Charter Documents of Companies – Setting Up of Business Entities and Closure Important Questions

Charter Documents of Companies – Setting Up of Business Entities and Closure Important Questions

Question 1.
Define the term ‘memorandum’ as per the Companies Act, 2013. [Dec. 1999 (2 Marks)]
Answer:
Memorandum [Section 2(56)]: Memorandum means the memorandum of association of a company as originally framed or altered from time to time in pursuance of any previous companies law or this Act.

Thus, MOA is a document that sets out the constitution of the company and is, therefore, the foundation on which the structure of the company is based. It defines the scope of the company’s activities and its relations with the outside world. The first step in the formation of a company is to prepare a document called the Memorandum of Association.

Question 2.
Write a short note on the Objects clause of Memorandum of Association [Dec. 2000 (5 Marks)]
Answer:
The third compulsory clause in the memorandum sets out the objects for which the company has been formed. As per Section 4(1 )(c), all companies must state in their MOA the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof.

The object clause is of great importance because it determines the purpose and the capacity of the company. It indicates the purpose for which the company has been set up and its actual capability. It states affirmatively the ambit and extent of powers of the company.

The purpose of the objects clause is to enable the persons dealing with the company to know its permitted range of activities. The acts beyond this ambit are ultra vires and hence void. Even the entire body of shareholders cannot ratify such acts.

Question 3.
What are the provisions relating to the shifting of the registered office? from one State to another State. [Dec. 2004 (5 Marks)]
Answer:
Change of Registered office from one State to another State [Section 1 13(4)]: The change of registered office from one State to another State involves alteration of memorandum and the change can be affected by a special resolution of the company which must be confirmed by the Central | Government on an application made to it.

Conditions for approval by the Central Government [Section 13(5)]: The Central Government shall dispose of the application within a period of 60 | days. Before passing order the Central Government may satisfy itself that | the alteration has the consent of the creditors, debenture holders, and other persons concerned with the company or that a sufficient provision has been made by the company either for the due discharge of all its debts and obligations or that adequate security has been provided for such discharge.

Filing of documents: When the registered office is shifted from one state to another State following documents are required to be filed with ROC:

  • A copy of special resolution;
  • The order passed by the Central Government.

The Registrar of the State where the registered office is being shifted will issue a fresh certificate of incorporation indicating the alteration.

Question 4.
State the provision of the Companies Act, 2013 relating to “alteration of name clause”. [Dec. 2005 (4 Marks)]
Answer:
Alteration of name [Section 13(2)]: The name of the company can be altered by passing a special resolution and with the approval of the Central Government in writing.

Approval of the Central Government is not necessary if the change relates to the addition or deletion of the word ‘Private’ to the name of the company consequent to the conversion of a private company into a public company and vice versa.

Registration of new name [Section 13(3)]: When any change in the name of a company is made, the Registrar shall enter the new name in the register of companies in place of the old name and issue a fresh certificate of incorporation with the new name. The change in the name shall be complete and effective only on the issue of such a certificate.

Alteration of Memorandum by change of name [Rule 29 of Companies (Incorporation) Rules, 2014]:
1. The change of name shall not be allowed to a company that has not filed annual returns or financial statements due for filing with the Registrar or which has failed to pay or repay matured deposits or debentures or interest thereon. However, the change of name shall be allowed upon filing necessary documents or payment or repayment of matured deposits or debentures or interest thereon as the case may be.

2. An application shall be filed in Form No. INC-24 along with the fee for change in the name of the company and a new certificate of incorporation in Form No. INC-25 shall be issued to the company consequent upon change of name.

Effect of Change: The change of name shall not affect any rights or obligations of the company or render defective any legal proceedings by or against it, and any legal proceedings which might have been continued or commenced by or against the company in its former name may be continued by or against the company in its new name.

Question 5.
The registered office of The company can be shifted from one state to another without the approval of the State Government. Comment. [June 2008 (5 Marks)]
Answer:
Central Government may direct notice to be served on the State if it is of the view that the interest of the State will be affected by the alteration. Where the alteration is affected by changing the registered office from one State to another State, the loss of revenue in one State would be accompanied by an increase in revenue in the other, and in such a case the interest of a particular State ought not to be considered but it is the interest of the country as a whole which should be considered.

The decision to shift the registered office of the company to another state being a domestic matter rests with shareholders and the company is the best judge of how to run its business more economically, efficiently, or conveniently, even though it would result in loss of revenue to the State.

A company was allowed to shift its registered office from Bihar to West Bengal in spite of the fact that the Bihar Government had granted a lease of land for the company’s factory on the condition that it would not shift its registered office. It was also held that interest-free loans, sales tax, electricity, and other subsidies would have no bearing on the shifting.

Question 6.
Write a short note on the Liability clause in the Memorandum of Association [Dec. 2010 (4 Marks)]
Answer:
The liability clause states the nature of liability that the members of the company incur, whether the liability shall be limited by shares or by guarantee or unlimited.

Liability of members [Section 4(1 )(d)]: The liability of members of the company is as follows:
(а) Company limited by shares: Liability of its members is limited to the amount unpaid on the shares held by them.
(b) Company limited by guarantee: Liability of its members limited by its MOA to such amount as the member may respectively undertake to contribute to the assets of the company in the event of its winding-up.

Question 7.
The name of every company must end with the word ‘Limited’. Comment. [Dec. 2012 (5 Marks)]
Answer:
The memorandum of a company shall state 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. However, Section 8 companies are not required to state at the end of their name words ‘Ltd.’ or ‘Private Ltd.’

Similarly, in the case of government companies, the name of the company need not be ended with the words “Ltd.” or “Private Ltd.”. This is as per the exemptions to Government Companies u/s 462 of Companies Act, 2013 vide notification dated June 5, 2015.

Question 8.
Can employees have the right to object in case of shifting of registered office from one state to another? Decide with case law. [June 2013 (4 Marks)]
Answer:
It was held that employees union, which was a registered body, would have the legal standing to appear before the Court and oppose the application on the ground that their interests would be likely to be prejudicially affected if the resolution for shifting the registered office of the company from one state to another is confirmed by the Court. However, the employees union cannot oppose on the ground that there would be a loss of revenue or unemployment in the State or that the meeting at which the special resolution was passed was not valid.

A different dimension to the employee’s right can be seen in the case of Kwality Ice Creams (India) P. Ltd In that case, the company’s petition for carrying its registered office from West Bengal to Delhi was opposed by two employees of the head office on the ground that their action against the company would be prejudiced. The CLB said that the facility for litigation is not a valid ground to stall shifting.

There was no restraint order from any Court against the proposed shifting. The CLB allowed shifting subject to the condition that the interest of none of the employees at the registered office would be prejudiced by retrenchment or otherwise.

Question 9.
Abha Ltd. was incorporated on 15th March 2012. A company with identical names and similar objects was incorporated on 5th August 2013. On account of the similarity of name, Abha Ltd., i.e., the company which was previously registered, filed a petition on 15th April 2014 with the Central Government seeking issue of direction for a change of name by the latter company so that its business interest is protected. On 16th August 2014, the Central Government sent an order to the latter company to change its name. Examine the aforesaid case and the validity of the order of the Central Government. [Dec. 2014 (4 MarksJ]
Answer:
Facts of Case: Abha Ltd. was incorporated on 15th March 2012. A company with identical names and similar objects was incorporated on 5th August 2013. On account of the similarity of name, Abha Ltd., ie., the company which was previously registered, filed a petition on 15th April 2014 with the Central Government seeking an issue of direction for a change of name by the latter company so that its business interest is protected. On 16th August 2014, the Central Government sent an order to the latter company to change its name.

Provision: According to Section 16( 1)(«) of the Companies Act, 2013, if by inadvertence or otherwise a name has been registered which is identical to or too nearly resembles the name of an existing company, the Central Government may direct the company to change its name. The company shall change its name within a period of 3 months from the issue of the above direction after passing an ordinary resolution.

Conclusion: Thus, Abha Ltd. (the first registered company) can make an application to Central Government to direct the second company to change its name. The second company shall change its name within a period of 3 months from the issue of the above direction by passing an ordinary resolution.

Question 10.
ABC Ltd. has altered its name from BCD Ltd. to ABC Ltd. However, the fact of alteration of the name of the company was not brought to the notice of NCLT. Please advise the company ABC Ltd. whether it has a right to execute a decree in its new name after the change of name. [Dec. 2017 (5 Marks)]
Answer:
Effect of change in name of the company: The change of name shall not affect any rights or obligations of the company or render defective any legal proceedings by or against it, and any legal proceedings which might have been continued or commenced by or against the company in its former name may be continued by or against the company in its new name.

Important case laws:
1. Where a company changes its name and the new name has been registered by the ROC, the commencing of legal proceedings in the former name is not valid. [Malhati Tea Syndicate Ltd. v. Revenue Officer]

2. In spite of a change in name the entity of the company continues. The company is not dissolved nor does any new company come into existence. If any legal proceeding is commenced, after a change in the name, against the company in its old name, the company should be treated as if it is not in existence. It is not an incurable defect and the plaint can be amended to substitute the new name. [Pioneer Protective Glass Fibre (P) Ltd. v. Fibre Glass Pilkington Ltd]

3. Courts have held that proceedings commenced by the company in its former name can be continued under its new name. [Solvex Oils and Fertilizers v. Bhandari Cross-Fields]

4. By change of name, the constitution of the company is not changed, only the name changes. It is not similar to the reconstitution of a partnership which means the creation of a new legal entity altogether. [Economic Investment Corporation Ltd. v. CIT(WB)]

5. If a company has the power to execute a decree in its old name, it has the right to execute the decree in its new name, even if the fact of change of name was not brought to the notice of the court. [D Srinivasaiah v. Vellore Varulakshmi Bank]

Question 11.
Can a listed company change its name as and when necessary? Give reasons in support of your answer. [Dec. 2009 (4 Marks)]
Answer:
Change in name of the listed entity [Regulation 45 of the SEBI (LODR) Regulations, 2015]: The listed entity shall be allowed to change its name subject to compliance with the following conditions:
(a) A time period of at least one year has elapsed from the last name change.

(b) At least 50% of the total revenue in the preceding one-year period has been accounted for by the new activity suggested by the new name.

(c) The amount invested in the new activity/project is at least 50% of the assets of the listed entity. However, if any listed entity has changed its activities that are not reflected in its name, it shall change its name in line with its activities within a period of 6 months from the change of, activities in compliance with provisions as applicable to change of name prescribed under the Companies Act, 2013.

On satisfaction of the above conditions, the listed entity shall file an application for name availability with ROC.

On receipt of confirmation regarding name availability from ROC, before filing the request for change of name with the ROC, the listed entity shall seek approval from Stock Exchange by submitting a certificate from CA stating compliance with required conditions.

Question 12.
A listed entity shall not be allowed to change its name more than once. Comment. [Dec. 2017 (5 Marks)]
Answer:
Change in name of the listed entity [Regulation 45 of the SEBI (LODR) Regulations, 2015]: The listed entity shall be allowed to change its name subject to compliance with the following conditions:
(a) A time period of at least one year has elapsed from the last name change.

(b) At least 50% of the total revenue in the preceding one-year period has been accounted for by the new activity suggested by the new name.

(c) The amount invested in the new activity/project is at least 50% of the assets of the listed entity. However, if any listed entity has changed its activities that are not reflected in its name, it shall change its name in line with its activities within a period of 6 months from the change of, activities in compliance with provisions as applicable to change of name prescribed under the Companies Act, 2013.

On satisfaction of the above conditions, the listed entity shall file an application for name availability with ROC.

On receipt of confirmation regarding name availability from ROC, before filing the request for change of name with the ROC, the listed entity shall seek approval from Stock Exchange by submitting a certificate from CA stating compliance with required conditions.

Question 13.
State any six powers which are prudent to be included in the objects clause of Memorandum of Association of a company as general and ancillary objects. [Dec. 2018 (4 Marks)]
Answer:
Object Clause should indicate objects for which the company is proposed to be incorporated and any matter considered necessary for the furtherance of thereof.

A company can undertake only those objects which are specified in the ‘Object Clause’.

Acts beyond object clause are void: Any act not specified in ‘object clause’ is ultra vires the company and is void.

Incidental Powers: As a general principle, a company has powers to do all j that is necessary to attain the main object e.g. a company must be able to employ people, purchase or take on rent premises, borrow money, acquire machinery, etc. These are ‘implied powers’ and need not be specified in Memorandum.

Statutory powers need not be mentioned in the object clause: Powers given by statute need not be mentioned in Memorandum e.g. power to amalgamate is statutory power. The company can amalgamate even if this power is not specified in Memorandum in the object clause.

‘Implied’ powers of the company and powers which are not ‘implied’:
‘Implied powers’ need not be specified in Memorandum. However, there are certain powers that cannot be taken as ‘implied’. These should be specified in the memorandum as ‘matter necessary for the furtherance of objects’ (ancillary or incidental powers). These should be such that is should arise out of or directly connected to the main activity.

Generally, the following powers are not treated as ‘implied’ and hence it is prudent to include such powers specified in the Memorandum:

  • Acquire any business similar to the business of the company.
  • Entering into an agreement with others for joint ventures, partnership, or sharing profits or other arrangements.
  • Taking shares in other companies having similar objects.
  • Taking shares in other companies where such investment amounts to doing indirectly that which is not permitted under the object clause.
  • Promoting other companies and helping them financially.
  • Power to use funds for political purposes.
  • Power to give gifts, make donations, or contribute to charities.
  • Entering into contracts of suretyship or guarantee.

Question 14.
Alteration of Capital Clause in Memorandum of Association is a precondition to restructuring the Capital structure of the Company’ – Elaborate the statement mentioning relevant provisions of the Companies Act, 2013 on types of alterations of Capital Clause. [Dec. 2019 (4 Marks)]
Answer:
Section 61(1) of the Companies Act, 2013 provides for, the types of alteration of a capital clause in the general meeting of a company limited by shares through alteration of its memorandum in the following ways:
(a) increase its authorized share capital by such amount as it thinks expedient;

(b) consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares: Provided that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner;

(c) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;

(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;

(e) cancel shares which, at the date of the passing of the resolution on that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so canceled.

All the above alterations do not require confirmation by the Tribunal except that alteration relating to consolidation and division which results in changes in the voting percentage of shareholders shall not take effect unless it is approved by the Tribunal on an application made in the prescribed manner.

These alterations are, however, required to be notified and a copy of the resolution should be filed with the Registrar within 30 days of the passing of the resolution along with an altered memorandum. [Section 64(1)] Hence, according to section 61(1) of the Companies Act, 2013, alteration of memorandum

Question 15.
X, an employee of BG Ltd., is aggrieved by the decision of shifting \ of the registered office of the Company from the state of Uttar Pradesh to Haryana. He has filed a Public Interest Litigation (PIL) regarding the same, considering that the business of the company will be severe) affected by the said decision of shifting of registered office. In the light of decided case laws, examine the strength of the argument raised in the PIL. [Dec.2019 (4 Marks)]
Answer:
The Public Interest Litigation (PIL) of X, an employee of BG Ltd. regarding shifting of the registered office is not tenable. The facts are similar to the case of Bharat Commerce and Industries Ltd., Re, (1973) 43 Com Cases 162 (Cal.), where it was held that employees’ union, which was a registered body and which represented quite a number of the employees at the registered office of the company, would have the legal standing to appear before the court and oppose the application on the ground that their interests are likely to be prejudicially affected if the resolution for shifting the registered office of the company from one State to another is confirmed by the court.

However, it was held that the employees’ union cannot oppose on the ground that there would be loss of revenue or unemployment in the State or that the meeting at which the special resolution was passed was itself not valid.

So long as the interest of none of the employees at the registered office is prejudiced by retrenchment or otherwise, the argument of X is not tenable. The victim will however be free to approach the Court for higher compensation

Question 16.
“The article of association plays a subordinate role to the memorandum of association”. Comment. [June 2000 (5 Marks)]
Answer:
The articles of association of a company are its by-laws or rules and regulations that govern the management of its internal affairs and the conduct of its business. The articles play a very important role in the affairs of a company.

It deals with the rights of the members of the company inter .se. They are subordinate to and are controlled by the memorandum of association.

The articles play a part subsidiary to the MOA. They accept the MOA as the charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, rights, and powers of governing body as between themselves and the company at large, and the mode and form in which business of the company is to be carried on, and the mode and form in which changes in the internal regulations of the company may from time to time be made.

Thus, the memorandum lays down the scope and powers of the company, and the articles govern the ways in which the objects of the company are to be carried out and can be framed and altered by the members. But they must keep within the limits marked out by the memorandum and the Companies Act.

The articles regulate the internal management of the affairs of the company by way of defining the powers of its officers and establishing a contract between the company and the members and between the members inter .se. This contract governs the ordinary rights and obligations incidental to | membership in the company. But the Articles of Association of a company are not law and do not have the force of law. Any provision of the articles or the memorandum is contrary to any provisions of any law, it will be invalid in toto.

Question 17.
Distinguish between: Memorandum of Association & Articles of Association [June 2006 (5 Marks)]
Answer:
Following are the main points of distinction between MOA & AOA:

Points Memorandum of Association Articles of Association
Meaning MOA is the charter of the company and defines the fundamental conditions and objects for which the company is granted incorporation. AOA is the rules and regulations framed to govern the internal management of the company.
Scope MOA cannot include any clause contrary to the provisions of the Companies Act. The AOA is subsidiary both to the Companies Act and the MOA.
Relation The MOA generally defines the relation between the company and the outsiders. The AOA regulates the relationship between the company and its members and between the members inter .se.
Alteration Clauses of the memorandum cannot be easily altered. They can only be altered in accordance with the mode prescribed by the Act. In some of the cases, alteration requires the permission of the Central Government or the Tribunal. In the case of AOA, members have a right to alter the articles by a special resolution. Generally, there is no need to obtain the permission of the Tribunal or the Central Government for alteration of the articles.
Ratification Acts done by a company beyond the scope of the MO A are absolutely void and ultra vires and cannot be ratified even by unanimous vote of all the shareholders. The acts of the directors beyond the articles can be ratified by the shareholders.

Question 18.
Memorandum and articles bind the individual member inter .se and the company to the members. [Dec. 2006 (4 Marks)]
The memorandum and articles, when registered, bind the company and its members to the same extent as if they have been signed by the company and by each member to observe and be bound by all the provisions of the memorandum and of the articles.

We shall examine the extent to which Js the memorandum and articles bind:
1. Members bound to the company: The memorandum and articles constitute a contract binding the members of the company. The members, as members, are bound to the company. Each member must, therefore, observe the provisions of the memorandum and articles, j Each member is bound by the covenants of the memorandum as originally made and as altered from time to time.

2. Company bound to the members: Since the articles constitute a contract binding the company to its members in their capacity as members, 1 member can bring an action against the company for infringement by it of the memorandum or articles. Further, the company is bound j to individual members in respect of their ordinary rights as members, e.g. the right to receive a share certificate or to receive notice of a general meeting, etc.

3. Member bound to member: As between the members inter .se each member is bound by the articles to the other members but that does j not mean the memorandum and articles create an express contract among the members of the company.

Thus, a member of a company has no right to bring a suit to enforce the articles in his own name against any other member or member. It is the company alone that can sue the offender so as to protect the aggrieved member. It is in this way that the rights of members inter .se are regulated. A shareholder may, however, sue in his own name to restrain another, or others from doing fraudulent or ultra vires acts.

4. Company not bound to outsiders: The term outsider signifies a person who is not a member of the company even if he is a director of or solicitor to the company. As between outsiders and the company, neither the memorandum nor the articles would give any contractual rights to outsiders against the company.

Question 19.
A Company does not have unlimited powers to alter its articles of association. Comment. [June 2007 (5 Marks)]
Answer:
Alternation of Articles [Section 14]: Subject to the provisions of the Act and the conditions contained in its memorandum, a company may alter | its articles by passing a special resolution.

Every alteration of the articles shall be filed with the ROC, together with a printed copy of the altered articles, within a period of 15 days who shall register the same. [Section 14(2)]

Any alteration of the articles shall subject to the provisions of the Act, be J valid as if it were originally in the articles. [Section 14(3)]

Limitation on the alternation of articles: The right to alter the articles is so important that a company cannot alter them in any manner. A company can exercise the power to alter the article subject to certain limitations.

These are:

  • The alteration must not exceed the powers given by the memorandum. In the event of a conflict between the memorandum and the articles, it is the memorandum that will prevail.
  • The alteration must not be inconsistent with any provisions of the Companies Act, 2013, or any other statute.
  • Articles must not include anything which is illegal or opposed to public policy.
  • The alteration must be bona fide for the benefit of the company as a whole.
  • The alteration must not constitute a fraud on the minority by a majority.
  • Articles cannot be altered so as to compel an existing member to take or subscribe for more shares or in any way increase his liability to contribute to the share capital unless he gives his consent in writing.
  • By effecting alteration in its articles, a company cannot defeat escape from its contractual obligation with any person.
  • The article cannot be altered so as to have retrospective effects.

Question 20.
A company has a statutory right to alter its articles of association. [June 2010 (5 Marks)]
Answer:
Following are the main points of distinction between MOA & AOA:

Points Memorandum of Association Articles of Association
Meaning MOA is the charter of the company and defines the fundamental conditions and objects for which the company is granted incorporation. AOA is the rules and regulations framed to govern the internal management of the company.
Scope MOA cannot include any clause contrary to the provisions of the Companies Act. The AOA is subsidiary both to the Companies Act and the MOA.
Relation The MOA generally defines the relation between the company and the outsiders. The AOA regulates the relationship between the company and its members and between the members inter .se.
Alteration Clauses of the memorandum cannot be easily altered. They can only be altered in accordance with the mode prescribed by the Act. In some of the cases, alteration requires the permission of the Central Government or the Tribunal. In the case of AOA, members have a right to alter the articles by a special resolution. Generally, there is no need to obtain the permission of the Tribunal or the Central Government for alteration of the articles.
Ratification Acts done by a company beyond the scope of the MO A are absolutely void and ultra vires and cannot be ratified even by the unanimous vote of all the shareholders. The acts of the directors beyond the articles can be ratified by the shareholders.

Question 21.
Alteration of an article of association must not constitute a fraud on the minority by a majority. Comment. [June 2013 (5 Marks)]
Answer:
Alteration of an article of association must not constitute a fraud on the minority by a majority. If the alteration is not for the benefit of the company as a whole, but for the majority of shareholders, then the alteration would be bad. In other words, an alteration to the articles must not discriminate between the majority shareholders and the minority shareholders so as to give the former an advantage over the latter.

Question 22.
The majority of the shareholders of Kasi Textiles Ltd., passed a special resolution to alter its Articles of Association and gave the directors the power to require any shareholder who is doing competing business with that of the company’s business to transfer his shares. Swaroop, who is carrying on a competing business, challenged the validity of the alteration. Decide whether Swaroop will succeed in the light of the provisions of the Companies Act, 2013 and decided case law. [June 2019 (5 Marks)]
Answer:
Articles of association of a company are its by-laws or rules and regulations that govern the management of its internal affairs and the conduct of its business. The articles play a very important role in the affairs of a company.

The articles regulate the internal management of the affairs of the company by way of defining the powers of its officers and establishing a contract between the company and the members and between the members inter .se. This contract governs the ordinary rights and obligations incidental to membership in the company. But the Articles of Association of a company are not law and do not have the force of law. Any provision of the articles or the memorandum is contrary to any provisions of any law, it will be invalid in toto.

Subject to the provisions of the Act and the conditions contained in its memorandum, a company may alter its articles by passing a special resolution. The right to alter the articles is so important that a company cannot alter it in any manner.

Alteration of Articles so as to give power to the directors to require any shareholder who competed with the company’s business to transfer his shares at full value is valid and binding upon the members of the company as it will be beneficial to and in the interest of the whole company.

Question 23.
Gomez, the Chairman of a company, borrowed ₹ 5 lakh from the State Bank of India, Patna under a promissory note. A suit was filed for the recovery of debts on the basis of the pro-note executed by the chairman. The company refused to accept the liability on the plea that the Chairman had borrowed funds without authorization from the company. Will the company succeed? Explain. [June 2007 (5 Marks)]
Answer:
Facts of Case: Gomez, the Chairman of a company, borrowed ₹ 5 lakh from the State Bank of India, Patna under a promissory note. A suit was filed for the recovery of debts on the basis of the pro-note executed by the chairman. The company refused to accept the liability on the plea that the Chairman had borrowed funds without authorization from the company.

Provision: The facts of the given case are similar to Krishnan Kumar Rohatgi & Others v. State Bank of India & Others. In this case, the company borrowed an amount of ₹ 5 lakhs from the Bank under a Promissory

Note: The repayment was guaranteed by a person by executing a guarantee in favor of the company.

The company used to make payments towards loans and the promissory note used to be renewed from time to time. In the suit for recovery, the company contended that the pro-note was executed by the Chairman without there being a resolution of the Board of directors authorizing the Chairman to execute the promote. Rejecting ] these contentions the High Court held that in cases where the directors borrow funds without their having authorization from the company and if the money has been used for the benefit of the company, the company cannot repudiate its liability to repay.

Under the general principles of law, when an agent borrows money for a principal without the authority of the principal but the principal takes the benefit of the money so borrowed or when the money so borrowed has gone into the coffers of the principal, the law implies a promise to be paid by the principal.

Conclusion: Thus, the company will be held liable to repay the amount because the company, being principal had taken benefit of the amount borrowed.

Question 24.
With the approval of the Board, an amount of ₹ 50 Crore was spent by Speed Jet Ltd., in producing a commercial film, not covered under its objects clause. The film was a complete flop and the company lost an amount of ₹ 40 Crore. Some of the members of the company objected to such investments not covered by the objects clause of the company.
They filed a suit making the directors personally responsible and making good the loss. Will they succeed? Support your answer with reasons. [Dec. 2009 (6 Marks)]
Answer:
Facts of Case: With the approval of the Board, an amount of ₹ 50 Crore was spent by Speed Jet Ltd., in producing a commercial film, not covered under its objects clause. The film was a complete flop and the company lost an amount of ₹ 40 Crore. Some of the members of the company objected to such investments not covered by the objects clause of the company. They filed a suit making the directors personally responsible and to make good the loss

Provision: An act that is ultra vires is void, and does not bind the company. Neither the company nor the other contracting party can sue on it. The company cannot make it valid, even if every member assents to it.

It is one of the duties of directors to ensure that the corporate capital is used only for the legitimate business of the company and hence if such capital is diverted to purposes foreign to the company’s memorandum, the director will be personally liable to replace it. In Jehangir R. Modi v. Shamji Ladha, the Bombay High Court held that a shareholder can maintain an action against the directors to compel them to restore to the company’s funds that have by them been employed in transactions that directors have no authority to enter into.

Conclusion: Thus, members of Speed Jet Ltd. will succeed in their claim-making directors personally responsible and to make good the loss.

Question 25.
Write a short note on Doctrine of Ultra Vires [Dec. 2010 (4 Marks)], [ Dec. 2014 (5 Marks)]
Answer:
The doctrine of ultra vires was first enunciated by the House of Lords in a classic case, Ashbury Railway Carriage & Iron Co. Ltd. v. Riche.

The general rule is that an act that is ultra vires the company is incapable of ratification. An act that is intra vires the company may be ratified by the company in proper foray The rule is meant to protect shareholders and the creditors of the company.

Effects of ultra vires transactions:
1. Void ab initio: The ultra vires acts are null and void ab initio. The company is not bound by these acts. Even the company cannot sue or be sued upon. Ultra vires contracts are void ab initio and hence cannot become intra vires by reason of estoppel or ratification.

2. Injunction: Members can get an injunction to restrain the company wherein the ultra vires act has been or is about to be undertaken.

3. Personal liability of directors: It is one of the duties of directors to ensure that the corporate capital is used only for the legitimate business of the company and hence if such capital is diverted to purposes foreign to the company’s memorandum, the director will be personally liable to replace it. [Jehangir R. Modi v. Shamji Ladha]

4. Where a company’s money has been used ultra vires to acquire some property, the company’s right over such property is held secure and the company will be the right party to protect the property. This is because, though the property has been acquired for some ultra vires object it represents the money of the company.

5. Ultra vires borrowing does not create the relationship between creditor and debtor.

Question 26.
Distinguish between: Doctrine of constructive notice & doctrine of indoor management [June 2011 (4 Marks)]
Answer:
Following are the main points of distinction between the doctrine of constructive notice & the doctrine of indoor management:

Points The doctrine of Constructive Notice The doctrine of Indoor Management
Meaning According to this doctrine, every person dealing with the company is deemed to have a “constructive notice” of the contents of its memorandum and articles. 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.
To whom protects It protects the company against the outsider. It protects outsiders against the company.
Affairs It is confined to the external position and affairs of the company. It is confined to the internal position and affairs of the company.
Reason The memorandum and articles of association of the company are public documents. They must be registered with the ROC. These are open to the public and third parties to access. The internal affairs need not be registered. They are not open to the public and third parties.
Effect It operates as an estoppel against the outsider. It mitigates the effects of the “Doctrine of Constrictive Notice”.

Question 27.
Write a short note on Doctrine of Constructive Notice [Dec. 2011 (5 Marks)]
Answer:
The memorandum and articles, when registered, become public documents and can be inspected by anyone on payment of a nominal fee. Therefore, every person who contemplates entering into a contract with a company has the means of ascertaining and is consequently presumed to know, not only the exact powers of the company but also the extent to which these powers have been delegated to the directors, and of any limitations placed upon the exercise of these powers.

In other words, every person dealing with the company is deemed to have a “constructive notice” of the contents of its memorandum and articles. In fact, he is regarded not only as having read those documents but also as having understood them according to their proper meaning. Consequently, if a person enters into a contract that is beyond the powers of the company, as defined in the memorandum, or outside the limits set on the authority of the directors, he cannot, as a general rule, acquire any rights under the contract against the company.

Example: If the articles provide that a bill of exchange to be effective must be signed by two directors, a person dealing with the company must see that it is so signed; otherwise he cannot claim under it.

Question 28.
While the doctrine of constructive notice seeks to protect the company against the outsider, the doctrine of indoor management operates to protect the outsiders against the company. Elucidate. [June 2012 (8 Marks)], [June 2014 (4 Marks)]
Answer:
The principle of indoor management operates to protect the outsiders against the company. According to this doctrine, as laid down in Royal BritishBankv. Turquand, persons contracting with a company are entitled to assume that the provisions of the articles have been observed by the officers of the company. It is no part of the duty of an outsider to see that the company carries out its own internal regulations.

In Royal British Bank v. Turquand, the directors of a banking company were authorized by the articles to borrow on bonds such sums of money as should from time to time, by resolution of the company in general meeting, be authorized to borrow. The directors gave a bond to Turquand without the authority of any such resolution. It was held that Turquand could sue the company on the strength of the bond, as he was entitled to assume that the necessary resolution had been passed.

Exceptions to the doctrine of indoor management: The doctrine of indoor management is subject to certain exceptions. In other words, relief on the ground of “indoor management” cannot be claimed by an outsider dealing with the company in the following circumstances:
1. Where the outsider had knowledge of irregularity: The rule does not protect any person who has actual or even an implied notice of the lack of authority of the person acting on behalf of the company. Thus, a person knowing that the directors do not have the authority to make the transaction but still enters into it, cannot seek protection under the rule of indoor management.

2. No knowledge of memorandum & articles: Doctrine of indoor management cannot be invoked in favor of a person who did not consult the memorandum and articles and thus did not rely on them.

3. Forgery: The rule of indoor management does not extend to transactions involving forgery or to transactions that are otherwise void or illegal ab initio. In the case of forgery, it is not that there is the absence of free consent but there is no consent at all. The person whose signatures have been forged is not even aware of the transaction and the question of his consent being free or otherwise does not arise. Consequently, it is not that the title of the person is defective but there is no title at all.

4. Negligence: The doctrine of indoor management does not reward those who behave negligently. Thus, where an officer of a company does something which shall not ordinarily be within his powers, the person dealing with him must make proper inquiries and satisfy himself as to the officer’s authority. If he fails to make an inquiry, he is estopped from relying on the Rule.

Question 29.
Write a short note on Doctrine of Alter Ego [Dec. 2013 (4 Marks)]
Answer:
An alter ego is an alternate personality. It is used by the Courts to ignore the status of shareholders, officers, and directors of a company in reference to their liability in their respective capacity so that they may be held personally liable for their actions when they have acted fraudulently or unjustly.

The House of Lords has held that the default of the managing director who [ is the directing mind and will of the company, would be attributed to him and he beheld for the wrongdoing of the company. [Lennards Carrying | Co. v. Asiatic Petroleum Co.]

A corporation is considered the alter ego of its stockholders, directors, or | officers when it is used merely for the transaction of their personal business [ for which they want immunity from individual liability.

A parent corporation is the alter ego of a subsidiary corporation if it controls and directs its activities so that it will have limited liability for its wrongful acts.

The alter ego doctrine is also known as the instrumentality rule because the corporation becomes an instrument for the personal advantage of its Parent Corporation, stockholders, directors, or officers. When a Court applies it, the Court is said to pierce the corporate veil.

Question 30.
In the case of a company whatever is not stated in the memorandum of association as objects of the company is prohibited by the doctrine of ultra vires. Discuss with relevant case law. [June 2014 (8 MarksJ]
Answer:
Facts of Case: Gomez, the Chairman of a company, borrowed ₹ 5 lakh from the State Bank of India, Patna under a promissory note. A suit was filed for the recovery of debts on the basis of the pro-note executed by the chairman. The company refused to accept the liability on the plea that the Chairman had borrowed funds without authorization from the company.

Provision: The facts of the given case are similar to Krishnan Kumar Rohatgi & Others v. State Bank of India & Others. In this case, the company borrowed an amount of ₹ 5 lakhs from the Bank under a Promissory Note. „ The repayment was guaranteed by a person by executing a guarantee in favor of the company.

The company used to make payments towards loans and the promissory note used to be renewed from time to time. In the suit for recovery, the company contended that the pro-note was executed by the Chairman without there being a resolution of the Board of directors authorizing the Chairman to execute the pro-note. Rejecting ] these contentions the High Court held that in cases where the directors borrow funds without their having authorization from the company and if the money has been used for the benefit of the company, the company cannot repudiate its liability to repay.

Under the general principles of law, when an agent borrows money for a principal without the authority of the principal but the principal takes the benefit of the money so borrowed or when the money so borrowed has gone into the coffers of the principal, the law implies a promise to be paid by the principal.

Conclusion: Thus, the company will be held liable to repay the amount because the company, being principal had taken benefit of the amount borrowed.

Question 31.
Alok, the Managing Director of Yellow Ltd., borrowed a large sum of money and misappropriated the same. Later, when the lender demanded his money, the company refused to repay, contending that the money borrowed by Managing Director was misappropriated by him and the company is not liable for repayment. Decide, giving reasons, whether the lender would succeed in recovering the money from the company. [June 2015 (4 Marks)]
Answer:
Facts of Case: Alok, the Managing Director of Yellow Ltd., borrowed a large sum of money and misappropriated the same. Later, when the lender demanded his money, the company refused to repay, contending that the money borrowed by Managing Director was misappropriated by him and the company is not liable for repayment

Provision: The facts of the given case are similar to V.K.R.S.T Firm v. Oriental Investment Trust Ltd., wherein it was held that under the authority of the company, its managing director borrowed large sums of money and misappropriated it. The company was held liable stating that where the borrowing is within the powers of the company, the lender will not be prejudiced simply because its officer has applied the loan to unauthorized activities provided the lender had no knowledge of the intended misuse.

Conclusion: Thus, the lender would succeed in recovering the money from the company.

Question 32.
Surprise Ltd. was incorporated under the Companies Act, 2013. The memorandum of association of the company in its objects clause stated that the company was established to make and sell or to carry on the business of mechanical engineers and general contractors. The company entered into a contract with Prominent Ltd., a firm of railway contractors to finance the construction of a railway line in Mumbai. The contract was ratified by the shareholders in a general meeting. Subsequently, the contract was repudiated by the company on the ground that the contract was ultra vires the objects clause.
Prominent Ltd. filed a suit claiming damages for the breach of contract. Explaining the meaning of the doctrine of ultra vires, decide whether Prom-inent Ltd. will succeed. [Dec. 2015 (4 Marks)]
Answer:
Facts of Case: Surprise Ltd. was incorporated under the Companies Act, 2013. The memorandum of association of the company in its objects clause stated that the company was established to make and sell or to carry on the business of mechanical engineers and general contractors.

The company entered into a contract with Prominent Ltd., a firm of railway contractors to finance the construction of a railway line in Mumbai. The contract was ratified by the shareholders in a general meeting. Subsequently, the contract was repudiated by the company on the ground that the contract was ultra vires the objects clause.

Provision: The general rule is that an act that is ultra vires the company is incapable of ratification.

The rule is meant to protect shareholders and the creditors of the company.

The ultra vires acts are null and void ab initio. The company is not bound by these acts. Even the company cannot sue or be sued upon.

The facts of the given case are similar to Ashbury Railway Carriage & Iron Co. Ltd, v. Riche in which doctrine of ultra vires was first enunciated by the House of Lords. The House of Lords has held that an ultra vires act or contract is void in its inception because the company had not the capacity to make it and since the company lacks the capacity to make such a contract, how it can have the capacity to ratify it.

If the shareholders are permitted to ratify an ultra vires act or contract, it will be nothing but permitting them to do the very thing which they are prohibited from doing. The House of Lords has expressed the view that a company incorporated under the Companies Act has the power to do only those things which are authorized by its objects clause of its memorandum and anything not so authorized (expressly or impliedly) is ultra vires the company and cannot be ratified or made effective even by the unanimous agreement of the members.

Conclusion: Thus, considering the views in the above case, Surprise Ltd. can repudiate the contract, and Prominent Ltd. cannot claim the damages.

Question 33.
Explain the doctrine of ‘ALTER EGO’ with suitable case law. [Dec. 2018 (4 Marks)]
Answer:
The memorandum and articles, when registered, become public documents and can be inspected by anyone on payment of a nominal fee. Therefore, every person who contemplates entering into a contract with a company has the means of ascertaining and is consequently presumed to know, not only the exact powers of the company but also the extent to which these powers have been delegated to the directors, and of any limitations placed upon the exercise of these powers.

In other words, every person dealing with the company is deemed to have a “constructive notice” of the contents of its memorandum and articles. In fact, he is regarded not only as having read those documents but also as having understood them according to their proper meaning. Consequently, if a person enters into a contract that is beyond the powers of the company, as defined in the memorandum, or outside the limits set on the authority of the directors, he cannot, as a general rule, acquire any rights under the contract against the company.

Example: If the articles provide that a bill of exchange to be effective must be signed by two directors, a person dealing with the company must see that it is so signed; otherwise he cannot claim under it.

Question 34.
Ria Technologies Ltd. was incorporated 10 years back. The Board of directors now wants to change its name to Ria Systems Ltd. Draft a notice and the explanatory statement for calling an extraordinary general meeting of the company for change of its name, assuming relevant data. [Dec. 2016 (4 Marks)]
Answer:
Charter Documents of Companies - Setting Up of Business Entities and Closure Important Questions 1
NOTICE is hereby given that an Extraordinary General Meeting of the Company will be held at on day 2019 at to transact the following business:

1. To consider and, if thought fit, to pass, with or without modifications, the following resolution as an ordinary resolution, in respect of which special notice has been received by the Company from a member(s) pursuant to Section 139 read with Section 115 of the Companies Act, 2013:
“Resolved That pursuant to the provisions of Section 4 read with Section 13 of the Companies Act, 2013 and other applicable provisions of the Companies Act, 2013 if any and subject to the approval of the RBI, the name of the Company be changed from Ria Technologies Ltd. to Ria Systems Ltd.”

“Resolved Further That the name Ria Technologies Ltd. wherever it occurs in the Memorandum and Articles of Association of the Company be substituted by the name Ria Systems Ltd.” “Resolved Further That the Board of directors be and is hereby authorized to do all such acts, deeds and things as may be deemed expedient and necessary to give effect to this resolution.”

For Ria Technologies Ltd.
Dated:________
By order of the Board,
Company Secretary

Notes:
1. A member entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and vote instead of himself and the proxy need not be a member.
2. The Explanatory Statement pursuant to Section 102 of the Companies Act, 2013, in respect of the special resolution set out above is annexed hereto.

Annexure Explanatory statement is pursuant to Section 102 of the Companies Act, 2013. The present activities of the Company include dealing in hardware and software of computers, etc. The present name does not convey the magnitude of operations of the Company and expresses an only part of its activities.

For some time the directors have been giving thought to changing the name of the Company. The new name reflects the full operations of the Company.

The ROC has confirmed that the new name is available upon the application of the Company for a change of the name of the Company and g subject to the resolution the Board of directors of the Company proposes S to make an application to the ROC for confirmation to the change of name.

None of the Director and KMP and their relatives have any interest in this Resolution except as a member of the Company.

Question 35.
The Board of Directors of Day Night Prakashani Ltd. decide to shift its registered office of the company from Mumbai to National Capital Region (NCR). The Board has approved the change. The Board has to seek the approval of the members of the company for going ahead with the legal formalities as required under the Companies Act, 2013, for which the extraordinary general meeting of the members is scheduled to be held on 17th June 2017. In this connection, you are required to draft a notice of the EGM for shifting of office outside the state and give an explanatory statement in this regard. ‘ [June 2017 (8 Marks)]
Answer:
Charter Documents of Companies - Setting Up of Business Entities and Closure Important Questions 2
NOTICE
NOTICE is hereby given that pursuant to Section 13 of the Companies Act, 2013 and Rule 22 of the Companies (Management & Administration) Rules, 2014 the company is seeking the consent of the shareholders through a Special Resolution, set out below, for the shifting of the Registered Office from the State of Maharashtra (Mumbai) to State of Delhi (National Capital Region) and for alteration in Clause II of the Memorandum of Association of the Company pursuant to the change in the registered office address of the Company.

“Resolved That pursuant to the provisions of Section 13 and other applicable provisions, if any, of the Companies Act, 2013 and the rules made thereunder and subject to the approval of the Central Government, consent of the members be and is hereby accorded for shifting of the registered office of the Company from State of Maharashtra (Mumbai) to State of Delhi (National Capital Region) and that the Clause II of the Memorandum of Association of the Company is substituted by the following clause:

“II. The registered office of the Company will be situated in the State Delhi (National Capital Region) ie. within the jurisdiction of the Registrar of Companies, Delhi.”

Resolved Further That Board of Directors of the Company be and is hereby authorized to take such steps and to do such acts & deeds as they may deem necessary and proper in this matter.”

For Day Night Prakashani Ltd.
Dated:_____
By order of the Board,
Company Secretary

Notes:

  1. A member entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and vote instead of himself and the proxy need not be a member.
  2. The Explanatory Statement pursuant to Section 102 of the Companies Act; 2013, in respect of the special resolution set out above is annexed hereto.

Annexure Explanatory Statement
(Pursuant to Section 102 of the Companies Act, 2013)
The Company was incorporated under the provision of the Companies Act, 2013, in the State of Maharashtra. As per Clause II of the Memorandum of Association of the Company, the Registered Office of the Company is presently situated in Maharashtra at Mumbai.

As per the shareholding pattern the majority of shares are held by shareholders residing in Delhi (National Capital Region).

Your approval is sought for voting by postal ballot in terms of the provisions of Section 110 of the Companies Act, 2013 read with the Companies (Management & Administration) Rules, 2014.

In accordance with the provision of Section 13 of the Companies Act, 2013 pursuant to the shifting of the Registered Office from one state to another alteration in Clause II of the Memorandum of Association of the Company is required, which requires the approval of shareholders in General Meeting by way of Special Resolution to give effect to such change. Further, pursuant to the provisions of Section 110 of the Companies Act, 2013 and the Companies (Management & Administration) Rules, 2014 the Special Resolution for shifting of Registered Office from one state to another is required to be passed by way of Postal Ballot.

In view of the above, your approval is sought through Postal Ballot for shifting the Registered Office of the Company from the State of Maharashtra to the State of Delhi (National Capital Region) and for altering Clause II of the Memorandum of Association.

The proposed change will in no way be detrimental to the interest of any member of Public, Employees, or other Associates of the Company in any manner whatsoever.

The Board recommends the aforesaid Special Resolution for your approval.

None of the Directors of the Company are concerned or interested in the said resolution except in the capacity as a member of the Company.

Setting Up of Business Entities and Closure Questions and Answers

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