, more
informed and knowledgeable about their rights.

The said Act provides more power to shareholders. It stipulates appointment of

at least one woman Director on the Board (for certain class of companies),
hence it improves women’s employment in the corporate sector. It stipulates
certain class of companies for spending a certain amount of money every year
on activities or initiatives which reflects corporate social responsibility. It has
introduced the National Company Law Tribunal (NCLT) and the National
Company Law Appellate Tribunal in order to replace the company Law Board for
industrial and financial reconstruction. Such tribunals relieve the courts of their
burden and simultaneously provides specialised justice. It permits cross border
mergers, in both ways; a foreign company merging with an Indian Company
and vice versa, but with the prior permission of RBI.No independent director
shall hold office for more than two consecutive terms of five years.

It states that all the listed companies should have at least one-third of the
board as independent directors. Such other class or classes of public companies
as prescribed by the central government shall also be required to appoint
independent directors.

It states that at least seven days’ notice to call a board meeting must be given.
The notice may be sent by electronic means to every director at the address
under which he is registered in the company. Another beauty of this The
Companies Act, 2013 is that it doesn’t restrict an Indian company from
indemnifying (compensate for harm or loss) its directors and officers like The
Companies Act, 1956. It also provides for the rotation of auditors and audit
firms in case of publicly traded companies. It prohibits auditors from performing
non-audit services to the company where they are an auditor to ensure
independence and accountability of auditor. It makes the entire process of both
rehabilitation and liquidation of the companies in the financial crisis, time-
bound.

Promoter in India : a look into important

aspects

Introduction
Establishing a company is not a one-day task. Before a firm may take its
ultimate form, it must complete many processes. Promoters play an important
role right from the start of the process. The process of forming a corporation is
extensive and involves several steps. The ‘promotion’ stage of the formation
process is the first step. An individual or a group of people known as promoters
comes up with the concept of starting a business at this stage. Various
processes must be completed to incorporate a firm. The promoters carry out
these functions and establish the firm. The term has been used frequently in
Indian company matters. The Indian Companies Act 1956 used it to fix liability
on promoters, but did not define it and accepted their established position
under the common law principle. Subsequently, the Indian Companies Act
2013 defined the term for the first time. It is a common misconception that the
promoters’ job continues until the business has purchased the property, raised
initial money, and the board of directors has taken over control of the
company’s activities. However, a review of the different provisions of the
Companies Act of 2013 demonstrates that the promoters’ role cannot be
overlooked even when the board of directors assumes control of the company’s
business. This can be carried over to the period when the firm is operating as a
going concern and even to the time when the company’s affairs are being
wound up. 

Definition
The definition of the phrase “promoter” has been defined in Section 2 (69)[1] of
Companies Act, 2013.  The term has been used specifically in Section 35, 39,
40, 300 and 317 of the Act. Section 2 (69) of the Act states that promoter is a
person whose name has been mentioned in the prospectus of the company or is
identified in the annual returns of the company, or any person who has direct or
indirect control over the affairs of the company, whether as a stakeholder or as
a director, or on whose direction the Board of Directors act. In simple words, a
promoter is a person who performs the various preliminary steps like making
the prospectus of the company, floating the securities in the market, etc. but if
a person is doing this in a professional capacity, he wouldn’t be considered a
promoter.  In Bosher v. Richmond Land Co. (1892), the term Promoter has
been defined as a person who brings about the incorporation and organization
of a corporation. He brings together the persons who become interested in the
enterprise, aids in procuring subscriptions, and sets in motion the machinery
which leads to the formation itself.

Statutory definition – Section 2(69) of the

Companies Act, 2013
The Companies Act, 2013 contains a statutory definition of the promoter which
is also more or less in terms of functional categories: Promoter means a
person  

1. who has been named as such in a prospectus or is identified by the

company in the annual return referred to in Section 92; 
2. who has control over the affairs of the company, directly or indirectly,
whether as a shareholder, director or otherwise; 
 3. in accordance with whose advice, directions or instructions the Board
of directors of the company is accustomed to act. The proviso excludes
persons acting in a professional capacity.

Types of promoters
As stated above, a promoter is the one who conceives the idea of formation of a
company. An individual, an association of person, a firm or a company, can act
as a promoter. A promoter may be an occasional, professional, managing or
financial promoter. A professional promoter is the one who hands over the rein
of the company to the stakeholders when the company is up and running.
Financial promoters are those promoters, who promote financial institutions or
banks. Their main aim is to assess the financial situation of the market and
form a company at the opportune moment. In the case of managing promoters,
they not only help in the formation of the company but when the company is
formed, they get managing agency rights in the company. Occasional promoters
are those whose main work is to float the company and do all the preliminary
work. Although they do not do the promotion work routinely, they may float a
company and then go back to their original profession.

Functions of a promoter
A promoter plays various function in the formation of a company, from
conceiving the idea to taking all the necessary steps to convert the idea into
reality. Some of the functions of a promoter are-

 One of the main functions of a promoter is to comprehend the idea of

formation of the company.
 The promoter looks into the viability and feasibility of the idea that
whether the formation of the company will be profitable and practicable
or not.
 After the idea has been conceived, the promoter collects and organizes
the resources available to convert the idea into a reality.
 The promoter decides the name of the Company and also settle the
content regarding the Articles of Association and the Memorandum of
Association of the Company.
 The promoter is the one who decides where the head office of the
company will be situated. The promoter also nominates people or
associations for vital posts. For instance, the promoter may appoint the
bankers, auditors and Directors of the company for the first time.
  The promoter also prepares all the other necessary documents which
are required to incorporate a company.
Defining the legal status of a promoter can be a very tough job. He cannot be
considered an employee, trustee or an agent of the company. The role of the
promoter ceases to exist when the company is on the track and is handled by
the Board and the Management.

Duties of a promoter
The promoters who form the company have certain basic duties towards the
company. A promoter has a relationship of confidence and trust with the
company, i.e., a fiduciary relationship. Keeping this fiduciary relationship in
mind, the promoter is under the obligation to disclose all the material facts
which relate to the formation of the company. The promoter is also under the
obligation to not take any secret profit while carrying out the promoting
activities like buying a property and then selling it to the company for profit,
without making any disclosure. The promoter is not barred from making profits
while dealing with various parties. The only condition is that he is under the
duty to disclose such profits and not make any secret profits.[3]

Liabilities of a promoter

Liability regarding irregularities in the prospectus 

Section 26 describes what should be stated in the prospectus and what reports
should be included. The promoter may be held accountable by the shareholders
if this provision is not followed. 

Civil liability
Section 35 outlines the civil liabilities for any prospectus misstatements. Under
this Section, a person who has subscribed for the company’s shares and
debentures on the basis of the prospectus can hold the promoter accountable
for any false statements in the prospectus. The promoter may be held liable for
any loss or damage suffered by any person who subscribes for shares or
debentures as a result of the false statements made in the prospectus. Specific
provisions have also been provided under Section 62 regarding the reasons on
which the promoter can avoid his liability. These remedies are available to
anyone who can be held accountable for a prospectus misstatement.
Criminal liability
Section 34 deals with the criminal liabilities of drafting a prospectus that
contains false claims. The promoters can be held criminally accountable, in
addition to the civil liabilities described in the previous two examples, if the
prospectus they released contains misstatements. The penalty is either a two-
year prison sentence or a fine of up to 5000 rupees, or both. Unless he can
show that the inaccurate statement was inconsequential or that he was justified
in believing, on reasonable grounds, that the statement was truthful at the time
of prospectus issuing, the promoter may be held criminally liable for
misstatements.

Public examination of promoters 

Section 300 gives the court the authority to order a public investigation of all
promoters found guilty of fraud in the promotion or establishment of a
corporation. If the liquidator’s report indicates fraud in the promotion or
establishment of the company during its winding up, the promoter, like every
other director or officer of the company, can be held liable for public
examination by the court.                                                                             

Personal liability 
Promoters can be held personally liable for pre-incorporation contracts.

 A promoter has to mention the true facts in the prospectus of the

company. If he does not do so, he may be held liable for it. The
promoter will be liable for any untrue statement which has been made
in the prospectus, and on the basis of that untrue statement any
person has subscribed to the securities of the company. The person
may sue the promoter if he has suffered any damage.
 Apart from civil liability, the promoter may be held criminally liable also
for mentioning any untrue statements in the prospectus. A severe
penalty will also be imposed on him if he provides any untrue
statement with the view of obtaining capital.
 A promoter can be made liable to a public examination if there are any
reports which allege fraud in the formation of the company or the
promotion activities.
 The company can also proceed against the promoter in case there is a
breach of duty on the promoter’s part or he has misappropriated any
property of the company or is guilty of breach of trust.
Position of a promoter in relation to the company-
before and after incorporation

Prior to incorporation of the company

Promoters found it extremely difficult to carry out promotion activities before
the Specific Relief Act was introduced in 1963. Before this Act was passed, pre-
incorporation contracts of the company were held to be void. Such contracts
also couldn’t be ratified. Therefore, people were very hesitant to supply
resources for incorporation of the company without any definite contract.
Promoters were also very apprehensive about taking personal liability. The
introduction of the Specific Relief Act, 1963[4] made it easier for the
promoters to carry out incorporation activities, as the promoters could now
enter into pre-incorporation contracts with third-parties.

Section 15 (h) and 19 (e)  states that;

 The promoter should have entered into the contract for the purpose
and benefit of the company
 The terms provided in the incorporation agreement should warrant
such contracts.
 The contract should be ratified after the company, and it should be
informed to the opposite party.
A contract made between the promoter on the behalf of the company and the
third parties will still be considered as a contract between two individuals. The
right to ratify a contract does not lie with the company inherently. The authority
of ratifying a contract should be given to the company through its
memorandum. So a company cannot be sued by the third party if the company
does not ratify the contract, even if the contract was beneficial for the company.

In case the company does not have the authority to ratify the contract (because
such authority has not been provided in the Articles), or the company does not
ratify the contract, then the promoter will be personally liable.

After Incorporation of the Company

After the company comes into existence, and in case it ratifies the contract
entered into by the promoter, in such a case the contract will become binding
on the company and not the promoter. Section 15(h)[5]  and 19 (e)[6] also
state that the promoter can transfer his rights and liabilities to the company,
provided that such provision is present in the incorporation agreement.
Although the promoter is not entitled to any kind of salary and remuneration.
But the general trend is to compensate the promoter in lump-sum after the
company has been set up. A promoter cannot be asked to be compensated as a
legal right. If the promoter is compensated at all, the compensation given to
him is on the basis of equity ad fairness. If any shares are being allotted to the
promoter of the company, the promoter also becomes a member of the
company automatically.

Privileges of promoter

Right to indemnity
When more than one member acts as the company’s promoter, one promoter
can sue the other for the compensation and damages he paid. Promoters are
jointly and severally accountable for any false statements made in the
prospectus, as well as for any hidden profits.

Right to recover genuine preliminary expenditures

A promoter is entitled to reimbursement for valid preliminary expenditures
incurred in the establishment of the firm, such as advertising costs, solicitors’
fees, and surveyors’ fees. It is not a contractual entitlement to receive the
preliminary expenses. It is up to the company’s board of directors to decide.
Vouchers should be attached to the cost claim.

Right to remuneration
Unless there is a contract to the contrary, a promoter has no right to
remuneration from the company. Although the company’s articles may provide
for the directors to pay promoters a certain sum for their services, this does not
provide the promoters with any contractual right to sue the company. This is
just a power granted to the company’s directors. However, because the
promoters are usually the directors, the promoters will earn their remuneration
in practice.
Weaver Mills v. Balkies Ammal(1969)
The Madras High Court’s ruling in Weavers Mills Ltd. v. Balkies Ammal 
[1969] broadened the applicability of Pre-incorporation contracts. In this
instance, the promoters agreed to buy several properties for and on behalf of
the firm that was being pushed. When the firm was formed, it took possession
of the land and began to build facilities on it. It was held that the company’s
title to the property could not be set aside even if the promoter had not
conveyed the land to the firm after its incorporation.

Kelner v. Baxter (1866)

In Kelner v. Baxter (1866), the promoter accepted Mr. Kelner’s promise to sell
wine on behalf of an unformed company; however, the corporation neglected to
pay Mr. Kelner, and he sued the promoters. The principal-agent relationship
cannot exist prior to incorporation, according to Erle CJ, and the principal of an
agent cannot exist if the firm does not exist. He goes on to say that the
company cannot assume obligation for a pre-incorporation contract by adoption
or ratification because a stranger cannot ratify or accept a contract, and the
company was a stranger because it did not exist at the time the contract was
formed. As a result, he concluded that the promoters are personally accountable
for the pre-incorporation contract because they consented to it.

Conclusion
It can be said that a promoter can be an individual, a company, or an
association of person which conceives the idea of formation of a company,
undertake all the activities which are necessary for the company’s incorporation
and brings about the actual existence of the company as a separate legal entity.
The promoter nominates the directors, bankers and auditors of the company
and also decide the contents of the Articles of the company. The promoter can
be called as a molding block who gives basic shape to the company, and his role
is of utmost important.
Formation and Incorporation of a Company
Introduction
The formation and incorporation of a company are very much similar to the
birth of a human like it also goes through various stages of formation of its body
parts during the womb stage. Various groundwork is carried out to bring a
company into existence. The process of an idea converting into a company
includes various stages, these crucial stages of the pre-incorporation and
formation stages are discussed in detail as under. This article explains the
functions, duties and liabilities of a promoter along with providing insights into
cases regarding pre-incorporation contract. This article dwells into the
integrated process of Company registration.

Promotion
As the name suggests this stage of incorporation deals with the promotions of
the yet to be incorporated Company. It is the stage where the Promoter walks
in the market of the potential investors to collect the investment towards an
idea which might be his own brainchild or of someone else.
The Promoter induces the confidence on the idea, over the investors and tries to
build upon the investment so as to be able to incorporate the company.
Promoter has been defined under Section 2(69) of the Companies Act, 2013.
Technically a promoter is a person so named in the prospectus of the Company.
The Company shall also name their promoter in the annual return made
under Section 96 of the Companies Act, 2013.

A Promoter is to a company, as Parents is to a child. The Promoter along with

convincing investors towards the idea of the company also brings together the
physical capital of the labour, raw materials, managerial ability, machinery etc. 

The Promoter although is passionate towards the company’s ideas, but has to
SWOT analyse the idea with respect to the future prospects and feasibility with
respect to the societal dynamics. 

The idea of promoter can be seen with having 3 different perspectives: 

 promoter is someone who is identified in the prospectus of the

company or is mentioned as a promoter in the annual returns of the
company, and/or 
 promoter is a person who has the power to appoint majority of
members of board of directors or person having authority over making
policies or making decisions for the company, and/or 
 promoter is a person on whose advice board of directors are
accustomed to act.

Functions of a Promoter

(i) Spotting a Business Demand in the Market 

The promoter before promoting a company idea first identifies a potential
business opportunity. The potential opportunity may be any new product or a
new service or may even be the production or manufacture of an already
established product by new means.

(ii) The practicality of the Idea

The promoter has to evaluate the idea of the new potential company under the
magnifying glass of technical and financial feasibility. Therefore, it is but
important that the promoters undertake detailed studies regarding all aspects of
the business idea by using various tools such as the economic studies of the
market, taking opinions of the technical experts of such products, opinions of
the chartered accountants, economists etc. The idea which the promoter intends
to use for perpetrating the market. The feasibility of the idea can be evaluated
using the below mentioned three tests.

 Technical conceivability: the ideas of the business may be good but

sometimes they may be technically difficult to conceive into reality
given such hurdles regarding the raw material acquisition, the difficulty
of making a product with limited funds, etc.
 Budgetary feasibility: Sometimes it may not be possible to gather a
large fund required for the business being under the sword of limited
means and sometimes stipulated time. Also, financial institutions may
be hesitant to give huge loans to new ventures.
 Monetary feasibility: A business idea may be technically and
financially feasible but not monetarily appreciable. It may not be
gainful or may not return enough profits. In such a case, the
promoters refrain from promoting the idea of business.

(iii) Name of the Company

The Promoter after fixing the launch of the idea intends to get a name to the
Company. Promoter applies to the registrar of companies of that jurisdiction
wherever the promoter intends to make the registered head office of the
Company. Application to registrar contains three names “X or Y or Z” in the
sequence of priority and Promoter adheres to Section 8 of the Companies
(Incorporation) Rules, 2014.

(iv) Finalizing Signatories to MOA

The promoters decide who all will be the members signing the Memorandum of
Association of the Company which is to be formed. Generally, the signatories of
the MOA are the first Directors of the Company. The written consent of the
signatories of the memorandum is essential to become Directors of the
company.

(v) Hiring Professionals

Promoters are required to appoint certain professionals such as mercantile
bankers, auditors, lawyers, etc. These professionals aid the promoter in the
preparation of necessary documents that are to be filed with the Registrar of
Companies during the registration of the Company.

(vi) Preparation of Necessary Documents

The promoters are the ones who are responsible to collect documents that are
submitted to the Registrar of the Companies for getting the company
registered. These documents are a return of allotment, Memorandum of
Association, Articles of Association, consent of Directors and statutory
declaration.

Duties of the Promoter 

The relation of promoter with the company cannot be described as a principal-
agent relation as during pre-incorporation stage, the company has not even
come into existence. Various judicial interpretations towards understanding the
nature of relation between the promoter and the company has taken place in
the common law Courts as well as Indian Courts and it has been decided that
the relation between the promoter and the company is fiduciary in nature.
Duties of the Promoter shall be discussed herewith: 

1. Duty to disclose secret profit

As mentioned earlier the promoters stand in a fiduciary relationship with the
company which will be incorporated. The duty of a promoter is to disclose the
secret profit made by him if any to the company. The Promoter has a right to
claim expenses if any made during the incorporation stage from the company.

2. Duty to keep the company informed about the transactions

A promoter may intend to sell, lease or rent any property of the company. But if
such a transaction is made without informing the company, the company may
repudiate such contract of sale, lease or rent, the company may even claim the
profit made by the promoter from the transaction by allowing such a contract
made by the promoter.

3. Fiduciary duty towards the future Shareholders

The promoter is bound by a fiduciary relationship with the company, signatories
of memorandum of association and also show the future allottees of share of
the company. Relation of trust between promoter and future shareholders goes
to show that the promoter shall uphold all the values expected of him by the
Company.

4. Duty to disclose profits gained during promotion

The promoter during the promotion of the company may certain times be
subjected to certain private arrangements leading to his personal profit, given
the promoter stands in fiduciary relationship with the company he must disclose
the profits gain during promotion as explained about to the company.

5. Duty to pay the company whatever received as trustee

The promoter stands in a fiduciary relationship with the company, and it is the
duty of the promoter to make good to the company whatever he has obtained
as the Trustee of the company.

Liabilities of the Promoter

A Promoter is subjected to liabilities under the various provisions of
the Companies Act, 2013. The liabilities of the promoter are:

1. Liability to justify the transactions to the company

The promoter stands in a fiduciary relationship with the company, therefore the
company has all rights to enquire into the transactions made by the promoter
without the consent of the company. The company while dealing with such a
transaction may either repudiate such an agreement made by the promoter
with the third party or may even sue the promoter to recover the money along
with profits so made by him behind the back of the company.

2. Liability against the misstatement made in the prospectus

Section 26 of the Companies Act, 2013 lists down the matters that are to be
stated in the prospectus. The promoter may be held liable for not having
complied with the provision. Section 63 of the Companies Act, 1956 also
provided criminal liability for misstatement in prospectus and Promoter maybe
made liable under this section. Section 63 prescribed imprisonment that may be
extended to two years and fine that may be extended to 5000 Rs. for making
untrue statements in the prospectus.
Under Section 34 and Section 35 of the Companies Act, 2013 promoter maybe
held liable for any untrue statement made in the prospectus because of which a
person subscribed for shares and debentures believing the prospectus
statements to be true. However, the liability of the promoter is capped towards
only the original allottees of the shares and not the subsequent ones.

3. Personal liability towards the contracts

All the contracts entered upon by the promoter during pre-incorporation stage
of the Company, the promoter may be held personally liable for the
aforementioned contracts till it’s discharged according to contract terms or
when the company takes up the liability from the promoter after it is
incorporated.

4. Liability of the promoter during the winding-up process of

the company
In the process of winding up, the official liquidator under Section 340 of
the Companies Act, 2013 may by application request the court to make the
promoter liable for the misfeasance or breach of trust towards the Company.
Also under Section 300 of Companies Act, 2013 promoter may be liable to
examination, if it is alleged by the liquidator that there is fraud in the promotion
or the formation of the company.

Status of Contract in pre-incorporation and the

Principle of Promoter’s liability in pre-
incorporation
The pre-incorporation contracts are the contracts entered upon by the promoter
before the company is incorporated and these are essential for the successful
running of the company in the future. The nature of these pre-incorporation
contracts is however different to that of an ordinary contract. These contracts
are Bipartite and effects of it are tripartite. The Promoter enters into a contract
with the service providers or the interested persons and the consequential effect
of these contracts help the prospective company which is still lingering in its
non-incorporated stage. The instruments of Contract is essentially used for
the quid-pro-quo transactions between two parties, but here it is remarkably
used for the benefit of the non-party to contract as legally the company is non-
existent. 
The Company is essentially the beneficiary of the pre-incorporation contracts as
inferred from the above said para. Now it might stir up doubt as to why a
company is not liable towards the pre-incorporation contracts, the answer to the
question to be simply put is that one cannot make someone liable if they are
non-existent and hence not a party to the aforesaid pre-incorporation contract. 

The non-liability of the company with respect to the pre-incorporation contracts

was the same as the common law court in India until the passing of the Specific
Relief Act, 1963. The Specific Relief Act, 1963 essentially under Section
15(h) and Section 19(e) makes the pre-incorporation contracts and agreement
valid deviating from the trajectory followed under the common law.

Section 15(h) provides details as to who may obtain specific performance,

wherein clause h provides that when a promoter gets into a contract before
incorporation on behalf of the company and the company warrants such
contract and such company must have sent a communication of acceptance to
the other party of contract.

Section 19(e) provides that a party claiming relief under specific performance

can be claimed when the promoter of the company before incorporation had
entered into contract and if such contract was warranted during incorporation.
The company must have accepted the contract and communicated such
acceptance to the other party of contract.

The aforementioned provisions of the Specific Relief Act, 1963 changes the
course of action in a case between parties where contract was made before
incorporation, unlike the regular course of action against the promoter here the
company can be made liable if it has accepted the contract and has
communicated such acceptance to the other party of the contract.

Various cases have come before the judiciary in order to understand the liability
of Pre incorporation contracts, we shall be discussing such cases below:

 The case of Weavers Mills v Balkis Ammal and others, wherein the
promoter had agreed to purchase some properties on behalf of the
company, after incorporation the company took possession of the
properties and also constructed structures upon it. It was held that
although no conveyance had taken place between the promoter and
company regarding those properties. It was held that the company’s
title over the properties was valid and couldn’t be set aside. The
Madras High Court had extended the scope of interpretation of the
principle mentioned above. Promoters are generally held liable
 personally for the pre-incorporation contract unless the company
ratified the contract.
 Landmark case of Kelner v Baxter which is a case where “the principle
of promoter’s liability in pre-incorporation contract”, was explained.
The facts of the case is that, the promoter of a company was
approached by one Mr. Kelner to purchase his wine wherein the
promoter had agreed to purchase the same on behalf of the company.
Later on the company was unable to pay Mr. Kelner who sued the
promoter. It was interpreted whether the promoter was in a principal-
agent relationship with the company and if the liability can befall upon
the company. The learned judge interpreted that the principal agent
relationship was not in existence as the principal of the agent cannot
have existed without the incorporation, it was further added that
company cannot take the liability of Pre-incorporation contract through
adoption as the company is not privy to the contract, also the company
was not even existent at the time of contract.
 In the case of Newborne v Sensolid Ltd. Wherein it had happened so
that the appellate Court interpreted the findings of Kelner v Baxter,
wherein an unformed company enter into a contract wherein the other
party refused to do its duty under the contract. The judge had
observed that before incorporation the company couldn’t have come
into existence, neither could get into a contract and hence there cannot
be an action for pre-incorporation contract. Confusion was then created
that if a contract was signed by agent or a promoter then such
promoter will be liable personally, but if the person representing him as
representative of a non-formed company then the contract is
unenforceable.
Finally, it can be concluded regarding the pre-incorporation contracts and
Principle of Promoter’s liability in pre-incorporation that, common law clearly
shows that the promoter shall be held personally liable for the pre incorporation
contracts of the company and the same was followed in England and India prior
to the legislation of the Specific Relief Act, 1963. It basically goes on to suggest
that there is no escape from the liability of the promoter. But there are
recognised ways in Indian law to shift the liability of the promoter to the
company in case of the pre-incorporation contract wherein the first and
foremost way is novation of contract which is also accepted by the common law
courts regarding the shift of liability from Promoter to the company, India but
uniquely legislated Specific Relief Act, 1963 providing provisions wherein if the
contract was entered upon by the promoter during the pre-incorporation stage
the party to such contract can make the company liable under Specific relief Act
if the company ratify such contract and sends communication to such party of
the ratification of the contract. But otherwise the promoter is held liable in case
of Pre-incorporation contracts.
Registration/Incorporation of the Company
The Registration of the Company is legal recognition given to the body
corporate under the Company Law. The procedure of registration has been
clearly stated in Section 7 of the Companies Act, 2013. This provision clearly
lays down the requirements for the incorporation of the company. The details of
the documents namely:

 Memorandum of association, which is the constitution of the company

wherein the signatories in case of a public company has been fixed to a
minimum number of 7 and for a private company a minimum number
of 2 this document is duly stamped; 
 Articles of Association, this is the document filed along with the MOA; 
 List of directors, wherein the details regarding their names, occupation
and address is mentioned; 
 Written consent of the directors, the consent of the directors is to be
submitted to the registrar of the companies; 
 Verification document, wherein such document is to be digitally signed
by any recognised chartered accountant, Company secretary,
Advocate.

Integrated Process Of Company Registration

In the website of the Ministry of Corporate Affairs, there are options using which
one can register their company online whereby integrating various legal steps of
the incorporation in the same portal. Further, the process of incorporation or
registration requires first to apply for the unique name which shall be reserved
for the proposed company against the payment of Rs. 1000.

The process then involves filling up the form online, the form is named
“simplified proforma for incorporation”. The performa gives a viable option to
incorporate a company online, which starts by filling up the details regarding
the information of the promoter of the company. Secondly, the electronic
performa in the form number INC-33 and INC-34 provides the option of filling
up the e-MOA (Memorandum of association) and e-AOA (Articles of Association)
respectively. The MOA as we know is the constitution of the company, it usually
describes the object of the company and also describes the directors involved
during the incorporation of the company. After the memorandum of association,
the e-AOA option is provided so as to ease the process of incorporation even
further, an e-AOA lays down rules and regulations of company affairs. E-AOA
also lays down the powers, duties and rights of managers, officers and board of
directors. 

The Article of Association may be made by the company according to its own
requirements, or maybe selected by such company from the various options
available in the schedule of Companies Act. AOA must be signed by all the
directors and also attested by two witnesses. The articles of association of a
company is also known as by-laws of the company or also named as the
doctrine of indoor management since it deals with various issues such as:

 amount of share capital and kinds of share,

 rights of each kind of shareholders, 
 procedure for making allotment of shares, 
 procedure for issuance of share certificate, 
 transfer of shares, 
 procedure for conducting meetings, 
 procedure for appointing or removing directors of the company etc.
All the documents declared to be necessary under Section 7 of the Companies
Act are supposed to be attached along with the digital signature of all the
directors. The Ministry of Corporate Affairs has tried to simplify the process of
getting a DIN number for the directors of the newly incorporated company by
including such request form along with the PAN & TAN card of the so proposed
entity which is being incorporated. The single-window clearance regarding the
incorporation of a company was an action taken by the central government of
India to increase the feasibility and scope of the incorporation even further.

Certificate of Incorporation
The registration of the memorandum of the association, the article of
association and other documents are filed with the registrar. After getting
satisfied with the application & documents submitted, the registrar will consider
issuing the certificate of incorporation’. A certificate of incorporation is the
ultimate proof of the existence of a company.

Effect of the Certificate of Incorporation

1. Certificate of incorporation is the conclusive evidence of the legal
existence or presence of the Company as per Section 35 of Companies
Act, 1956.
 2. Even if there are formal deficiencies in the documents submitted for
the incorporation of the company, once the certificate of incorporation
is issued, the certificate becomes conclusive evidence regarding the
legal existence of the company from the date mentioned in the
incorporation certificate.
3. If the certificate of incorporation was received on 24th but the
certificate reflects the date 22nd then the company shall be taken to
have come into existence from 22nd as reflected by the certificate of
incorporation and this will also authenticate the transactions made by
such company on 22nd and 23rd in the eyes of law.

Certificate of Commencement of Business

 As soon as a private company gets the certification of incorporation it
can start its business. Once the certificate of incorporation is received
by the company, a public company issues a prospectus for inviting the
public to subscribe to its share capital. It fixes the minimum
subscription in the prospectus. Then, it is required to sell the minimum
number of shares mentioned in the prospectus.
 After completing the sale of the required number of shares, the
certificate is sent to the registrar along with the letter from the bank
stating that all the money is received.
 The registrar then scrutinizes the documents. If all the legal formalities
are done then the registrar issues a certificate known as ‘certificate of
commencement of business’. This is the conclusive evidence for the
commencement of business for the public company.

Conclusion
From the above article, we understand that the company’s incorporation period
can be understood to be the integration of Pre incorporation period and
incorporation period. Pre incorporation period may be understood as the idea
phase of the company. The promoter whose name is reflected in the prospectus
of the company plays a very important role in collecting the funding for the
company. The promoter also conducts a SWOT analysis of the company to
understand the potential of such a company in the marketplace and making it a
feasible option to invest upon by the investors. The duties and liabilities of the
promoter has been discussed in detail showing how the relationship between
the promoter and the company is fiduciary in nature. The principle of promoter’s
liability relation to the pre-incorporation contract has been dealt in detail
coming to a conclusion that the promoter shall be held personally liable for all
the pre-incorporation contracts, unless there is novation of the contract or in
case of India when the provisions of Specific Relief Act applies wherein the
company ratify the contract and send communication to the other party of
contract regarding their liability. The role of the government in easing the
process of incorporation is very crucial as it determines the potential intention
of the investors towards companies in the market. 

The ease of incorporation has been increased by making it online affair, The
Ministry of Corporate Affairs provides options to incorporate the company with a
unique name by providing the online option of submitting the memorandum of
association along with the articles of association online with the declaration
digitally signed stating that all the procedures of incorporation of a company
under law have been followed by the respective company. The State’s duty as
an enabler of business for the growth of the economy finds its presence in this
legislation. Certificate of incorporation plays a crucial role to prove that the
company has been duly incorporated and the same cannot be taken back unless
the winding up is initiated for the registrar of company finds that the company
incorporated has played fraud for its incorporation. The certificate of
incorporation speaks for itself and receipt date of the same does not affect the
date of incorporation i.e. if the incorporation certificate clearly specifies the date
of incorporation as 14th February although certificate is received on 20th
February all the transactions taken place after 14th February shall be taken to
be done in compliance with law.

Memorandum of Association : Know

everything about it
Introduction
A company is formed when a number of people come together for achieving a
specific purpose. This purpose is usually commercial in nature. Companies are
generally formed to earn profit from business activities. To incorporate a
company, an application has to be filed with the Registrar of Companies (ROC).
This application is required to be submitted with a number of documents. One of
the fundamental documents that are required to be submitted with the
application for incorporation is the Memorandum of Association.

Definition of Memorandum of Association

Section 2(56) of the Companies Act, 2013 defines Memorandum of Association.
It states that a “memorandum” means two things:

 Memorandum of Association as originally framed;

Memorandum as originally framed refers to the memorandum as it was during
the incorporation of the company. 

 Memorandum as altered from time to time;

This means that all the alterations that are made in the memorandum from time
to time will also be a part of Memorandum of Association. 

The section also states that the alterations must be made in pursuance of any
previous company law or the present Act. 

In addition to this, according to Section 399 of the Companies Act, 2013, any
person can inspect any document filed with the Registrar in pursuance of the
provisions of the Act. Hence, any person who wants to deal with the company
can know about the company through the Memorandum of Association.

Meaning of Memorandum of Association

Memorandum of Association is a legal document which describes the purpose
for which the company is formed. It defines the powers of the company and the
conditions under which it operates. It is a document that contains all the rules
and regulations that govern a company’s relations with the outside world. 

It is mandatory for every company to have a Memorandum of Association which

defines the scope of its operations. Once prepared, the company cannot operate
beyond the scope of the document. If the company goes beyond the scope,
then the action will be considered ultra vires and hence will be void. 

It is a foundation on which the company is made. The entire structure of the

company is detailed in the Memorandum of Association. 

The memorandum is a public document. Thus, if a person wants to enter into

any contracts with the company, all he has to do is pay the required fees to the
Registrar of Companies and obtain the Memorandum of Association. Through
the Memorandum of Association he will get all the details of the company. It is
the duty of the person who indulges in any transactions with the company to
know about its memorandum. 
Object of registering a Memorandum of
Association or MOA
Memorandum of Association is an essential document that contains all the
details of the company. It governs the relationship between the company and
its stakeholders. Section 3 of the Companies Act, 2013 describes the
importance of memorandum by stating that, for registering a company, 

1. In case of a public company, seven or more people are required;

2. In case of a private company, two or more people are required;
3. In case of a one person company, only one person is required.
In all the above cases, the concerned people should first subscribe to a
memorandum before registering the company with Registrar. 

Thus, Memorandum of Association is essential for registration of a company.

Section 7(1)(a) of the Act states that for incorporation of a company,
Memorandum of Association and Articles of Association of the company should
be duly signed by the subscribers and filed with the Registrar. In addition to
this, a memorandum has other objects as well. These are,

1. It allows the shareholders to know about the company before buying it

shares. This helps the shareholders determine how much capital will
they invest in the company. 
2. It provides information to all the stakeholders who are willing to
associate with the company in any way. 

Content of Memorandum of Association

Section 4 of the Companies Act, 2013 states the contents of the memorandum.
It details all the essential information that the memorandum should contain. 

Name Clause
The first clause states the name of the company. Any name can be chosen for
the company. But there are certain conditions that need to be complied with. 

Section 4(1)(a) states: 

 1. If a company is a public company, then the word ‘Limited’ should be
there in the name. Example, “Robotics”, a public company, its
registered name will be “Robotics Limited”.
2. If a company is a private company, then ‘Private Limited’ should be
there in the name. “Secure”a private company, its registered name will
be “Secure Private Limited”.
3. This condition is not applicable to Section 8 companies.

What are Section 8 companies? 

Section 8 Company is named after Section 8 of the Companies Act,2013. It
describes companies which are established to promote commerce, art, sports,
education, research, social welfare, religion etc. Section 8 companies are similar
to Trust and Societies but they have a better recognition and legal standing
than Trust and Societies. 

What kind of names are not allowed? 

The name stated in the memorandum shall not be, 

1. Identical to the name of another company;

2. Too nearly resembling the name of an existing company. 
According to Rule 8 of the Company (Incorporation) Rules,2014.

 If a company adds ‘Limited’, ‘Private Limited’, ‘LLP’, ‘Company’,

‘Corporation’, ‘Corp’, ‘inc’ and any other kind of designation to its name
to differentiate it from the name of the other company, the name
would still not be accepted. 
Illustration:Precious Technology Limited is same as Precious Technology
Company. 

 If plural or singular forms are added to differentiate between names.

Illustrations: Greentech Solution is same as GreenTech Solutions.
Colors Technology is same as Color Technology. 

 If type, and case of letters, or punctuation marks are added. 

Illustration: Wework is same as We.work. 

 Different tenses are used in names.

Illustration: Ascend Solution is same as Ascended Solutions. 
  If there is an intentional spelling mistake in the name or phonetic
changes in the name.
Illustrations: Greentech is same as Greentek. 

DQ is same as DeeQew. 

 Internet related designations are used like .org, .com, etc.

Illustration: Greentech Solution Ltd. is same as Greentech Solutions.com Ltd.

Exception: The name will not be disregarded if the existing company by a board
of resolution allows it. 

 Change in order of combination of words. 

Illustration: Shah Builders and Contractors is same as Shah Contractors and
Builders. 

Exception: The name will not be disregarded if the existing company by a board
of resolution allows it. 

 Addition of a definite or indefinite article. 

Illustration: Greentech Solutions Ltd is same as The Greentech Solutions Ltd.

Exception: The name will not be disregarded if the existing company by a board
of resolution allows it. 

 Slight variation in spelling of two names, including a grammatical

variation. 
Illustration: Colours TV Channel is same as Colors TV Channel. 

 Translation of a name, from one language to another. 

Illustration: Om Electricity Corporation is same as Om Vidyut Nigam. 

 Addition of the name of a place to the name. 

Illustration: Greentech Solutions Ltd. Is same as Greentech Mumbai Solutions
Ltd. 

Exception: The name will not be disregarded if the existing company by a board
of resolution allows it. 

 Addition, deletion or modification of numericals in the name. 

Illustration: Greentech Solutions Ltd. Is same as 5 Greentech Solutions Ltd.
Exception: The name will not be disregarded if the existing company by a board
of resolution allows it. 

In addition to this, an undesirable name will also not be allowed to be chosen. 

Undesirable names are those names which in the opinion of the Central
Government are:

1. Prohibited under the Provisions of Section 3 of Emblems and Names

(Prevention and Improper Use) Act, 1950.
2. Names which resemble each other, which are chosen to deceive. 
3. The name includes a registered trademark. 
4. The name includes any word or words which are offensive to a section
of people. 
5. Name which is identical to or too nearly resembles the name of an
existing Limited Liability Partnership. 
Furthermore, statutory names such as the UN, Red Cross, World Bank, Amnesty
International etc. are also not allowed to be chosen. 

Names which in any way indicate that the company is working for the
government are also not allowed. 

Reservation of a Name
Section 4(5)(i) of the Act states that for formation of the Company, the
Registrar on receiving the required documents can reserve a name for 20 days.
If the application is made by an existing company, then once the application is
accepted, the name will be reserved for 60 days from the date of application.
The company should get incorporated with the reserved name in these 60
days. 

If after making the reservation of a name, it is found that some wrong

information is given. Then two cases arise. 

1. In case the company has not been incorporated. In this case, the
Registrar can cancel the reservation of the name and impose a fine of
Rupees 1,00,000.
2. In case the company has been incorporated. In this case, after hearing
the reasons of the company, the Registrar has 3 options. These are,
  On being satisfied, he can give 3 months time to the company to
change the name by passing an ordinary resolution. 
 He can strike off the name from the Register of Companies. 
 He can file a petition of winding up of the company. 
Rule 8 and 9 of the Company (Incorporation) Rules, 2014 state that the
application for reservation of name under section 4(4) should be filed on Form
INC – 1.

Registered Office Clause

The Registered Office of a company determines its nationality and jurisdiction of
courts. It is a place of residence and is used for the purpose of all
communications with the company. 

Section 12 of the Companies Act, 2013 talks about Registered Office of the
company. 

Before incorporation of the company, it is sufficient to mention only the name of

the state where the company is located. But after incorporation, the company
has to specify the exact location of the registered office. The company has to
then get the location verified as well, within 30 days of incorporation. 

It is mandatory for every company to fix its name and address of its registered
office on the outside of every office in which the business of the company takes
place. If the company is a one-person company, then “One-person Company”
should be written in brackets below the affixed name of the company. 

Change in place of Registered Office should be notified to the Registrar within

the prescribed time period. 

Object Clause
Section 4(c) of the Act, details the object clause.The Object Clause is the most
important clause of Memorandum of Association. It states the purpose for which
the company is formed. The object clause contains both, the main objects and
matters which are necessary for achieving the stated objects also known as
incidental or ancillary objects. The stated objects must be well defined and
lawful according to Section 6(b) of the Companies Act, 2013. 
By limiting the scope of powers of the company. The object clause provides
protection to:

Shareholders – The object clause clearly states what operations will the
company perform. This helps the shareholders know their investment in the
company will be used for what purpose. 

Creditors – It ensures the creditors that capital is not at risk and the company is
working within the limits as stated in the clause. 

Public Interest – The object clause limits the number of matters the company
can deal with thus, prohibiting diversification of activities of the company. 

Doctrine of Ultra Vires

If the company operates beyond the scope of the powers stated in the object
clause, then the action of the company will be ultra vires and thus void. 

Consequences of Ultra Vires

1. Liability of Directors: The directors of the company have a duty to
ensure that company’s capital is used for the right purpose only. If the
capital is diverted for another purpose not stated in the memorandum,
then the directors will be held personally liable. 
2. Ultra Vires Borrowing by the Company: If a bank lends to the company
for the purpose not stated in the object clause, then the borrowing
would be Ultra Vires and the bank will not be able to recover the
amount. 
3. Ultra Vires Lending by the Company: If the company lends money for
an ultra vires purpose, then the lending would be ultra vires. 
4. Void ab initio – Ultra Vires acts of the company are considered void
from the beginning. 
5. Injunction – Any member of the company can use the remedy of
injunction to prevent the company from doing ultra vires acts. 

Liability Clause
The Liability Clause provides legal protection to the shareholders by protecting
them from being held personally liable for the loss of the company. 
There are two kinds of limited liabilities: 

Limited By Shares – Section 2(22) of the Companies Act, 2013 defines a

company limited by shares. In a company limited by shares, the shareholders
only have to pay the price of the shares they have subscribed to. If for some
reason they have not paid the full amount for the shares and the company
winds up then their liability will only be limited to the unpaid amount. 

Limited By Guarantee – It is defined in Section 2(21) of the Companies Act,

2013.A company limited by guarantee has members instead of shareholders.
These members undertake to contribute to the assets of the company at the
time of winding up. The members give guarantee of a fixed amount that they
will be liable for. 

Non-profit Organizations and other charities usually have a structure of

companies limited by guarantee. 

Capital Clause
It states the total amount of share capital in the company and how it is divided
into shares. The way the amount of capital is divided into what kind of shares.
The shares can be equity shares or preference shares. 

Illustration: The share capital of the company is 80,00,000 rupees, divided into
3000 shares of 4000 rupees each.

Subscription Clause
The Subscription Clause states who are signing the memorandum. Each
subscriber must state the number of shares he is subscribing to. The
subscribers have to sign the memorandum in the presence of two witnesses.
Each subscriber must subscribe to at least one share. 

Association Clause
In this clause, the subscribers to the memorandum make a declaration that
they want to associate themselves to the company and form an association. 
Memorandum of Association for One-
Person-Company
A one-person company is called so because it can be formed by one person. The
minimum capital required to form a one-person company is 1,00,000 Rupees. 

It is a new concept which has been introduced to promote entrepreneurship. All

the laws which are applicable on private companies will be applicable on one-
person company. 

Section 2(62) of the Companies Act, 2013 defines one-person company. 

A one-person company is a separate legal entity from its owner. It is mandatory

for the company to be converted into a private limited company in case its
annual turnover crosses the 2 Crore mark. 

In case of one-person-company, in addition to all the other clauses, the

Memorandum of Association contains a clause called the Nomination Clause.
This clause mentions the name of an individual who will become the member in
case the subscriber dies or becomes incapacitated. The nominee must be an
Indian citizen and resident of India i. e. he must have been living in India for at
least 182 days in the preceding year. A minor cannot be a nominee. 

The individual whose name is mentioned should give his consent in written form
and it is required to be filed with the Registrar of Companies at the time of
incorporation. 

If the nominee wants to withdraw, he shall give it in writing and the owner of
the company will have to nominate a new person within 15 days. 

What’s the use of Memorandum of

Association?
1. It defines the scope & powers of a company, beyond which the
company cannot operate. 
2. It regulates company’s relation with the outside world. 
 3. It is used in the registration process, without it the company cannot be
incorporated. 
4. It helps anyone who wants to enter into a contractual relationship with
the company to gain knowledge about the company. 
5. It is also called the charter of the Company, as it contains all the
details of the company, its members and their liabilities. 

Subscription of Memorandum of
Association
Subscribers are the first shareholders of the company. They are the people who
agreed to come together and form the company. The name of each subscriber
along with their particulars are mentioned in the memorandum. 

Different kinds of companies require different number of subscribers for

incorporation. 

1. Private Company: In case of a private company, the minimum number

of subscribers required are 2.
2. Public Company: In case of a public company, 7 or more subscribers
are required. 
3. One-Person-Company: In case of one-person-company, only one
person is required. 

Who can Subscribe?

Rule 13 of the Companies (Incorporation) Rules, 2014 describes the provisions
of subscribing to the memorandum. 

There are specific kinds of persons (natural or artificial) who can subscribe to
the memorandum. These are:

1. Individuals – An individual or a group of individuals can subscribe to

the memorandum. 
2. Foreign citizens and Non Resident Indians – Rule 13(5) of the
Companies (Incorporation) Rules, states that for a foreign citizen to
subscribe to a company in India, his signature, address and proof of
identity will need to be notarized. 
The foreign national must have visited India and should have a Business Visa.

For a Non Resident Indian, the photograph, address and identity proof should
be attested at the Embassy with a certified copy of a passport. There is no
requirement of Business Visa. 

1. Minor – A minor can only be a subscriber through his guardian. 

2. Company incorporated under the Companies Act – The company can
be a subscriber to the memorandum. The Director, officer or employee
of the company or any other person authorized by the board of
resolution. 
3. Company incorporated outside India – Foreign Company is defined in
Section 2(42) of the act, it states that a foreign company is a company
incorporated outside India. A company registered outside India can
also subscribe to the memorandum by fulfilling the additional
formalities. 
4. Society registered under the Societies Registration Act, 1860. 
5. Limited Liability Partnership – A partner of a limited liability partnership
can sign the memorandum with the agreement of all the other
partners. 
6. Body corporate incorporated under an Act of Parliament or State
Legislature can also be a subscriber to the memorandum. 

Subscription to Memorandum of Association

Every subscriber should sign the memorandum in presence of at least one
witness. The following particulars of the witness should also be mentioned. 

1. Name of the witness

2. Address 
3. Description 
4. Occupation 
If the signature is in any other language then, then an affidavit is required that
declares that the signature is the actual signature of the person. 

According to Circular No. 8/15/8, dated 1-9-1958. The subscriber can also
authorize another person to affix the signature by granting a power of attorney
to the person. Department Circular No. 1/95, dated 16th February 1995 states
that only one power of attorney is required. 

The person who is granted the power of attorney may be known as an agent. 

He should also state the following particulars in the memorandum:

1. Name of the agent

2. Address
3. Description 
4. Occupation 

Particulars to be Mentioned in
Memorandum of Association
Rule 16 of the Companies (Incorporation) Rules, 2014 details the particulars
that are to be mentioned in the memorandum. 

Every Subscriber’s following details should be mentioned. 

1. Name (includes last name and family name), a photograph should be

affixed and scanned with the memorandum.
2. Father’s Name and Mother’s Name
3. Nationality 
4. Date of Birth 
5. Place of Birth
6. Qualifications 
7. Occupation 
8. Permanent Account Number
9. Permanent and Current Address
10. Contact Number
11. Fax Number (Optional) 
12. 2 Identity Proofs in which Permanent Account Number is
mandatory.
 13. Residential Proof (not older than 2 months) 
14. Proof of nationality, if subscriber is a foreign national 
15. If the subscriber is a current director or promoter, then his
designation along with Name and Company Identity Number
If a body corporate is subscribing to the memorandum then the following
particulars should be mentioned. 

1. Corporate identity number of the company or registration number of

the body corporate.
2. Global location number, which is used to identify the location of the
legal entity. (Optional)
3. The name of the body corporate.
4. The registered address of the business.
5. Email address.
In case the body corporate is a company, then a certified copy of Board
resolution which authorizes the subscription to the memorandum. The
particulars required in this case are, 

1. Number of shares to be subscribed by a body corporate. 

2. Name, designation and address of the authorized person.
In case the body corporate is a limited liability partnership. The particulars
required are, 

1. A certified copy of the resolution. 

2. The number of shares that the firm is subscribing to. 
3. The name of the authorized partner. 
In case the body corporate is registered outside the country. The particulars
required are, 

1. The copy of certificate of incorporation.

2. The address of the registered office.

Printing and Signing of Memorandum of

Association
Section 7(1)(a) states that the memorandum should be duly signed by all the
subscribers and should be in a manner prescribed by the Act. 
Rule 13 of the Company (Incorporation) Rules, 2014 describes the manner in
which the memorandum should be signed. 

1. The Memorandum of Association should be signed by each subscriber

to the memorandum. The subscriber shall mention his name, address,
occupation and the number of shares he is subscribing to. The
documents should be signed in the presence of at least one witness.
The witness would also mention his name, address, and occupation. By
signing the memorandum, the witness states that, “I witness to
subscriber/subscriber(s)who has/have subscribed and signed in my
presence (date and place to be given); further I have verified his or
their Identity Details (ID) for their identification and satisfied myself of
his/her/their identification particulars as filled in.”
2. If the person subscribing to the document is illiterate, he can either
authorize an agent to sign the document through Power of Attorney or
he can put his thumb impression on the column for signatures. The
person’s name, address, occupation and the number of shares he is
subscribing to should be written by a person who has been allowed to
write for him. The person who is writing for the illiterate person should
read and explain the contents of the document to an illiterate person. 
3. Where the person subscribing to the memorandum is an artificial
person i. e. a body corporate the memorandum shall be signed by the
employee, officer or any person authorized by the Board of Resolution. 
4. Where the person subscribing to the memorandum is a foreign national
who does not reside in India but in a country, 

 in any part of the Commonwealth, his signatures and address on the

memorandum and proof of identity shall be notarized by a Notary
(Public) in that part of the Commonwealth.
 in a country which is a signatory to the Hague Apostille Convention,
1961, his signature and proof of identity and address on the
memorandum shall be notarized before the Notary (Public) of the
country of his origin and be duly approved in accordance with the said
Hague Convention.
 in a country outside the Commonwealth and which is not a party to the
Hague Apostille Convention, 1961, his signatures and address on the
memorandum and proof of identity, shall be notarized before the
Notary (Public) of such country and the certificate of the Notary
(Public) shall be authenticated by a Diplomatic or Consular Officer
empowered in this behalf under section 3 of the Diplomatic and
Consular Officers (Oaths and Fees) Act, 1948 (40 of 1948).
Section 3 of the Diplomatic and Consular Officers states that, every Diplomat or
any officer in a foreign country can perform the functions of a notary public. 
 1. Where there is no Diplomatic or Consular officer by any of the officials
mentioned in section 6 of the Commissioners of Oaths Act, 1889.
2. If the foreign national visited India and intended to incorporate a
company, in such a case the incorporation shall be allowed if, he is
having a valid Business Visa. 
Section 15 of the Companies Act, 2013 states that the memorandum should be
in printed form. 

The Ministry of Corporate Affairs has clarified that a document printed in form
laser printers will be considered valid provided it is legible and fulfills other
requirements as well. 

The submission of xerox copies is not allowed. The xerox copies can be
submitted to the members of the company. 

Alteration, Amendment & Change in

Memorandum of Association under
Companies Act, 2013.
The term “alter” or “alteration” is defined in Section 2(3) of the Act, as any
additions, omissions or substitutions. A company can alter the memorandum
only to the extent as permitted by the Act. According to Section 13, the
company can alter the clauses in the memorandum by passing a special
resolution.

A resolution is a formal decision taken in a meeting. There are two kinds of

resolutions, ordinary and special. A special resolution is one which requires at
least 2/3rd majority to be effective. The alteration to the clauses also require
the approval of the Central Government in writing. 

The alteration of memorandum can happen for a variety of reasons. The

alteration can be made if, 

1. Enables the company to carry its business more effectively;

2. Helps to achieve the objectives;
3. Helps the company to amalgamate with another company;
4. Helps the company dispose off any undertaking.  
Alteration of Memorandum 
The alteration of various clauses of the memorandum have different
procedures:

1. Alteration to the Name Clause: To alter the name of the company, a

special resolution is required. After the resolution is passed, the copy is
sent to the registrar. For changing the name, the application needs to
be filed in Form INC- 24 with the prescribed fees. After the name is
changed, a new certificate of incorporation is issued. 
2. Alteration to the Registered Office Clause: The application for changing
the place for Registered Office of the company shall be filed with the
Central Government in Form INC- 23 with the prescribed fees.
If the company is changing its Registered Office from one to another, then the
approval of the Central Government is required. The Central Government is
required to dispose off the matter within 60 days and should ensure that the
change of place has the consent of all the stakeholders of the company. 

 Alteration to the Object Clause: To alter the object clause, a special

resolution is required to be passed. The changes must be confirmed by
the authority. The document which confirms the changes by authority
with a printed copy of the altered memorandum should be filed with
the Registrar. 
If the company is a public company, then the alteration should be published in
the newspaper where the Registered Office of the company is located. The
changes to the object clause must also mentioned on the company’s website. 

 Alteration to the Liability Clause: The Liability clause of the

memorandum cannot be altered except with the written consent of all
the members of the company. By altering the liability clause, the
liability of the directors of the company can be made unlimited. In any
case, the liability of the shareholders cannot be made unlimited.
Changes in the liability clause can be made by passing a special a
special resolution and sending a copy of the resolution to the Registrar
of Companies. 
Alteration to the Capital Clause: The capital clause of a company can be altered
by an ordinary resolution. 

The company can, 

1. Increase its authorised share capital;

2. Convert the shares into stock;
 3. Consolidate and divide all of its shares;
4. Cancel the shares which have not been subscribed to;
5. Diminish the share capital of the shares cancelled. 
The altered Memorandum of Association should be submitted to the Registrar
within 30 days of passing the resolution. 

Difference between Memorandum of

Association and Articles of Association
While Memorandum of Association is a document that governs a company’s
relationship with the outside world. The Articles of association governs a
company’s internal affairs and management. The directors and all other officers
of the company should perform the functions in accordance with the Articles of
Association. The Articles of Association are subordinate to the memorandum.
Thus, while framing the Articles of Association it is very important to keep in
mind that the Articles do not, in any way contradict or exceed the scope of the
memorandum. 

The Articles of Association form a contract, 

1. Between members of the company;

2. Between the company and its members. 
The Articles of Association are important for a company because, 

1. They bind the company with its members. 

2. They bind the members with each other. 
3. They are not concerned with the outside world, they only deal with the
internal affairs of the company which are essential for the smooth
functioning of the business. 

Content of the Articles of Association

There is no specific clause that the Articles should contain, they can be drafted
as per the requirements of the company.The Articles may contain the
following: 

1. Rights of shareholders.
2. Liabilities, duties and powers of the directors. 
 3. Accounts and audits.
4. Minutes of meetings.
5. Rules regarding use of common seal.
6. Procedure for winding up of the company. 
7. Borrowing powers of the company. 
8. Procedure for transfer of shares.
9. Procedure for alteration of the share capital of the company. 
10. Manner in which notices are given for General Meetings. 
11. Minimum attendance for a General Meeting. 
12. State the agenda of Annual General Meetings. 
13. Procedure for maintaining the financial records of the company. 
14. Determine the Accounting period. 
15. Determine the procedure for passing a resolution. 
16. Memorandum of Association Articles of Association

It details the relationship of a company with It regulates the internal affairs

the outside world.  of the company. 

It is defined in section 2(56) of the Companies It is defined in section 2(5) of

Act, 2013.  the Companies Act, 2013. 

It contains all the rules of the

It contains the objects of the company.
company.

Approval of the Central

Approval of the Central Government is required
Government is not required for
for alteration. 
alteration. 

Forms of Articles of Association

Forms of Memorandum of Association are in
are in Tables F,G,H,I,J of
Tables A,B,C,D,E of Schedule 1. 
Schedule 1.
 Acts ultra vires to the memorandum are void Acts ultra vires to the Articles
and cannot be made legitimate by ratification can be made legitimate by
of shareholders.  ratification of shareholders. 

The memorandum should not be in The articles should not be in

contravention to the provisions of the contravention to the
Companies Act, 2013.  memorandum. 

Both Memorandum of Association and Articles of Association are essential

documents which describe the procedure for companies to deal with the outside
world and manage its internal affairs. 

Conclusion 
Thus, Memorandum of Association is a fundamental document for the formation
of a company. It is a charter of the company. Without memorandum, a
company cannot be incorporated. The memorandum together with Articles of
Association form the constitution of the company.
Articles of Association Under Indian
Company Law
Introduction
The Companies Act, 2013 defines ‘articles’ as the “articles of association of a
company originally framed, or as altered from time to time in pursuance of any
previous company laws or of the present.” The Articles of Association of a
company are that which prescribe the rules, regulations and the bye-laws for
the internal management of the company, the conduct of its business, and is a
document of paramount significance in the life of a company. The Articles of a
company have often been compared to a rule book of the company’s working,
that regulates the management and powers of the company and its officers. It
prescribes several details of the company’s inner workings such as the manner
of making calls, director’s/employees qualifications,  powers and duties of
auditors, forfeiture of shares etc.

In fact, the articles of association also establish a contract between the

members and between the members and the company. This contract is
established, governs the ordinary rights and obligations that are incidental to
having membership in the company.

It must be noted, however, that the articles of association, are subordinate to

the memorandum of association of a company, which is the dominant,
fundamental constitutional document of the company. Further, as laid down
in Shyam Chand v. Calcutta Stock Exchange, any and all articles that go
beyond the memorandum of association will be deemed ultra vires. Therefore,
there should not be any provisions in the articles that go beyond the
memorandum. In the event of a conflict between the memorandum and the
articles, the provisions in the memorandum will prevail. In case of any
ambiguity or uncertainty regarding details in the memorandum, it should be
read along with the articles.

Distinction Between Memorandum and

Articles of Association
The pivotal differences between memorandum and articles of association are as
follows:
S.No
Memorandum of Association Articles of Association
.

Contain the provisions for

Contains fundamental conditions upon
1 internal regulations of the
which the company is incorporated.
company.

Regulate the relationship

Meant for the benefit and clarity of the
between the company and its
2 public and the creditors, and the
members, as well amongst the
shareholders.
members themselves.

Lays down the area beyond which the Articles establish the regulations
3
company’s conduct cannot go. for working within that area.

Memorandum lays down the Articles prescribe details within

4
parameters for the articles to function. those parameters.

Can only be altered under specific

circumstances and only as per the Articles can be altered a lot
5 provisions of the Companies Act, 2013. more easily, by passing a
Permission of the Central Government special resolution.
is also required in certain cases.

Articles cannot include

Memorandum cannot include provisions provisions contrary to the
contrary to the Companies Act. memorandum. Articles are
6
Memorandum is only subsidiary to the subsidiary to both the
Companies Act. Companies Act and the
Memorandum.

Acts done beyond the Articles

Acts done beyond the memorandum
can be ratified by the
7 are ultra vires  and cannot be ratified
shareholders as long as the act
even by the shareholders.
is not beyond the memorandum.

Nature and Content of Articles of

Association
As per the Companies Act, 2013, the articles of association of different
companies are supposed to be framed in the prescribed form, since the model
form of articles is different for companies limited by shares, companies limited
by guarantee having share capital, companies limited by guarantee not having
share capital, an unlimited company having share capital and an unlimited
company not having share capital.  

The signing of the Articles of Association

The Companies (Incorporation) Rules, 2014 prescribes that both the
Memorandum and the Articles of a company are to be signed in a specific
manner.

 Memorandum and Articles of a company, are both required to be

signed by all subscribers, who are further required to add their names,
addresses and occupation, in the presence of at least one witness, who
must attest the signatures with his own signature and details.
 Where a subscriber is illiterate, he must affix a thumb impression in
place of his signature, and appoint a person to authenticate the
impression with his signature and details. This appointed person should
also read out the content of the documents to the illiterate subscriber
for his understanding.
 Where a subscriber is a body corporate, the memorandum and articles
must be signed by any director of the body corporate who is duly
authorised to sign on behalf of the body corporate, by a passing a
resolution of the board of directors of the body corporate.
 Where the subscriber is a Limited Liability Partnership, the partner of
the LLP who is duly authorised to sign on the behalf of the LLP by a
resolution of all the partners shall sign.

Provisions for Entrenchment

The concept of Entrenchment was introduced in the Companies Act, 2013 in
Section 5(3) which implies that certain provisions within the Articles of
Association will not be alterable by merely passing a special resolution, and will
require a much more lengthy and elaborate process. The literal definition of the
word “entrench” means to establish an attitude, habit, or belief so firmly that
bringing about a change is unlikely. Thus, an entrenchment clause included in
the Articles is one which makes certain changes or amendments either
impossible or difficult.
Provisions for entrenchment can only be introduced in the articles of a company
during its incorporation, or an amendment to the articles brought about by a
special resolution in case of a public company, and an agreement between all
the members in case of a private company.  

Alteration of Articles of Association

Section 14 of the Companies Act, 2013, permits a company to alter its articles,
subject to the conditions contained in the memorandum of association, by
passing a special resolution. This power is extremely important for the
functioning of the company. The company may alter its articles to the effect
that would turn:

A public company into a private company

For a company wanting to convert itself from public to a private
company simply passing a special resolution is not enough. The company will
have to acquire the consent and approval of the Tribunal. Further, a copy of the
special resolution must be filed with the Registrar of Companies within 30 days
of passing it. Further, a company must then file a copy of the altered, new
articles of association, as well as the approval order of the Tribunal with the
Registrar of Companies within 15 days of the order being received.

A private company into a public company

For a company wanting to convert from its private status to public, it may do so
by removing/omitting the three clauses as per section 2(68) which defines the
requisites of a private company. Similar to the conversion of the public to a
private company, a copy of the resolution and the altered articles are to be filed
with the Registrar within the stipulated period of time.

Limitations on power to alter articles

 The alteration must not contravene provisions of the memorandum,
since the memorandum supersedes the articles, and the memorandum
will prevail in the event of a conflict.
 The alteration cannot contravene the provisions of the Companies Act,
or any other company law since it supersedes both the memorandum
and the articles of the company.
  Cannot contravene the rules, alterations or suggestions of the Tribunal.
 The alteration cannot be illegal or in contravention with public policy.
Further, it must be for the bona fide benefit and interest of the
company. The alterations cannot be an effort to constitute a fraud on
the minority and must be for the benefit of the company as a whole.
 Any alteration made to convert a public company into a private
company, cannot be made until the requisite approval is obtained from
the Tribunal.
 A company may not use the alteration to cover up or rectify a breach
of contract with third parties or use it to escape contractual liability.
 A company cannot alter its articles for the purpose of expelling a
member of the board of directors is against company jurisprudence
and hence cannot occur.

Binding effect of Memorandum and Articles

of Association
After the Articles and the Memorandum of a company are registered, they bind
the company and its members to the same extent as if they had been signed by
each of the members of the company. However, while the company’s articles
have a binding effect, it does not have as much force as a statute does. The
effect of binding may work as follows:

Binding the company to its members

The company is naturally completely bound to its members to adhere to the
articles. Where the company commits or is in a place to commit a breach of the
articles, such as making ultra vires  or otherwise illegal transaction, members
can restrain the company from doing so, by way of an injunction. Members are
also empowered to sue the company for the purpose of enforcement of their
own personal rights provided under the Articles, for instance, the right to
receive their share of declared divided.

It should be noted, however, that only a shareholder/member, and only in his

capacity as a member, can enforce the provisions contained in the Articles. For
instance, in the case of Wood v. Odessa Waterworks Co., the articles of
Waterworks Co. provided that the directors can declare a dividend to be paid to
the members, with the sanction of the company at a general meeting. However,
instead of paying the dividend to the shareholders in cash a resolution was
passed to give them debenture bonds. It was finally held by the court, that the
word “payment” referred to payment in cash, and the directors were thus
restrained from acting on the resolution so passed.

Members bound to the company

Each member of the company is bound to the company and must observe and
adhere to the provisions of the memorandum and the articles. All the money
that may be payable by any member to the company shall be considered as a
debt due. Members are bound by the articles just as though each and every one
of them has signed and contracted to conform to their provisions. In Borland’s
Trustees v. Steel Bros. & Co. Ltd., the articles the company provided that in
the event of bankruptcy of any member, his shares would be sold at a price
affixed by the directors. Thus, when Borland went bankrupt, his trustee
expressed his wish to sell these shares at their original value and contended
that he could do so since he was not bound by the articles. It was held,
however, that he was bound to abide by the company’s articles since the shares
were bought as per the provisions of the articles.

Binding between members

The articles create a contract between and amongst each member of the
company. However, such rights can only be enforced by or even against a
member of the company. Courts have been known to make exceptions, and
extend the articles to constitute a contract even between individual
members. In the case of Rayfield v Hands Rayfield was a shareholder in a
particular company., who was required to inform directors if he intended to
transfer his shares, and subsequently, the directors were required to buy those
shares at a fair value. Thus, Rayfield remained in adherence to the articles and
informed the directors. The directors, however, contended that they were not
bound to pay for his shares and the articles could not impose this obligation on
them. The courts, however, dismissed the directors’ argument and compelled
them to buy Rayfield’s shares at a fair value. The court further held that it was
not mandatory for Rayfield to join the company to be allowed to bring a suit
against the company’s directors.

No binding in relation to outsiders

Contrary to the above conditions, neither the memorandum nor the articles
constitute a contract between the company and any third party. The company
and its members are not bound to the outsiders with respect to the provisions
of the memorandum and the articles. For instance, in the case of Browne v La
Trinidad, the articles of the company included a clause that implied that
Browne should be a director that should not be removed or removable. He was,
however, removed regardless and thus brought an action to restrain the
company from removing him. Held that since there was no contract between
Browne and the company, being an outsider he cannot enforce articles against
the company even if they talk about him or give him any rights. Therefore, an
outsider may not take undue advantage of the articles to make any claims
against the company.

The doctrine of Constructive Notice

When the Memorandum and Articles of Association of any company, are
registered with the Registrar of Companies they become “public documents” as
per section 399 of the Act. This implies that any member of the general public
may view and inspect these documents at a prescribed fee. A member of the
public may make a request to a specific company, and the company, in turn,
must, within seven days send that person a copy of the memorandum, the
articles and all agreements and resolutions that are mentioned in section 117(1)
of the Act.

If the company or its officers or both, fail to provide the copies of the requisite
documents, every defaulting officer will be liable to a fine of Rs. 1000, for every
day, until the default continues, or Rs. 1,00,000 whichever is less.

Therefore, it is the duty of every person that deals with the company to inspect
these public documents and ensure in his own capacity that the workings of the
company are in conformity with the documents. Irrespective of whether a
person has actually read the documents or not, it is assumed that he familiar
with the contents of these documents, and that he has understood them in their
proper meaning. The memorandum and articles of association are thus deemed
as notices to the public, hence a ‘constructive notice’.

Illustration: If the articles of Company A, provided that any bill of exchange

must be signed by a minimum of two directors, and the payee receives a bill of
exchange signed only by one, he will not have the right to claim the amount.

The doctrine of Indoor Management

The concept of the Doctrine of Indoor Management can be most elaborately
explained by examining the facts of the case of Royal British Bank v.
Turquand, which in fact, first laid down the doctrine. It is due to this that the
doctrine of indoor management is also known as the “Turquand Rule”.
The directors of a particular company were authorised in its articles to engage
in the borrowing of bonds from time to time, by way of a resolution passed by
the company in a general meeting. However, the directors gave a bond to
someone without such a resolution being passed, and therefore the question
that arose was whether the company was still liable with respect to the bond.
The company was held liable, and the Chief Justice, Sir John Jervis explained
that the understanding behind this decision was that the person receiving the
bond was entitled to assume that the resolution had been passed, and had
accepted the bond in good faith.

However, the judgement, in this case, was not fully accepted into in law until it
was accepted and endorsed by the House of Lords in the case of Mahony v
East Holyford Mining Co.

Therefore the primary role of the doctrine of indoor management is completely

opposed to that of constructive notice. Quite simply, while constructive notice
seeks to protect the company from an outsider, indoor management seeks to
protect outsiders from the company. The doctrine of constructive notice is
restricted to the external and outside position of the company and, hence,
follows that there is no notice regarding how the internal mechanism of the
company is operated by its officers, directors and employees. If the contract has
been consistent with the documents on public record, the person so contracting
shall not be prejudiced by any and all irregularities that may beset the inside, or
“indoor” operation of the company.

This doctrine has since then been adopted into Indian Law as well in cases such
as Official Liquidator, Manabe & Co. Pvt. Ltd. v. Commissioner of
Police and more recently, in M. Rajendra Naidu v. Sterling Holiday Resorts
(India) Ltd. wherein the judgment was that the organizations lending to the
company should acquaint themselves well with the memorandum and the
articles, however, they cannot be expected to be aware of every nook and
corner of every resolution, and to be aware of all the actions of a company’s
directors. Simply put, people dealing with the company are not bound to inquire
into every single internal proceeding that takes place within the company.

Exceptions to the Doctrine of Indoor

Management
1. Where the outsider had knowledge of the irregularity— Although
people are not expected to know about internal irregularities within a
company, a person who did, in fact, have knowledge, or even implied
notice of the lack of authority, and went ahead with the transaction
 regardless, shall not have the protection of this
doctrine. Illustration: In Howard v. Patent Ivory Co. (38 Ch. D
156), the articles of a company only allowed the directors to borrow a
maximum amount of one thousand pounds, however, they could
exceed this amount by obtaining the consent of the company in a
general meeting. However, in this case, without obtaining this requisite
consent, the directors borrowed a sum of 3,500 Pounds from one of
the directors in exchange for debentures. The company then refused to
pay the amount. It was eventually held that the debentures were only
good to the extent of one thousand pounds since the director had full
knowledge and notice of the irregularity since he was a director himself
involved in the internal working of the company.
2. Lack of knowledge of the articles— Naturally, this doctrine cannot and
will not protect someone who has not acquainted himself with the
articles or the memorandum of the company for example in the case
of Rama Corporation v. Proved Tin & General Investment
Co. wherein the officers of Rama Corporation had not read the articles
of the investment company that they were undertaking a transaction
with.
3. Negligence— This doctrine does not offer protection to those who have
dealt with a company negligently. For example, if an officer of a
company very evidently takes an action which is not within his powers,
the person contracting should undertake due diligence to ensure that
the officer is duly authorized to take that action. If not, this doctrine
cannot help the person so contracting, such as in the case of Al
Underwood v. Bank of Liverpool.
4. Forgery— Any transaction which involves forgery or is illegal or void ab
initio, implies the lack of free will while entering into the transaction,
and hence does not invoke the doctrine of indoor management. For
example, in the case of Ruben v. Great Fingal Consolidated, the
secretary of a company illegally forged the signatres of two directors
on a share certificate so as to issue shares without the appropriate
authority. Since the directors had no knowledge of this forgery, they
could not be held liable. The share certificate was held to be in nullity
and hence, the doctrine of indoor management could not be applied.
The wrongful an unauthorized use of the company’s seal is also
included within this exception.
Further, this doctrine cannot include situations where there was third agency
involved or existent. For example, in the case of Varkey Souriar v. Keraleeya
Banking Co. Ltd. this doctrine could not be applied where there was any scope
of power exercised by an agent of the company. The doctrine cannot be implied
even in cases of Oppression.
  Conclusion
Therefore, it is to be understood that in the sphere of corporate governance, the
articles of a  company is a crucial document which, along with the memorandum
from the company’s core constitution and rule book, and hence defines the
responsibilities of its directors,  kinds of business es to be undertaken by the
company, and the various means by which the shareholders may exert their
control over the directors, and the company itself. While the memorandum lays
down the objectives of the company, the articles lay down the rules by which
these objectives are to be achieved.  In cases of conflict, the Memorandum
supersedes the Articles and the Companies Act further, supersedes both
Memorandum and Articles.

These articles may be altered as per Section 14 of the Companies Act, 2013.
The entrenchment provisions in the Articles of a company protect the interests
of all the minority shareholders by ensuring that amendment in the article can
only occur after obtaining the requisite prior approval of the shareholders. The
Articles of a company bind the company to its members and bind the members
to the company and further also bind the members to each other, they
constitute a contract amongst themselves and therefore, its members with
respect to their rights and liabilities as members of the company.
Who is Liable for Misstatements in
Prospectus?
Introduction
The purpose of this article is to examine the liability for misstatements in the
prospectus of a company. Before going to the details of liability, a brief
overview of the meaning and significance of the prospectus would be helpful.

What is a prospectus?
Pursuant to section 2(70) of the Companies Act, 2013, prospectus is a
document that invites offers from the public for the subscription or purchase of
the securities of a company. The term ‘prospectus’ includes not only a
document described or issued as prospectus but also notices, circulars and
advertisements offering invitation to purchase or subscribe the securities.
Likewise, any document that offers sale of shares of a company by its members
will also be deemed to be a prospectus (sec. 28(2)). The prospectus must
contain such information and reports on financial information specified by the
Securities and Exchange Board of India (SEBI) in consultation with the Central
Government (sec. 26(1)). The date of publication of the prospectus is deemed
to be the date indicated in the prospectus. The Central Government, the
Tribunal or the Registrar can invoke all powers in matters related to prospectus
(sec. 24 Explanation).
Sec. 26 of the Companies Act sets out the matters to be stated in the
prospectus as well as the steps required to comply with its registration. Sec.
26(9) deals with the punishment for issuing prospectus in contravention of the
said provisions.  A company issuing such a prospectus shall be punishable with
a fine of minimum fifty thousand rupees and a maximum of three lakh rupees.
Also, every person who has a knowledge of the issue of such prospectus shall
be punishable with imprisonment that may extend to three years or with a
minimum of fifty thousand rupees as fine. The fine may extend to three lakh
rupees, and the person may be awarded both fine and imprisonment. (How do
we determine the mental culpability of a person? As in, how do we determine
that he had the knowledge that it is a prospectus in contravention? What is the
standard and on whom does the burden of proof lie?)

Misstatements in the prospectus

 Since prospectus is relied on by the members of the public to subscribe or
purchase the securities of a company, any misstatements on it invite penal
consequences. Misstatement may occur when a statement which is untrue or
misleading in form or context is included in the prospectus. Also, any inclusion
or omission of any matter which is likely to mislead will also be considered as a
misstatement (sec. 34). For e.g., a statement on the purpose of offering shares
which is untrue, or statement on the locations of offices for a company which is
misleading will amount to misstatement in the prospectus. 

Liability for misstatement in the prospectus

A person who has signed and given consent to the prospectus is liable for
misstatement. Persons who had the management of the whole, or substantially
whole of the affairs of the company can be held liable for misstatement in
prospectus if they have signed the prospectus and had given consent for the
same. Managers, Company Secretaries, and Directors will come under this
category. However, the mere signing of the declarations in the prospectus will
not result in liability for misstatement if the person signing is neither a manager
of the company nor draw salary from the company. In the Matter of Sahara
India Commercial Corporation Ltd., SEBI 31 Oct. 2018. Here, SEBI considered
the submission of the Company Secretary that he signed the prospectus on
behalf of the directors under their power of attorney and concluded that he was
not liable for misstatement as the director of the company.

Likewise, in Hafez Rustom Dalal vs Registrar of Companies, the Gujarat High

Court observed that while issuing notices, the respondent authority has to point
out the statements in the Prospectus which they consider false or deliberate or
made to induce the public for subscribing the shares of the Company.
A misstatement in the prospectus can invoke criminal (sec. 34) and civil
liabilities (sec. 35). Misstatements can lead to punishment for fraud under
Sec. 447. 

 Criminal liability
A person who authorizes the issue of a prospectus which has untrue or
misleading statements is liable for punishment under Sec. 34. Such a
punishment is for fraud as set out in Sec. 447. “Fraud” under Sec. 447 includes
an act, omission, concealment of any fact with an intent to deceive, gain undue
advantage, or to injure the interests of the company or its shareholders or its
creditors or any other person. It is not necessary that such an act involve any
wrongful gain or wrongful loss. Abuse of position committed by a person is also
considered fraud under this section. Sec. 447 further sets out the punishment
for fraud:

 If the fraud involves an amount of ten lakh rupees or more, or

one per cent. of the turnover of the company (whichever is lower)
the person who is found guilty of fraud shall be punishable with
imprisonment for a minimum term of six months which may extend to
ten years. Such a person shall also be liable to a fine of an amount not
less than the amount involved in the fraud and the fine may extend to
three times of such amount.
 If the fraud involves an amount less than ten lakh rupees or
one per cent. of the turnover of the company (whichever is lower)
and does not involve public interest, the imprisonment may extend to
five years or with fine which may extend to fifty lakh rupees or with
both.
 If the fraud in question involves public interest, the term of
imprisonment shall not be less than three years.
 Civil liability
Civil liability for misstatements in prospectus will arise when a person has
sustained any loss or damage by subscribing securities of a company
based on a misleading prospectus (sec. 35). In such instances the
following persons shall be liable under sec 447 and will have to pay
compensation to persons who have sustained such loss or damage:

1. director of the company at the time of the issue of the prospectus;

2. person who has agreed to be named as a director in the prospectus
and is named as a director of the company, or has agreed to become
such director;
3. is a promoter of the company;
 4. has authorised the issue of the prospectus; and
5. is an expert who has been engaged or interested in the formation or
promotion or management of the company.

Prohibition of the Company and directors

from dealing with securities following
misstatement
In the Matter of Taksheel Solutions Limited, the SEBI (25 Oct. 2013) found that
the Red Herring Prospectus/Prospectus had several missing vital pieces of
information which resulted in misstatement. SEBI had earlier prohibited the
company, its promoters/directors and independent directors from buying,
selling, or dealing in securities in any manner. The Board noted that the
company had the duty to make true and correct disclosures and statements in
the Prospectus to help the applicants take an informed investment decision. The
Board further observed that the Prospectus failed to disclose a related party
transaction too. Therefore, the Board confirmed the interim order of prohibition
on the Company and its Promoters/Directors in dealing with securities.
However, the Board vacated the prohibition on the independent directors who
had resigned from the Company and had undergone the restraint for more than
twenty-one months.

Suspension of the auditor for false

certificate attached to the Prospectus
In The Institute of Chartered Accountants of India v. Mukesh Gang, Chartered
Accountant, Referred Case. No.2 of 2011, the High Court of Andhra Pradesh
noted that the prospectus is a special document and a false certificate is issued
by the auditor would amount to his failure to discharge his statutory duties. The
court added that he must be presumed to be aware of the consequences that
flow from such gross negligence of a false certification because the public
subscribe to the shares based on the invitation (Prospectus). The court further
observed that as per Section 65 of the Companies Act, 1956 untrue statements
in the prospectus will result in liability for the loss or damage sustained by a
person while subscribing for shares or debentures based on such statements in
the Prospectus. Here, the court found that the certification by the statutory
auditor has resulted in misleading the general public into subscribing to the
shares of the company by placing faith on such a certificate. Therefore, the
court suspended the respondent from practising as a Chartered Accountant for a
period of three years under Section 21(5) of the Chartered Accountants Act,
1949.

Exceptions from liability for misstatements

in Prospectus
A person shall not be criminally liable under sec. 34 if he proves that: the
statement or omission was immaterial or 

 he had reasonable grounds to believe that the statement was true or

the inclusion or omission was necessary and believed in it up to the
time of issue of the prospectus. 
Likewise, a person shall not be liable under sub-section (1) of sec. 35 (civil
liability), if he proves that:

 he withdrew his consent to become a director of the company before

the issue of the prospectus, and that it was issued without his authority
or consent; or
 the prospectus was issued without his knowledge or consent, and 
 on becoming aware of its issue, he gave a reasonable public notice that
it was issued without his knowledge or consent.
A person may not be liable for a misleading statement made by an
expert if:

 the report is a correct and fair representation of the statement, or

 a correct copy or a correct and fair extract of the report or valuation;
and
 he had reasonable ground to believe that such expert was competent
to make the statement and had given the consent required by sub-
section (5) of section 26 to the issue of the prospectus and had not
withdrawn that consent before delivery of a copy of the prospectus for
registration. (sec. 35(2)(c)).

Conclusion
The prospectus being an invitation to the public to subscribe to the securities of
a company must be made with utmost care. The public rely on the statements
and reports attached to the prospectus to take an investment decision.
Therefore, the Companies Act provide for liabilities and punishments for persons
who provide misleading and untrue statements in the prospectus.
Prospectus- Remedies for Misrepresentation

Rescission for misrepresentationThe shareholder can also sue the company for
rescission of the contract. Under

this remedy the contract is cancelled and the money given by the shareholder

refunded. Under Section 75 of the Contract Act, a person who lawfully rescinds
a

contract is entitled to compensation for any damage which he has sustained

through non-fulfillment of the contract.

Loss of right of rescission

(a) By affirmation-

If the allotted with full knowledge of the misrepresentation upholds the

contract, he cannot afterwards rescind.

(b) By unreasonable delay-

Any man who claims to retire from a company on the ground that he was

induced to become a member by misrepresentation, is bound to come at the

earliest possible moment after he becomes aware of the misrepresentation.”

(c) By commencement of winding up-

The right of rescission is lost on the commencement of the winding up of the

company. “But where a shareholder has started active proceedings to be

relieved
of his shares, the passing of the winding up order during their pendency would

not prevent his getting the relief.”

Damages for deceit-

Any person induced by a fraudulent statement in a prospectus to take

shares, is entitled to sue the company for damages. He must prove the same

matters in claiming damages for deceit as in claiming rescission of the

contract. He cannot both retain the shares and get damages against the

company. He must show that he has repudiated the shares and has not acted

as a shareholder after discovering the fraud or misrepresentation.

Compensation

Now section 35 of companies act 2013-

Every director, promoter and every person authorizes the issue of the

prospectus is liable to pay compensation to the aggrieved party for loss or

damage he may have incurred by reason of any untrue statement in the

prospectus.

The persons who are liable to pay compensation are :

(a) Directors at the time of issue of prospectus,

(b) Persons who have authorized themselves to be named as directors

in the
prospectus,

(c) Promoters,

(d) Persons who have authorized the issue of prospectus.

Section 35 of companies act 2013—

Civil liability for misstatements in prospectus

(1) Where a person has subscribed for securities of a company acting on any

statement included, or the inclusion or omission of any matter, in the

prospectus

which is misleading and has sustained any loss or damage as a consequence

thereof, the company and every person who-

(a) Is a director of the company at the time of the issue of the prospectus;

(b) Has authorised himself to be named and is named in the prospectus as a

director of the company, or has agreed to become such director, either

immediately or after an interval of time;

(c) Is a promoter of the company;

(d) Has authorised the issue of the prospectus; and

(e) Is an expert referred to in sub-section (5) of section 26, shall, without

prejudice to any punishment to which any person may be liable under section
36,

be liable to pay compensation to every person who has sustained such loss or
damage.

(2) No person shall be liable under sub-section (1), if he proves—

(a) That, having consented to become a director of the company, he withdrew

his consent before the issue of the prospectus, and that it was issued without
his

authority or consent; or

(b) That the prospectus was issued without his knowledge or consent, and that

on becoming aware of its issue, he forthwith gave a reasonable public notice

that

it was issued without his knowledge or consent

Position, Appointment & Powers of

Directors under the Companies Act, 2013
A corporation is an artificial person which is intangible and invisible. For making
any decision and to have knowledge and intention, a living person has a mind
and hands by which he carries out his actions. But a corporate body being an
artificial person has none of these. So it needs to act through a living person.
The company’s business is entrusted in the hands of directors.

Section 2(34) of the Companies Act, 2013 defines a director.

Position of Directors
The position held by the directors in any corporate enterprise is a tough subject
to explain as held in the case of Ram Chand & Sons Sugar Mills Pvt. Ltd.v.
Kanhayalal Bhargava. The position of a director has been cited by Bowen
LJ in the case of Imperial Hydropathic Hotel Co   Blackpool v. Hampson as
a versatile position in a corporate body. Directors are sometimes described as
trustees, sometimes as agents and sometimes as managing partners. These
expressions are from indicating point by which directors are viewed in particular
circumstances.

Are directors servant of the company?

The directors are the professional men of the company who are hired to direct
the affairs of the company. They are the officers of a company and not a
servant. In the case of Moriarty v. Regent’s Garage Co, it was held that a
director is not a servant of the company, but a controller of the affairs
of a company.

Directors as agents
In the landmark case of Ferguson v. Wilson, it was clearly recognised that the
directors are the agents of a company in the eyes of law. The company being
an artificial person can act only through the directors. Regarding this, the
relation between the directors and the company is merely like the ordinary
relation of principal and agent.

The relation between the directors and the company is similar to the general
principle of agency. When a director signs on behalf of the company, it is a
company that is held liable and not the director. Also, like agents, they have to
declare any personal interest if they have in a transaction of the company.

One of the important points to be noted is that they are not agents of its
individual members. They are the agents of the institution.

In the case of Indian Overseas Bank v. RM Marketing, it has been held that
the directors of a company could not be made liable merely because he is a
director if he has not given any personal guarantee for a loan taken by the
company,

Directors as Trustees
In a strict sense, the directors are not the trustees, but they are always
considered and treated as trustees of money and properties which comes to
their hand or which is under their control. As observed by the Madras High
Court in the case of Ramaswamy Iyer v. Brahamayya & Co., regarding their
power of applying funds of the company and for the misuse of power, the
directors are liable as trustees and after their death, the cause of action
survives against their legal representative.

Another reason due to which the directors are described as trustees is because
of their nature of the office. Directors are appointed to manage the affairs of the
company for the benefit of shareholders. But, the director of a company is not
exactly a trustee, as a trustee of will or marriage settlement. He is a paid officer
of a company.

As per the principles laid down in the case of Percival v. Wright, directors are
not the trustees of the shareholders. They are trustees of the company. The
same principle was repeated again in the case of Peskin v. Anderson that the
directors are not trustees for shareholders and hold no fiduciary duty to them.

Directors as organs of Corporate body.

In the case of Bath v. Standard Land Co. Ltd.,  Neville J. stated that the
board of directors are the brain of the company and a company does act only
through them.

A corporation has no mind or body and its action needs to be done by a person
and not merely as an agent or trustee but by someone for whom the company
is liable as his action is the action of the company itself. If we consider a
company as a human body, the directors are the mind and the will of the
company and they control the actions of the company

Appointment of Directors
The appointment of Directors of a company is strictly regulated by the
Company’s Act, 2013.

Company to have Board of Directors

Every company is required to have a Board of directors and it should be
consisting of individuals as directors and not an artificial person. Section
149 lays down the minimum number of directors required in a company as
follows:

1. Public Company– At least 3 directors

 2. Private company- At least 2 directors
3. One person company– Minimum 1 director
There can be a maximum of 15 directors. A company may appoint more than 15
directors after passing a special resolution.

The Central Government may prescribe a class or classes of a company have a

minimum one women director. Every company is also required to have a
minimum of one director who has stayed in India in the previous year for a
period of 182 days or more.

Independent Directors
The provisions of Independent Directors has been laid down under section
149(4)  of the Companies Act, 2013.  This section lays down that at least
one-third of the total number of directors should be independent directors in
every listed company The Central Government may prescribe the minimum
number of independent directors in public companies.

Who is an independent director?

Sub-section (6) of section 149, defines that an independent director stands
for a director other than a managing director, whole-time director or a
nominee director:

1. Who is a person with integrity and has relevant expertise and

experience.
2. Who has not been a promoter of the company, its subsidiary or holding
company either in past or present.
3. Who himself or his relative has no pecuniary relationship with the
company, its holding or subsidiary company, directors or promoters.
4. Who himself or his relative, do not hold the position in key managerial
personnel, or not an employee of the company.
The independent director has to declare his independence at the first meeting of
the Board and subsequently every year at the first meeting of the Board in the
financial year.

An independent director holds office for a term of five years on the Board. He is
also eligible for being reappointed after passing a special resolution, but no
independent director is to hold the office for more than two consecutive terms.
Election of Independent Directors
The independent directors are to be selected from a data bank which contains
certain information such as name, address and qualifications of persons who are
eligible and willing to act as an independent director. The data bank is
maintained by anybody, institute or association with expertise in the creation
and maintenance of data bank and notified by the Central Government. A
company has to pick up a person with due diligence, as stated in section 150.

The appointment has to be approved by the company in general meeting, and

the manner and procedure for selection of independent directors who fulfil the
qualification stated under section 149 may be prescribed by the Central
Government.

Appointment of directors through election by

small shareholders
A listed company is required to have one director who should be elected by
small shareholders as per section 151  of the Companies Act, 2013. Small
shareholders in this context are referred to shareholders holding shares of the
value of maximum Rs. 20,000.

First Directors
The subscribers of the memorandum appoint the first directors of a company.
They are generally listed in the articles of the company. If the first director is
not appointed, then all the individuals, who are subscribers become directors.
The first director holds the office only up to the date of the first annual general
meeting, and the subsequent director is appointed as per the provisions laid
down under section 152.

Appointment at the general meeting

Section 152 lays down the provision that directors should be appointed by the
company in the General Meetings. The person so appointed is assigned with a
director identification number. He also has to make sure in the meeting that he
is not disqualified from becoming a director.
The individual appointed has also to file his consent to act as a director within
30 days with the registrar.

Annual rotation
The retirement of the directors by annual rotation can be prescribed by the
company in the Articles. If not so, only one-third of the directors can be given a
permanent appointment. The tenure of the rest of them must be determined by
rotation.

At an annual general meeting, one-third of such directors will go out, and the
directors who were appointed first and has been in the office for the longest
period will retire in the first place. When two or more directors have been in the
office for an equal period of time, their retirement will be determined by mutual
agreement, or by a lot.

Reappointment [section 152]

The vacancies created should be filled up at the same general meeting. The
general meeting may also adjourn the reappointment for a week. When the
meeting resembles and no fresh appointment is made neither there is any
resolution for the appointment, then the retiring directors are considered to be
reappointed.

The exception to this practice is that the retired directors will not be
considered to be reappointed when:

1. The appointment of that director was put to the vote but lost.
2. If the director who is retiring has addressed to the company and its
board in writing that he is unwilling to continue.
3. If he is disqualified.
4. When an ordinary or special resolution is required for his appointment.
5. When a motion for appointment of two or more directors by a single
resolution is void due to being passed without unanimous consent
under section 162.
Fresh Appointment
When it is proposed that a new director should be appointed in the place of
retiring director, then the procedure laid down under section 160 of the
Companies Act, 2013  is followed:

1. A written notice for his appointment as a director should be left at the

office of the company at least 14 days prior to the date of the meeting
along with a deposit of Rs.1,00,000.
2. That amount should be refunded to the person if he is elected as a
director, or
3. He gets more than 25% of the total valid votes cast.

Appointment by nomination
The appointment of Directors can also be made with respect to the Company’s
articles and not only through the general meetings. When an agreement
between the shareholders has been included in the articles that entitles every
shareholder with more than 10% share to be appointed as a director, then they
can be nominated as director.

Also, subject to the articles of the company, the Board can appoint any
nominated person by an institution in pursuance of law, as a director.

Appointment by voting on an individual basis

The appointment of a director is made by voting at the general meeting as laid
down under section 162 of the Companies Act, 2013. The candidates have
to vote individually and the wishes of the shareholders regarding each proposed
director are required.

As held in the case of Raghunath Swarup Mathur v. Raghuraj Bahadur

Mathur, when two or more directors are appointed on the basis of single
resolution and voting then it is considered to be void in the eyes of law.
Appointment by proportional representation
As per section 163 of the Companies Act, 2013, the article of a company can
enable the appointment of directors through the system of voting by
proportional representation. This system of voting is used to make effective
minority votes. This system of proportional representation can be followed by a
single transferable vote or by the system of cumulative voting or other means.

Appointment of Directors by Board

Generally, the appointment of the directors is done in the annual general
meeting of the shareholders but there are two instances when the Board
can also appoint a new director:

1. If the article empowers the Board to appoint additional directors along

with prescribing the maximum number.
2. Section 161 of the Act also authorises the directors to fill casual
vacancies.

Appointment by Tribunal
Under section 242(j) of the Companies act 2013, the Company Law
Tribunal has the power to appoint directors.

Disqualifications
The minimum eligibility requirement for the appointment of directors has been
laid down under section 164  of the Companies Act, 2013. The
disqualification for a person to be appointed as a director are:

1. Unsoundness of mind.
2. If he is an undischarged insolvent.
3. When is applied to be declared as insolvent and such application is
pending.
4. When he is sentenced for imprisonment for an offence involving moral
turpitude for a period of a minimum of 6 months.
 5. If the Tribunal or court has passed an order disqualifying him for being
appointed as a director.
6. If he has not paid his calls in respect to any shares of the company.
7. When he is convicted of an offence which deals with related party
transaction.
8. When he has not complied with the requirements of Director
Identification Number.

Removal of directors
The removal of directors takes place by:

1. Shareholders
2. Company Law Tribunal
3. Resignation

Removal by Shareholders
Section 169  of the Companies Act 2013  provides that a director can be
removed from his office before the expiration of his term of office by an
ordinary resolution. This section does not apply when:

1. The director is appointed by the tribunal in pursuance of section 242.

2. The company has adopted the system of electing two-thirds of his
directors by the method of proportional representation.
To remove a director, special notice is required, and such notice should contain
the intention to remove the director and the notice should be served at least 14
days prior to such meeting.

As soon as the company receives such notice, the copy of such notice is
furnished to the director concerned. Then the concerned director has the right
to make a presentation against the resolution in the general meeting. If a
director makes a representation, then its copy needs to be circulated among the
members.
Removal of Directors by Company Law Tribunal
The removal of directors by the Company Law Tribunal can be done
under section 242(2)(h).  When an application is made to the tribunal for
relief from oppression or mismanagement, then it may terminate any
agreement of the company which has been made with a director.  When the
appointment of a director is terminated then he cannot serve the managerial
position of any company for five years without leave of the Tribunal.

Resignation
Earlier, there was no provision for the resignation that by what procedure a
director can resign. The resignation was recognised under the provisions laid
down under section 318 of the Companies Act, 1956. Under this section, it
was held that when a director resigns his office, he is not entitled to
compensation.

If the articles mention the provisions for resignation then it will be followed. In
the case of Mother Care (India) Pvt. Ltd. v. Ramaswamy P Aiyar, the court
held that the resignation of a director is effective even if he is the only director
in the office.

Now, after the Act of 2013, section 168 lays down the provisions that:

1. The director can resign from his office by giving written notice to the
company.
2. On receiving the notice, the board has to take notice of it.
3. The registrar needs to be informed by the company within the
prescribed time period.
4. The fact of resignation needs to be placed by the company in the
director’s report in the immediately following general meeting.
5. The director has to send his copy of the resignation to the registrar
along with the detailed reasons within 30 days of the resignation.
Even after resignation, the director is held responsible for any wrong associated
with him and which happened during his tenure.

Powers of Directors
General powers vested under section 179
Section 149 of the Companies Act, 2013 empowers the directors with the
general power vested in the Board. The Board of directors is entitled to exercise
all the powers and do all required actions which a company is authorised to
exercise. But, such action is subject to certain restrictions.

The powers of directors are co-extensive with the powers of the company itself.
The director once appointed, they have almost total power over the operations
of the company.

There are two limitations on the exercise of the power of directors which are as
follows.

1. The board of directors are not competent to do the acts which the
shareholders are required to do in general meetings.
2. The powers of directors are to be exercised in accordance with the
memorandum and articles.
The individual directors have powers only as prescribed by memorandum and
articles.

The intervention of shareholders in exceptional

cases
In following exceptional situations the general meeting is competent to act in
matters delegated to the Board:

1. When directors have acted mala fide.

2. When directors have due to some valid reason become incompetent to
act.
3. The shareholders can intervene when directors are unwilling to act or
there is a situation of deadlock.
4. The general meetings of shareholders have residuary powers of a
company.
Restrictions on powers under the statutory
provision
The Companies Act 2013 also lays the manner in which the powers of the
company is to be exercised. There certain powers which can be exercised only
when its resolution has been passed at the Board’s meetings. Those powers
such as the power:

1. To make calls.
2. To borrow money.
3. To issue funds of the company.
4. To grant loans or give guarantees.
5. To approve financial statements.
6. To diversify the business of the company.
7. To apply for amalgamation, merger or reconstruction.
8. To take over a company or to acquire a controlling interest in another
company.
The shareholders in a general meeting may impose restrictions on the exercise
of these powers.

Powers to be exercised with general meeting

approval
Section 180 of the Companies Act 2013 states certain powers which can be
exercised by the Board only when it is approved in the general meeting:

1. To sale, lease or otherwise dispose of the whole or any part of the

company’s undertakings.
2. To invest otherwise in trust securities.
3. To borrow money for the purpose of the company
4. To give time or refrain the director from repayment of any debt.
When the director has breached the restrictions imposed under the sections, the
title of lessee or purchaser is affected unless he has acted in good faith along
with due care and diligence. This section does not apply to the companies
whose ordinary business involves the selling of property or to put a property on
lease.

Power to constitute an Audit committee

The board of directors are empowered under section 177 to constitute an audit
committee. It needs to be constituted of at least three directors, including
independent directors. In the committee, the independent directors need to be
in the majority. The chairperson and members of the audit committee should be
persons with the ability to read and understand the financial statements.

The audit committee is required to act in accordance with the terms of reference
specified by the Board in writing.

Power to constitute Nomination and Remuneration

Committees and Stakeholders Relationship
Committee
The Board of directors can constitute the Nomination and Remuneration
Committee and Stakeholders Relationship Committee under section 178. The
Nomination and Remuneration Committee should be consisting of three or more
non-executive directors out of which one half are required to be independent
directors.

The Board can also constitute the Stakeholders Relationship Committee, where
the board of directors consist of more than one thousand shareholders,
debenture holders or any other security holders. The grievances of the
shareholders are required to be considered and resolved by this committee.

Power to make a contribution to charitable or

other funds
The Board of directors of the company is empowered under section 181 to
contribute to the bona fide charitable and other funds. When the aggregate
amount of contribution, in any case, exceeds the 5% of the average net profit of
the company for the immediately preceding financial years, then the prior
permission of the company in a general meeting is required.
Power to make a political contribution
Under section 182 of the Companies Act 2013,  the companies can make a
political contribution. The company making a political contribution should be
other than a government company or a company which has been in existence
for less than three years.

Also, the amount of contribution should not exceed 7.5% of the company’s net
profit in the three immediately preceding financial years. The contribution needs
to be sanctioned by a resolution passed by the Board of Directors.

Power to contribute to National Defence Fund

The Board of Directors is empowered to make contributions to the National
Defence Fund or any other fund approved by the Central Government for the
purpose of National defence under section 183 of the Companies Act 2013.
The amount of contribution can be the amount as may be thought fit. This total
amount of contribution made should be disclosed in the profit and loss account
during the financial year which it relates to.

Conclusion
The directors of a company are like its brain. They have a major contribution to
a company’s growth and development and their position is very important for
the company. They are given certain powers under the Companies Act
2013 so that they can contribute their best to the company. Along with powers,
certain restrictions are also imposed on its exercise to avoid any misuse of such
powers.