• Lord Justice Lindley – “A company is an association of many persons

who contribute money or monies worth to a common stock and

employed in some trade or business and who share the profit and loss
arising therefrom. The common stock so contributed is denoted in
money and is the capital of the company. The persons who contribute
to it or to whom it pertains are members. The proportion of capital to
which each member is entitled is his share. The shares are always
transferable although the right to transfer is often more or less
restricted.”
AOA
• Chief Justice Marshall – “A corporation is an artificial being,
invisible, intangible, existing only in contemplation of the law. Being a
mere creation of law, it possesses only the properties which the
Charter of its creation confers upon it, either expressly or as incidental
to its very existence.”
• Prof. Haney – “A company is an artificial person created by law,
having separate entity, with a perpetual succession and common seal.”
• Incorporated company
• Legal Entity distinct from its members
• Artificial person
• Limited liability – Limited liability , unlimited liability, limited by shares
and limited by guarantee
• Transferability of shares
• Perpetual Succession
• Common Seal (Section 21 and 22)
• Unlimited Liability of a member of a Limited Liability company
• Section 3A, inserted by the Companies (Amendment) Act, 2017,
provides that if at any time the number of members of a company is
reduced, in the case of a public company, below seven and in the case
of a private company, below two, and the company carries on business
for more than six months while the number of members is so reduced,
every person who is a member of the company during the time that it
so carries on business after those six months and is aware of the fact
that it is carrying on business with less than seven members or two
members, as the case may be, shall be severally liable for the payment
of the whole debt.
Company Limited by shares
• the shareholder’s liability to contribute is measured by the nominal
value of the shares he holds, so that once he or someone who held the
shares previously has paid that nominal value plus any premium
agreed on when the shares were issued, he is no longer liable to
contribute anything further
• Company Vs Body Corporate Section 2 Sub section 11
• Manwood case
• Madras Central Urban Bank Ltd (1932)

• Kondoli tea Company Case ( tea estate case)

• Macuara Vs Northern Assurance Comp Ltd (1925) case (Timber

estate)
Advantages of Incorporation
• Independent legal entity
• Limited liability
• Perpetual Succession
• Transferability of shares
• Infinite membership
• Mobilisation of huge resources
• Separate property
• Ease in control and management
• Is a society registered under Societies Registration Act a body
corporate
• Is company a citizen?
Disadvantages of Incorporation
• Formality and expenses
• Loss of privacy
• Divorce of control of ownership
• Detailed winding up procedure
• Control by few
• Greater public accountability
• Possibility of frauds
Question 1
• A and B were only two members of a private company. Both of them
have been killed in a bomb blast. Does the company cease to exit?
• No, Perpetual success, The King is dead, Long Live the King

• There was a company named as ABC pvt limited. Ms Roase interested

to purchase shares in the company . The price of each share amount
to Rs 1000. Ms Roase purchased 10 shares in the company and paid
Rs 5000 for the shares she purchased. The company went into loss
after 9 months.During winding up of the company, the valuation of
the assets of the company comes to around total Rs 10,………
Corporate Veil - Concept
• Corporate Veil
• Lifting the Corporate veil
• Two types – Judicial interpretation and Statutory provisions
Through Judicial Interpretation

• Determination of enemy character of the company – Daimler Case

• Where company is a sham – Gilford motors case
• Prevention of fraud and Improper conduct – Jones Vs Lipman Case
• Where the Company is acting as an agent of the shareholder – F.G
Flims Ltd (1953)
• Protection of revenue – Sir Dinshaw Mancekjee case
• Avoidance of welfare provisions/legislation/initiatives – Workmen of
Associated Rubber Industry Case
• Protecting Public Policy
Statutory Circumstances to lift the veil
• Reduction of number of members as per CA,2013
• Liability for fraudulent conduct of business (Section 339)
• Liability for Ultra Vires – Memorandum of Association
• Investigation of Ownership of company (Sec 216)
• Mis description of the Company name (sec 12)
• Mis statement in Propectus (Sec 34 and 35)
• Failure to refund application money
AOA
INTRODUCTION
• THE articles of association of a company are its byelaws or rules and
regulations that govern the management of its internal affairs and
the conduct of its business.
• Section 2(2) defines articles
• The AOA regulates the internal management of the company. They
define the powers of the officers
• They establish a contract between the company and the members
and between the members inter se
• MOA lays down what is to be done and AOA lays down how it is to be
done.
• Section 2(68) – AOA and Transferability of shares
• Contents –
• Adaptation of preliminary Contracts, Numbers and value of shares ,
Allotment of shares , Call on shares, lien on shares, transfer and
transmission of shares , forfeiture of shares , alteration of shares,
conversion of shares into shares, voting rights, proxies , meeting ,
appointment of directors, borrowing powers, dividends , audit and
accounts and winding up.
Procedure for alteration of AOA
• Section 14
• Approval for BOD
• Special Resolution Passed
• Intimation to ROC
• Seek approval from Tribunal
• Intimate ROC of the approval of the Tribunal
- Model Forms of articles – Section 5 ( Table F,G,H,I and J ) Sch I
- Signing of Articles – (Iliterate, body corporate, LLP , foreign national
residing outside India)
-
Limitations on the Powers to alter articles
• Not to be inconsistent with Memorandum
• Not to be inconsistent with companies act or any other law
• Not to be inconsistent with nay alteration made by the tribunal
• The altered articles must not include anything which is illegal or
opposed to public policy or unlawful
• The alteration must be bonafide for the benefit of the company as a
whole
• An alteration of articles cannot be made without the approval of the
Tribunal
• Differ bet MOA and AOA
• Binding effect of MOA and AOA – members bound to the company,
company bound to the members, members bound to members,
company and the outsiders
Doctrine of Constructive notice
Doctrine of indoor management
PROMOTORS
Meaning
• The whole process of formation of a company may be divided into
four stages
• Promotion
• Registration
• Floatation/ Raising of capital
• Commencement of business
Promotion
• Promotion is a term of wide import denoting the preliminary steps
taken for the purpose of registration and floatation of the company.
• The person who assumes the task of promotion are called promotors.
• A promotor may be an individual , syndicate , association, partner or
company
Who is a promotor
• Section 2 (69) of the Act define the term promotor
“promoter” means a person—
(a) who has been named as such in a prospectus or is identified by the
company in the annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or in directly
whether as a share holder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board
of Directors of the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is
acting merely in a professional capacity
• A person who is acting merely in a professional capacity shall not be treated as a promotor. A
person cannot be held as promotor merely because he is a signatory to MOA, or he has provided
money for the payment of expenses or has worked in professional capacity, etc.
• Justice C. Cockburn described a promotor as one who undertakes to form a company with reference
to a given project and to set it going and who takes the necessary steps to accomplish that purpose.
• A company may have more than one promotors.
• Status of the Promotor
• Legal Status of the Promotor –
• Neither he is an agent not a trustee . He acts under a fiduciary relationship.
• Erlanger Vs New Somberro Phosphate , Lord Cairns stated the promotors of a company stand
undoubtedly in a fiduciary position.They have in their hands the creation and moulding of the
company. They have the power of defininh how and when and in what shape and under whose
supervision it shall come into exisitence abd begin to act t as a trading corporation.
 Functions of a Promotor
• To originate the scheme for formation of the company ; Promoters are generally the first persons
who conceive the idea of business. They carry out the necessary investigation to find out
whether the formation of a company is passible and profitable. Thereafter, they organise the
resources to convert the idea into a reality by forming a company. In this sense, the promoters are
the originators of the plan for the formation of a company.
• Required number of members - To secure the cooperation of the required number of persons
willing to miate themselves with the project : The promoters, in accordance with whether they
want to incorporate a private or a public company, try to secure the co -operation af persons
needed to form the company
• Discovery of Idea
• Detailed Investigation
• Assembling of resources
• Preparing preliminary documents
• Entering into preliminary constracts
• Naming a company
• Appointing bankers, brokers, underwriters and solicitors
Fiduciary relationship of promotor
• Not to make any profit at the expense of the company.
• Not to derive profit from the sale of its own property without full
disclosure to the BOD.
• Erlanger v New Sombrero Phosphate Co. Case
• To make full disclosure of profit and interest while selling its own
property.
• Not to make any unfair use of his /her position
Rights of promotors
• Right to receive preliminary expenses.
• Right to recover proportionate profit from co- promotors.
• Right to remuneration – (Contract)
Liabilities of Promotor
• Section 447 – Section 7 - Fraud
• Section 26 (Prospectus)
• Section 35 (1) – Mis stamen in prospectus
• Section 42 (10) – Private Placement
• Full disclosure
• Section 266 (2) – Diversion of Funds
• Section 284 (2) – Extend full cooperation to the official liquidator
Cases on Promoters
• Gluckstein Vs Barnes {1900] AC 200 – Disclosure not made by
promoter
• Kelner Vs Baxter (1866) – contracts prior to incorporation
• Erlanger Vs NSP
• Jubliee Cotton mills
Doctrine of Ultra Vires
• Ashbury Railway Carriage and Iron Company Ltd. V.
Riche, (1875) L.R. 7 H.L. 653.,
Doctrine of Constructive notice
• Section 399 , Section 17 , Rule 34

• Kotla Venkataswamy vs. Chinta Ramamurthy (Mortgage

bond , - the mortgage bond was not validly executed) –
AIR 1934 Mad 579
Doctrine of Indoor Management
• Royal British Bank Vs Turquanad (The company was liable )
PROSPECTUS
Meaning and definition
• A prospectus as per Sec 2 (70) means any document described or
issued as a s prospectus and includes red herring prospectus or shelf
prospectus or any notice , circular, advertisement or other document
inviting offers from the public for the subscription or purchase of any
securities of a body corporate.
• A prospectus is not merely an advertisement .
• It may be a circular, notice.
• A document shall be called a prospectus if it satisfies two things
• It invites subscription to or purchase of shares or debentures or any other security of a body corporate
• The invitation is made to public.
• What Constitutes an offer to the public ? Explanation III to sub-section (3) of Section 42 read along with rules
• If any company invites subscription or allots any security to 200 or more persons in a financial year , it will
said to have made public offer . The counting of the figure 200 persons doesn’t include
a.Qualified Institutional buyers
b. Employees who offered securities UNDER the scheme of ESO ( Employees Stock Option)
Types of prospectus

• Deemed Prospectus (Section 23 , 28)

• Shelf Prospectus ( Section 31) ( Information Memorandum – details
of the company and issuance of shares, any changes , any financial
condition-, one year validity , SEBI allowed,- IM + Shelf Prospectus =
Prospectus
• Red Herring Prospectus – (Section 32) – Incomplete Prospectus – nor
quantum nor price – prior to the issue of prospectus – to be
submitted to Registrar before 3 days – closing – registrar + SEBI
• Abridged Prospectus – Section 33
[Nash v. Lynde (1929)].
• Single private communication does not amount to issue to the public .
In this case, several copies of a document marked “strictly
confidential” and containing particulars of a proposed issue of shares,
were sent by the managing director of a company to a co-director,
who in turn sent a copy to a solicitor, who gave it to a client who, in
turn, passed it on to a relation. Thus, a document was passed on
privately through a small circle of friends of the directors. The House
of Lords held that there had been no issue to the public.
Parmathan Nath Sanyal Vs Kali Kumar Dutt
(1924)
• Prospectus is not an offer by the company but it is only an invitation
to offer
Contents of a prospectus
• Section 26 of the Act provides contents of the Prospectus
• Information in Prospectus
• Reports to be set out in prospectus – Report by auditor of the
company, last five financial year,
• Declaration
• Information to be given in the prospectus
• Declaration
• Other matters
• Statement by Expert
• Penalty for non compliance
• Exemptions – Rights issue - Shares/ Debentures uniform in all
respects
• Variations in terms of contracts or objects in prospectus – Section 27
• Offer of sale of shares by certain members of company – Section 28
When Prospectus not to be issued
• A private company is note required to issue prospectus
• Even a public company need not issue prospectus if the promoters or
directors feel that they can mobilise resources through personal
relationships and contacts. Shares and debentures are not offered to
the public
• Where the shares or debentures are offered to the existing
shareholders
Misstatement in a Prospectus
• The prospective shareholders are entitled to true and faithful
disclosures in the prospectus.
• The person issuing the prospectus are bound to state everything
accurately and not to omit material facts.
What is an untrue or misstatement
• According to Section 34 of the Act , a statement included in a
prospectus shall be deemed to be untrue:
a. If the statement is misleading in the form or context in which it is
included
b. Where any inclusion or omission from a prospectus of any matter is
likely to mislead.
Suppression of material facts is considered as mis statement.