COMPANY LAW

UNIT II
 INCORPORATION OF A COMPANY
I. INCORPORATION
Incorporation of a company means registration of company under the Companies Act, 2013
S.7 deals with procedure for incorporation of a company
- the following shall be filed with the registrar
1. the memorandum and articles of the company duly signed by all the subscribers
2. a declaration in the prescribed form by an advocate, a chartered accountant, post accountant, or
company secretary and by a person named in the articles as a director, manager or secretary- that all
requirement of the act have been complied
3. a declaration from each of the subscribers to the memorandum and the first directors, if any, that he is
not convicted of any offence or that he has not been found guilty if any fraud or misfeasance or any breach of
duty
4. the address for correspondence
5. the particulars of name, residential address, nationality and other particulars of every subscriber along
with proof of identity.
6. particulars of the person mentioned in articles as first directors of the company, their names, DIN,
residential address, nationality
7. the particulars of the interest of persons mentioned in the articles as first directors
 - the registrar shall register all the documents and information in the register and issue a certificate of
incorporation
- the registrar shall allot to the company a corporate identity number - a distinct identity for the company
- company shall maintain and preserve at its registered office copies of all documents and information as
originally filed
- if any false or incorrect particulars are filed with the registrar – he shall be liable for action under S.447
- if proved that company has been incorporated by furnishing any false or incorrect information or separation of
material facts or fraudulent action – the promoters first directors and the persons making declaration – liable for
action under S.447
- if so, the tribunal
- may pass such orders for regulation of management of company – including changes in
memorandum and articles – in public interest or interest of company or direct
- direct that liability of members – unlimited
- direct removal of the name of the company from the register
- pass an order for winding up of the company
II. REGISTRATION
- the act of entering in register maintained for the purpose of keeping an official record of any
transaction of which a record is required to be kept by law or customary practice.
- includes making of certain endorsements, certificate of registration and copying of documents in the
register book
- a company which requires to be incorporated has to register at authorised registration offices

III. EFFECT OF REGISTRATION

- from the date of incorporation, subscribers to the memorandum and all other persons
- become members of the company
- shall be a body corporate
- have perpetual succession
- power to acquire, hold, dispose of property- movable and immovable
- to contract
- to sue and be sued
IV. COMPANIES CAPABLE OF BEING REGISTERED
- company includes partnership firm, limited liability partnership, cooperative society, society or any other
business entity
- a company formed whether before or after the commencement of this act and consisting of two or more
members
- EXCEPTIONS
- company registered under the Indian Companies Act, 1882 or of 1913 or Companies Act, 1956,
- a company where the liability of its members limited by any Act of Parliament.
- a company limited by shares shall be registered only if it has permanent paid-up or nominal share
capital.
- a company shall not register without the assent of a majority of its members present in person at a
general meeting.
- a majority required by a company to register as a limited company should be not less than three
fourths of the members present in person.
- a company about to register as limited by guarantee the assent to it can be accompanied by a
resolution declaring that each member undertakes to contribute to the assets of the company in the
event of it being wound up.
- a company with less than seven members shall register as a private company.
CERTIFICATE OF REGISTRATION
- on compliance with the requirements with respect to registration and on payment of fees, the Registrar shall
certify under his hand that the company applying for registration is incorporated as a company under this act
and in the case of a limited company that it is limited and thereupon the company shall be so incorporated.
MEMORANDUM OF ASSOCIATION
- the document which contains particulars of the specific objects for which a company is established, and
covering the whole scope of operation, beyond which it is not legal to go
- Contents of Memorandum
(a) the name of the company with the last word "Limited" in the case of a public limited
company, or the last words "Private Limited" in the case of a private limited
company, provided that nothing in this clause shall apply to a company registered under Section 8;
(b) the State in which the registered office of the company is to be situated;
(c) the objects for which the company is proposed to be incorporated and any matter considered
necessary in furtherance thereof;
(d) the liability of members of the company, whether limited or unlimited, and also state,
(1) in the case of a company limited by shares, that liability of its members is limited to the
amount unpaid, if any, on the shares held by them
(2) in the case of a company limited by guarantee, the amount up to which each member
undertakes to contribute-
 (e) in the case of a company having a share capital,
(i) the amount of share capital with which the company is to be registered and the division thereof
into shares of a fixed amount and the number of shares which the subscribers to the memorandum
agree to subscribe which shall not be less than one share
(ii) the number of shares each subscriber to the memorandum intends to take, indicated opposite his
name
(f) in the case of One Person Company, the name of the person who, in the event of death of the
subscriber, shall become the member of the company.

According to Section 4 of the Companies Act, 2013, the memorandum of every company must have some clauses.
These clauses are also known as the *conditions in the memorandum'. The memorandum is divided into
following five clauses:
1. Name clause
2. Registered office of company
3. the objective clause
4. The liability clause
5. The capital clause
Association or Subscription clause
- The subscription clause is the last clause and contains 'declaration' by the subscribers.
- The memorandum must be subscribed by at least seven persons in the case of a public company and by at
least two in the case of a private company.
- Each subscriber must sign the memorandum, and take at least one share, and write opposite his name, the
number of shares he takes.
- After incorporation no subscriber can withdraw his name on any ground whatever.

Alteration of memorandum
- company may alter the provisions of its memorandum by a special resolution
- any change in the name of the company shall not have effect except with the approval of the Central
Govt. in writing ( no such approval necessary if there is only deletion or addition of the word private)
- if there is any change in the name of the company, the Registrar shall enter the new name in the register of
companies and issue a fresh certificate
- alteration of memorandum relating to place of registered office from one state to another should be
approved by the central Govt.
- The Central govt. shall dispose of the application within a period of sixty days and satisfy itself that the
alteration had the consent of the creditors, debenture holders and other persons concerned with the
company
- The company shall file with the Registrar the special resolution and the approval of the Central Govt.
 - such documents shall be filed by the company with the Registrar within such time and such manner
as may be prescribed
- a company which has raised money from company and has not utilised such money shall not change
its objects for which it raised the money unless a special resolution is passed.
- the registrar shall register any alteration and certify the registration within a period of thirty days
from the date of filing.
ARTICLES OF ASSOCIATION

Is a written agreement prescribing revelations for the government of the company

S.2(5)-Articles means articles of association of a company as originally framed or as altered from time to time
is the second important document after memorandum of association
Has to be registered along with the memorandum
They are the rules, regulations, and byelaws for the internal management or regulation of the affairs of a
company
object is to carry out the aims and objects set out in memorandum of association
states rights and duties of the memorandum of the company
states the powers of officers and directors of the company
Determines the relationship between the company and its members and shareholders among themselves
Lays down the mode and manner in which the business off the company is to be conducted
Subordinate to the memorandum and the Companies Act, that is, does not violate any provisions of the
memorandum or the Act.
CONTENTS OF ARTICLES OF ASSOCIATION

• Nature of the company

• Number and value of shares- classes of shareholders
• Rights of different classes of shareholders
• Procedure for making calls
• Rules regarding transfer, transmission of shares, forfeiture of shares, etc.
• Rules regarding the appointment, remuneration, powers and duties of directors and officers
Appointment of manager and secretary
• Rules regarding notice of meetings, voting rights, quorum, audit of accounts, declaration of dividend,
borrowing powers of the company and mode of borrowing
• Rules regarding issue of share certificates, maintenance of book of accounts, reorganisation of share
capitals
• Dividends and reserves, capitalisation of profits
• Rules regarding winding up of the company
Effect of memorandum and articles
-memorandum and articles when registered bind the company and the members to the same
instant as if they respectively had been signed by the company and by each member, and
contained covenants on its and his part to observe all the provisions of memorandum and
articles.
Alteration of articles
- a company may by special resolution alter its articles including alterations- private company into public
company or public company into private company
- every alteration of the articles and order of the Central Govt. approving the alteration shall be filed with the
Registrar within fifteen days
- any alteration of articles registered shall be valid as if it were originally in the articles
Restrictions on alteration of articles
1. special resolutions 14. Articles cannot be made unalterable
2. must not be against the provisions of the act 15. Must not be inconsistent to an order of court
3. must not conflict with the memorandum
4. must not sanction anything illegal
5. must be for the benefit of the company
6. no increase in the liability of members
7. approval of Central Govt.
8. breach of contract
9. must not result in expulsion of a member
10. alteration may be with retrospective effect
11. should not result in any discrimination between two groups of shareholders
12. a reserve liability once created cannot be undone but may be cancelled on a reduction of capital.
 DOCTRINE OF INDOOR MANAGEMENT

The outsiders dealing with the company are entitled to assume that as far as the internal proceedings of the
company are concerned, everything has been regular done. They are presumed to have read these documents and to
see that the proposed dealing is not inconsistent therewith, but they are bound to do more; they need not inquire
into regularity of the internal proceedings as required by the memorandum and the articles. They can presume that
all is being done regularly. This limitation of the doctrine of constructive notice is known as the “doctrine of
indoor management”.

The doctrine of indoor management is an exception to the rule of constructive notice. It imposes an important
limitation on the doctrine of constructive notice. According to this doctrine "persons dealing with the company are
entitled to presume that internal requirements prescribed in memorandum and articles have been properly
observed.”

A very famous case law through which the principle came into being is the Royal British Bank v. Turquand, [(1856)
6 E & B 327]. This doctrine is therefore also known as Turquand’s Rule
❖ Royal British Bank v. Turquand, [(1856) 6 E & B 327],
the directors of a company had issued a bond to Turquand. They had the power under the Articles
to issue such bond provided they were authorised by a resolution passed by the shareholders at a
general meeting of the company. No such resolution was passed by the company. It has been
held that Turquand could recover the amount of the bond from the company on the ground that
he was entitled to assume that the resolution had been passed.

❖ Mahony v. East Holyford Mining Co., [(1875) L.R. 7 H.L. 869], the cheques were to be signed by
two named directors and countersigned by the named secretary as per Articles. The secretary of
the company send to their bankers what purported to be a copy of the Board Resolution naming
the directors and the secretary. The bankers honoured the cheques accordingly. The company
went into liquidation. No Board Meeting was even held. The liquidator sought to recover the
amount paid by the bank. It was held that the liquidator was not entitled to succeed. The bankers
were bound to inspect the Articles which they have done. Beyond that they were neither bound
not entitled to look. Otherwise, it would take them indoors
EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT
1. Knowledge of irregularity
2. Suspicion of irregularity
3. Forgery
4. Negligence
5. Ignorance of articles
6. Lack of authority
 PROSPECTUS
Outline of any plan submitted for public approval of a joint stock company.
A document containing a statement of the property, business, undertaking, enterprise or project for the formation
and development of the company for which an appeal is made to the public to subscribe for shares.
Includes any notice, circular, advertisement or other document inviting deposits or offers from the public for the
subscription or purchase of any shares or debentures of a boy corporate.
S.2(70) of Companies Act, 2013 – prospectus means any document described or issued as a prospectus and . .
.includes a red herring prospectus or shelf prospectus
Shelf prospectus- a prospectus in respect of which securities or class of securities included therein are issued for
subscription in one or more issues over a certain period without the issue of a further prospectus
Red Herring prospectus- a prospectus which does not include complete particulars of the quantum or price of the
securities included therein
OBJECT
- to bring to the notice of public that a new company has been formed
- to arouse interest of the public to make investment in the company
- to create confidence in the public about the company, its directors, and its profitability
- to secure that the directors of a company accept responsibility of the statements in the prospectus
CHARACTERISTICS OF THE PROSPECTUS
- prospectus to be in writing
- invitation for the subscription
- public issue
- shall be dated and signed
- shall state such information and reports on financial information
- a declaration about the compliance of the provisions of this act
- no prospectus shall be issued unless on or before the date of its publication it has been delivered to
the Registrar for filing
- a prospectus shall not include a statement made by an expert unless the expert is a person who is not
engaged or interested in the formation or promotion or management of the company and has given
his written consent to the issue of prospectus
- no prospectus shall be valid if it is issued more than 90 days after the date on which a copy is
delivered to the Registrar

If a prospectus is issued in contravention of any of the above provisions, the company shall be punishable
with a fine not less than Rs. 50,000 which may extent to Rs. 3,00,000 and every person who is knowingly a
party to such issue shall also be punished the same
 The golden rule as to the statements in prospectus is that ‘ the public is at the mercy of Company promoters.
Everything must be therefore stated with strict and scrupulous accuracy’
The true nature of the company’s venture should be disclosed ( S.26 )
A company shall not vary the terms of a contract referred in the prospectus or object for which the prospectus was
issued except with the approval or authority given by the company in general meeting by way of special resolution
CIVIL AND CRIMINAL LIABILITY FOR MISSTATEMENT IN A PROSPECTUS
• misstatement is a statement that is untrue or misleading in form or context.
• a prospectus containing false, misleading, ambiguous or fraudulent statements of material facts or suppressing
facts is called misleading prospectus.
• where a prospectus issued, circulated or distributed includes any statement which is untrue or misleading in
form or context, every person who authorises the issue of such prospectus shall be liable under S.447.
-S.34 ( bonafide statements made – excluded )
• where a person who has subscribed for securities of a company acted on any statement which is misleading
and has sustained any loss or damage, then
- the company and every director, promotor or any person who authorised the issue of prospectus
shall be liable to pay compensation to every person who has sustained such loss or damage -S.35
• where it is proved that a prospectus has been issued with the intent to defraud the applicants for the security
or for any fraudulent purpose, the company and every person mentioned above shall be personally
responsible without any limitation of liability.