1

Q.2. Write short notes on any four.

1) Advantages of forming Company :Ans. Essential features or characteristics or
advantages of incorporation :- The essential or outstanding features or characteristics of company
are also known as advantages of incorporation which are summarized as under:

1) Artificial Person :-A company is an artificial legal person, because, it has been recoginsed
by law as it is being capable of rights and duties. A person is any subject matter other than a
human being to whom the law regards as capable of rights and duties. In other words, company is
created by law and, therefore, it can be dissolved by law only. It has no soul, no flesh and no
body. It is invisible, intangible and it is not in the shape of human body, but its' existence is seen
by the eyes of law. Since, the company is an artificial legal person, the provisions of the
Constitution of India and the Citizenship Act do not apply to company State Trading Corporation of
India v/s. CTO.

2) Separate legal entity or Separate legal existence: A company has a separate legal
existence. It has a separate legal personality or entity which is distinct and independent of its
members who are known as shareholders who compose the company. A company exists in the
eyes of law, and therefore, it is described as an artificial legal person. The incorporation of a
company gives a company a corporate personality which is different from the members or
shareholders of the company. A company upon its incorporation is empowered to acquire, hold
and transfer property in its own name and it is also empowered to sue and can be sued by its own
members. Since, the company has an independent existence any of its member can enter into
contract with the company in the same manner when he enters into contract with any other
individual. Such person is not held liable for the acts of the company i.e. even if he holds the entire
share capital.

Salomon v/s Salomon & Co. Ltd. (1897 A.C. 22)-In this case, for the first time the principle
of the separate legal entity or separate legal existence of a company was recognized by the
House of Lords. Salomon & Co. Ltd. was practically owned by Mr. Salomon. In the event of
its liquidation, the question arose whether Mr. Salomon had a right to a prior claim, with
regard to the debentures held by him, over the unsecured creditors of the company. The
unsecured creditors claimed that since Mr. Salomon and the company were one and the
same (as the company was practically owned by Mr. Salomon). Mr. Salomon should be held
personally liable to satisfy their claims. In other words, they should be paid in priority to
Mr. Salomon. It was held by the House of Lords that, once the company was incorporated,
it became a separate person in the eyes of law. Such company being a separate person,
was independent from Mr. Salomon Even though Mr. Salomon was virtually the holder of all
the shares of the company, he was also a creditor secured by debentures and, therefore,
Mr. Salomon was entitled to repayment in priority to unsecured creditors of the company
which had acquired a separate legal existence or separate legal entity.

3) Perpetual Succession: The word "Perpetual Succession" means that, even if the
membership of the company keeps changing from time to time, such change does not affect the
company's continuity or does not affect the continuous existence of the company. In other words,
as soon as the company is duly incorporated, it becomes, in the eyes of law, a separate person
independent from its members. Therefore, the changes in its membership by death, insolvency,
mental disorder or retirement of its members, their transfers, etc. do not affect the continuous
existence of the company. The company never dies. The life of the company does not depend
upon the life of its' members. The company is created by process of law and can be put to an end
by a process of law only. Members may come and go, but the company can go on forever (until
dissolved by process of law). Therefore, the company remains in existence even if all its human
members of a private company, while in general meeting, were killed by a bomb blast, the
company was survived even in such situation. (L.C.B. Gower has cited the above example in his
book "Modern Company Law" p.76 (3 ed. 1969).
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4) Limited Liability:
The term "Limited Liability" means that the liability of members of the company is limited to the
unpaid value of the shares. In other words, the members are liable to the value of the shares
purchased by them. The extent of limited liability can be understood with the following example, if
the face value of a share in a company is Rs.100/- and the member has already paid Rs.70- and
the member can be called upon to pay Rs.30/- per share during the existence of the company.
When the liability is limited to the extent of the value of share, a company is called "company
limited by share". When the liability is limited to the extent of the guarantee, a company is called
"company limited by guarantee". A company limited by guarantee means, the liability of the
members of the company is limited to such amount which the members may undertake to
contribute to the assets of the company in the event of liquidation of company. In other words,
each member promises to pay a fixed amount in the event of liquidation of company or in case of
its' winding up. This fixed sum of money or amount is called "guarantee".

5) Transferable Shares:
Shares of the company are considered as goods under the Sale of Goods Act, 1930. Shares of a
member in a company are movable property, which is transferable in the manner stipulated in the
Articles of Association of the company. The transferability of shares allows the member of the
company to sell and purchase in the market openly. In other words, the member of the company
can sell and purchase the shares in the open market and can get back his investment without any
withdrawal of money from the company or get back his money or his investment to the capital
structure of the company.
Lords Blackburn observed that, the object of joint stock companies was that, their shares should
be capable of being easily transferred.

6) Common Seal
The moment a company is incorporated, a company acquires a separate legal entity and it is
regarded as artificial legal person. A company has no soul, flesh and body and, therefore, it is
incapable of signing documents for itself. A company performs acts through natural persons who
are the directors of a company. Since a company is incapable to sign, the law has made provision
for the use of common seal below the signature of the directors, the Company is not liable for such
contracts. In other words, in the absence of a common seal affixed below the signature of the
Directors on the document of contract, the contract will not be legally binding on the company.

7) Separate Property:
A company has a separate legal entity and it is an artificial legal person which is different and
distinct from its members. And therefore, a company is capable of enjoying, owing or disposing of
the property in its own name, because, a company is the owner of its capital and assets. The
members of a company commonly known as shareholders of a company, are not the owners of
the property of a company -

Gramophone and Typewriter Co. vs. Stanley (1906) 2 KB 856 :-

In other words, the shareholders have no right to any item of property belonging to a company.
This position can be understood with the following example.

Macaura v/s. Northern Assurance Co. Ltd. (1925) AC 619 :-

It was held in this case that, a member of a company held nearly all the shares of a company,
which was dealing with the timber business. He was substantial creditor of that company. The
company's timber was insured by him in his own name. The timber was accidentally destroyed by
fire. It was held in this case that, the Insurance Company was not liable to him.

8) Capacity to Sue:

Another advantage or characteristic of incorporation is the "capacity to sue". A company is an

artificial legal person and is also a body corporate. Therefore, a company has the capacity to sue
and be sued in its own name:

9) Finance:
 3

A company is such a business organization, which may raise huge fund with the help of shares
and debentures by public subscription. The public financial institution finds easy and beneficial to
lend their resources willingly to a company as compared to other forms of business organizations.
A company grants the facility of borrowing and giving security with a floating charge and this is
also one of the important advantages of incorporation.

10) Professional Management:

Another important advantage or characteristic of incorporation is the professional management. A
copmany is backed by professional management, as it is capable of attracting young management
graduates who are willing to join companies as they automatically get executive or managerial
status. And their independent functioning as manager is secured, because, a company does not
have a human employer, as the shareholders exercise only a formative role in the form of control.

2 .Palmer's Private Companies 25-26 (42 ed. 1961)-

It was observed that, a company with the advantage of professional management, becomes
capable of achieving the very highest development, success and progress in commercial
institutions or undertakings. (Abbreviations to remember the above 10 points-ASPL, TC, SC, FP)

2) Kinds of Share capital

According to the Section 43 of the The Companies Act, 2013 the Kinds of share capital are as
follows:-

The share capital of a company limited by shares shall be of two kinds, namely

(a) equity share capital:

(i) with voting rights; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as
may be prescribed; and

(b) preference share capital:

Provided that nothing contained in this Act shall affect the rights of the preference shareholders
who are entitled to participate in the proceeds of winding up before the commencement of this Act.

Explanation: For the purposes of this Section:

(i) 'equity share capital', with reference to any company limited by shares, means all share
capital which is not preference share capital;

(ii) "preference share capital" limited by shares, means that part of the issued share capital of
the company which carries or would carry a preferential right with respect to:
(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate,
which may either be free of or subject to income -tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share
capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the
payment of any fixed premium or premium on any fixed scale, specified in the memorandum or
articles of the company;

(iii) capital shall be deemed to be preference capital, notwithstanding it is entitled to either or

both of the following rights, namely:-

(a) that in respect of dividends, in addition to the preferential rights to the amount specified in
sub-clause (a) of clause (ii), it has a right to participate, whether fully or to a limited extent, with
capital not entitled to the preferential right aforesaid;
 4

(b) that in respect of capital, in addition to the preferential right to the repayment, on a winding
up, of the amounts specified in sub-clause (b) of sub-clause (ii), it has a right to participate,
whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus
which may remain after the entire capital has been repaid.

[Corresponding Section 2 (464), 85 and 86 of 1956 Act]

3) Annual General Meeting

(1) Introduction:
The Companies Act, 2013, governs the functioning of companies in India. One of its essential
provisions pertains to the Annual General Meeting (AGM). Sections 96 to 137 of the Companies
Act, 2013, elaborate on the rules and regulations concerning AGMs.

(2) Purpose of AGM (Section 96):

AGM is a mandatory yearly meeting of shareholders, providing them with the opportunity to
discuss the company's performance, financial statements, and other key matters. It serves as a
forum for transparency and accountability.

(3) Frequency (Section 96):

AGMs must be held once in every calendar year. The gap between two AGMs should not exceed
15 months.

(4) Notice (Section 101):

Section 101 stipulates that a notice of the AGM must be sent to all shareholders, directors, and
auditors at least 21 days before the meeting. The notice must include the date, time, and place of
the meeting, along with the agenda.

(5) Quorum (Section 103):

To conduct business at an AGM, a minimum number of members must be present, which is
known as quorum. Quorum for a public company is a minimum of five members personally
present if it has up to 1,000 members, and 15 members personally present if it has more than
1,000 members.

(6) Agenda (Section 102):

The agenda of the AGM includes standard items like adoption of financial statements,
appointment of auditors, and declaration of dividends. Members can also raise specific matters
during the meeting.

(7) Resolutions and Voting (Section 114):

Resolutions proposed during the AGM require voting. Shareholders can vote in person or through
proxy. Section 114 outlines the procedure for voting.

(8) Minutes of the Meeting (Section 118):

Detailed minutes of the AGM must be recorded and maintained as per Section 118. These
minutes are legal records of the meeting's proceedings.

(9) Special Resolutions (Section 114):

Certain decisions, like altering the company's Articles of Association or changing its name, require
a special resolution, which needs approval from a higher majority of shareholders.

(10) Conclusion:
The AGM is a crucial aspect of corporate governance, ensuring transparency, shareholder
participation, and compliance with the Companies Act, 2013. Companies must adhere to the Act's
provisions regarding AGMs to maintain good corporate governance practices.

(11) This short note provides an overview of AGMs under The Companies Act, 2013, including
their purpose, frequency, notice requirements, quorum, agenda, voting procedures, and the
importance of maintaining detailed minutes of the meeting. Companies in India must carefully
 5

follow these provisions to meet their legal obligations and ensure transparency and accountability
in their operations.

5) Appointment of Directors
Introduction :-
The Companies Act, 2013, regulates the appointment of directors in India, laying down the
procedures and qualifications for individuals to assume the role of directors in a company.
Sections 149 to 172 of the Act elaborate on the appointment, qualifications, and disqualifications
of directors.

a) Appointment Process (Section 152) :-

Appointment by Shareholders:
Directors are appointed by the shareholders of the company through an ordinary resolution during
a general meeting. Certain directors, like independent directors, may require a special resolution.
Appointment by Board:
In some cases, directors can also be appointed by the existing board of directors, but such
appointments need ratification by the shareholders at the next general meeting.
b) Types of Directors (Section 149) :-
● Managing Director (MD): Responsible for the day-to-day management of the company.
● Whole-Time Director (WTD): Engaged in full-time management but not the Managing
Director.
● Independent Director: Provides unbiased judgment and advice.
● Additional Director: Appointed between two annual general meetings, subject to
shareholder approval.
● Nominee Director: Appointed by a financial institution or government agency that has
provided financial assistance to the company
c) Qualifications and Disqualifications (Sections 164 and 165) : -
Directors must meet specific qualifications and avoid disqualifications prescribed by the Act. For
instance, a person declared insolvent or convicted of specific offenses cannot become a director.
d) Director Identification Number (DIN) (Section 153) :-
Every individual intending to become a director must obtain a unique DIN, which serves as their
identification for various regulatory purposes.
e) Rotation of Directors (Section 152) :-
Certain directors, like independent directors and those serving as MD or WTD, may be subject to
rotation, limiting their tenure to ensure fresh perspectives and independence.
f) Resignation and Removal of Directors (Section 168 and 169) :-
Directors may resign by providing written notice to the company. Shareholders can remove a
director through an ordinary resolution before the expiration of their term.
g) Conclusion :-
The Companies Act, 2013, provides a comprehensive framework for the appointment of directors
in Indian companies. The process ensures that individuals with the requisite qualifications and
without disqualifications are entrusted with the responsibility of guiding and managing the
company. Compliance with these provisions helps maintain corporate governance, transparency,
and accountability in the functioning of companies. Directors must also be aware of their roles,
responsibilities, and fiduciary duties to uphold the interests of the company and its stakeholders.

7) Distinguish between Private and Public company

In India, the Companies Act, 2013, distinguishes between private companies and public
companies, primarily under Section 2(68) for private companies and Section 2(71) for public
companies. Here is a comparative overview of the key differences between private and public
companies according to the Companies Act:

1. Minimum Number of Members:

a) Private Company (Section 2(68)): A private company must have a minimum of 2 members.
b) Public Company (Section 2(71)): A public company must have a minimum of 7 members.
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2. Maximum Number of Members:

a) Private Company (Section 2(68)): The maximum number of members in a private company
is limited to 200.
b) Public Company (Section 2(71)):There is no maximum limit on the number of members in a
public company.

3. Transferability of Shares:
a) Private Company (Section 2(68)): Restrictions on the transfer of shares are commonly
imposed by the articles of association. Shareholders' consent is often required for share transfers.
b) Public Company (Section 2(71)): Shares of a public company are freely transferable, and
there are no restrictions on share transfers.

4. Minimum and Maximum Directors:

a) Private Company (Section 149(1)): A private company must have a minimum of 2 directors
and can have a maximum of 15 directors.
b) Public Company (Section 149(1)): A public company must have a minimum of 3 directors
and can have more than 15 directors.

5. Invitation to the Public:

a) Private Company (Section 3(1)(iii)): A private company is prohibited from making a public
invitation to subscribe for its shares or debentures.
b) Public Company (Section 3(1)(iv)): A public company can invite the public to subscribe to
its shares or debentures and can also get listed on stock exchanges.

6. Prospectus Requirement :-
a) Private Company (Section 2(68)): Private companies are not required to issue a
prospectus when raising capital.
b) Public Company (Section 2(71)): Public companies must issue a prospectus when making
a public offer of shares or debentures.

7. Commencement of Business:
a) Private Company (Section 3(1)(a)): A private company can commence its business
immediately upon incorporation.
b) Public Company (Section 11(2)): A public company can commence business only after
obtaining a certificate of commencement of business.

8. Statutory Meeting:
a) Private Company: The requirement for a statutory meeting and statutory report does not
apply to private companies.
b) Public Company (Section 165): Public companies are required to hold a statutory meeting
and submit a statutory report.

9. Restrictions on Borrowing:
a) Private Company (Section 180): Private companies have fewer restrictions on borrowing
compared to public companies.
b) Public Company (Section 180): Public companies have stricter borrowing limits and require
shareholder approval for certain borrowings.

10. Appointment of Directors (Section 149):

a) Private Company: A private company can have directors who are related to each other.
b) Public Company: Public companies must appoint at least one-third of their directors as
independent directors.

These distinctions between private and public companies under the Companies Act, 2013, reflect
varying levels of regulation and transparency requirements, allowing companies to choose a
structure that aligns with their objectives and operational needs.
 7

8 The "doctrine of indoor management" in the Companies Act 2013 essentially means that
when dealing with a company, an outsider can assume that the company's internal procedures
and requirements have been followed correctly, as outlined in its Memorandum and Articles of
Association, and they are not required to investigate potential internal irregularities, unless they
have knowledge or suspicion of such issues; this principle is also known as "Turquand's Rule" and
acts as an exception to the doctrine of constructive notice.
Key points about the doctrine of indoor management:
 Protection for outsiders:
This doctrine protects third parties who deal with a company in good faith from being adversely
affected by the company's internal management issues.
 Based on public documents:
Outsiders are only required to check the company's public documents like the Memorandum and
Articles of Association to verify the scope of the company's authority.
 Exception to constructive notice:
Unlike the doctrine of constructive notice, which assumes that outsiders are aware of all company
details, including internal irregularities, the doctrine of indoor management allows them to rely on
the company's apparent authority.
 Originating case:
This doctrine stems from the landmark case of "Royal British Bank v. Turquand".
Important considerations:
 Good faith requirement:
The protection under this doctrine only applies if the outsider is acting in good faith and has no
knowledge of any internal irregularities.
 Limitations:
If an outsider has actual knowledge of a breach of internal procedures or suspects such a breach,
they cannot rely on the doctrine of indoor management

9) Cumulative and Non-Cumulative notice

In company law in India, cumulative and non-cumulative notices refer to the notices of a meeting
of a company's board of directors. These notices are issued to inform directors about upcoming
meetings where important decisions are to be made. The specific provisions related to these
notices can be found in the Companies Act, 2013. Let's explore the differences between
cumulative and non-cumulative notices with relevant sections and illustrations:

1. Cumulative Notice (Section 173(3)):

A cumulative notice is a notice that combines the agenda items of the upcoming board meeting
with those of the subsequent meeting(s). This means that if any item of business is not transacted
at the meeting for any reason, it will be carried forward to the next meeting without the need for a
separate notice.

Section 173(3):
"Where a meeting of the Board could not be held for want of quorum, then, unless the articles
otherwise provide, the meeting shall automatically stand adjourned to the same day at the same
time and place in the next week or if that day is a national holiday, till the next succeeding day
which is not a national holiday, at the same time and place or to such other day and such other
time and place as the Board may determine."

Illustration 1: Cumulative Notice

Suppose a board meeting is scheduled for January 5th, and the agenda includes discussing the
 8

company's financial statements. However, due to a lack of quorum, the meeting cannot be held. In
this case, the agenda item regarding the financial statements will automatically be included in the
agenda for the board meeting scheduled for January 12th, without the need for a separate notice.

2. Non-Cumulative Notice (Section 173(1)):

A non-cumulative notice is a notice that relates only to a specific board meeting and its agenda
items. If any business remains unfinished or unaddressed at that meeting, it will require a separate
notice for a subsequent meeting where the pending business can be discussed.

Section 173(1):
"The notice calling a meeting of the Board shall specify the place and the date of the meeting and
shall contain the agenda of the meeting."

Illustration 2: Non-Cumulative Notice

Suppose a board meeting is scheduled for January 5th, and the agenda includes discussing the
company's financial statements. Due to time constraints or other reasons, the board cannot
address this agenda item during the meeting. In this case, if the board wishes to discuss the
financial statements at a later date, a separate notice must be issued for a new board meeting
specifically to address this matter.

In summary, cumulative notices combine agenda items from a meeting that could not be held due
to lack of quorum with the agenda of a subsequent meeting. Non-cumulative notices, on the other
hand, relate only to the specific meeting for which they are issued, and any unfinished business
requires a separate notice for discussion at a subsequent meeting. These provisions ensure
transparency and clarity in board meetings and decision-making processes in accordance with the
Companies Act, 2013.

11) Doctrine of Constructive notice

A) Introduction :-
The doctrine of constructive notice is a fundamental principle in company law in India. It implies
that every person dealing with a company is deemed to have constructive notice of the company's
memorandum and articles of association, and therefore, they are bound by the provisions
contained in these documents. This doctrine helps ensure transparency and accountability in
company transactions. Relevant sections of the Companies Act, 2013, provide the legal basis for
this doctrine.

B) Sections Related to Doctrine of Constructive Notice:

1) Section 4(22): Memorandum of Association:
- This section defines the memorandum of association as the charter of the company,
containing the fundamental conditions upon which the company is incorporated.

Illustration 1: Memorandum of Association:

- If a person intends to become a shareholder of a company, they are deemed to have
constructive notice of the company's objectives, powers, and limitations specified in its
memorandum of association.

2) Section 5: Articles of Association:

- This section defines the articles of association as the document that contains rules and
regulations for the internal management of the company.

Illustration 2: Articles of Association:

- Any individual or entity entering into a contract with a company is presumed to have
constructive notice of the provisions outlined in the company's articles of association. This
includes details about the board of directors, meetings, voting rights, and share transfer
restrictions.

3) Section 6: Effect of Memorandum and Articles:

- This section explains that the provisions of a company's memorandum and articles of
 9

association bind the company and its members to the same extent as if they had been signed and
sealed by each member.

Illustration 3: Binding Effect :-

- If a company's articles of association stipulate that certain decisions require a special
resolution, anyone dealing with the company, including shareholders and directors, is legally
bound by this requirement as if they had individually consented to it.

4) Importance of the Doctrine of Constructive Notice :-

- The doctrine of constructive notice serves as a safeguard against misunderstandings or
disputes in company transactions.
- It ensures that individuals and entities engaging with a company have access to and are
aware of the company's governing documents, thereby promoting transparency and legal
compliance.
- By imposing a duty on all parties to be aware of a company's memorandum and articles,
the doctrine helps maintain corporate governance and accountability.

C) Conclusion :-
The doctrine of constructive notice is a critical aspect of company law in India, emphasizing that
individuals and entities involved with a company are deemed to be aware of and bound by the
provisions of its memorandum and articles of association. This doctrine enhances the legal
framework for company transactions, fostering transparency and ensuring that all parties act in
accordance with the company's governing documents.

What is the doctrine of ultra-vires? Introduction: Companies have to borrow funds from time to
time for various projects in which they are engaged. Borrowing is an indispensable part of day to
day transactions of a company, and no company can be imagined to run without borrowing from
time to time. Balance sheets are released every year by the companies, and you will hardly find
any balance sheet without borrowings in the liabilities clause of it. However, there are certain
restrictions while making such borrowings. If companies go beyond their powers to borrow then
such borrowings may be deemed as ultra-vires. What is the doctrine of ultra-vires? Ultra-viresIt
is a Latin term made up of two words “ultra” which means beyond and “vires” meaning power or
authority. So we can say that anything which is beyond the authority or power is called ultra-vires.
In the context of the company, we can say that anything which is done by the company or its
directors which is beyond their legal authority or which was outside the scope of the object of the
company is ultra-vires. Doctrine of Ultra-Vires: Memorandum of association is considered to be
the constitution of the company. It sets out the internal and external scope and area of company’s
operation along with its objectives, powers, scope. A company is authorized to do only that much
which is within the scope of the powers provided to it by the memorandum. A company can also
do anything which is incidental to the main objects provided by the memorandum. Anything which
is beyond the objects authorized by the memorandum is an ultra-vires act. The doctrine of ultra-
vires in Companies Act, 2013 : Section 4 (1)(c) of the Companies Act, 2013, states that all the
objects for which incorporation of the company is proposed any other matter which is considered
necessary in its furtherance should be stated in the memorandum of the company.

Whereas Section 245 (1) (b) of the Act provides to the members and depositors a right to file a
application before the tribunal if they have reason to believe that the conduct of the affairs of the
company is conducted in a manner which is prejudicial to the interest of the company or its
members or depositors, to restrain the company from committing anything which can be
considered as a breach of the provisions of the company’s memorandum or articles.

Basic principles regarding the doctrine

1. Shareholders cannot ratify an ultra-vires transaction or act even if they wish to do so.
2. Where one party has entirely performed his part of the contract, reliance on the defense
of the ultra-vires was usually precluded in the doctrine of estoppel.
 10

3. Where both the parties have entirely performed the contract, then it cannot be attacked
on the basis of this doctrine.
4. Any of the parties can raise the defense of ultra-vires.
5. If a contract has been partially performed but the performance was insufficient to bring
the doctrine of estoppel into the action, a suit can be brought for the recovery of the
benefits conferred.
6. If an agent of the corporation commits any default or tort within the scope of his
employment, the company cannot defend it from its consequences by saying that the
act was ultra-vires.

Types of ultra-vires acts and when can an ultra-vires act be ratified?

Ultra-vires acts can be generally of four types:

1. Acts which are ultra-vires to the Companies Act.

2. Acts which are ultra-vires to the Memorandum of the company.
3. Acts which are ultra-vires to the Articles of the company but intra-vires the company.
4. Acts which are ultra-vires to the directors of the company but intra-vires the company.

Effects of ultra vires Transactions – Doctrine of Ultra Vires

1. Void ab initio: The ultra vires acts are null and void ab initio. These acts are not binding
on the company. Neither the company can sue, nor it can be sued for such acts.
[Ashbury Railway Carriage and Iron Company v. Riche ].
2. Estoppel or ratification cannot convert an ultra-vires act into an intra-vires act.
3. Injunction: when there is a possibility that company has taken or is about to undertake
an ultra-vires act, the members can restrain it from doing so by getting an injunction
from the court. [Attorney General v. Gr. Eastern Rly. Co., (1880) 5 A.C. 473].
4. Personal liability of Directors: The directors have a duty to ensure that all corporate
capital of the company is used for a legitimate purpose only. If such funds are diverted
for a purpose which is not authorized by the memorandum of the company, it will attract
a personal liability for the directors. In Jehangir R. Modi v. Shamji Ladha, [(1866-67) 4
Bom. HCR (1855)], the Bombay High Court held, “A shareholder can maintain an action
against the directors to compel them to restore to the company the funds of the
company that have by them been employed in transactions that they have no authority
to enter into, without making the company a party to the suit”.

12) Forfeiture of shares

Ans.

A) Introduction :-
Forfeiture of shares is a legal process through which a company cancels the shares of a
shareholder who fails to comply with certain obligations, typically the payment of calls on shares.
The provisions for the forfeiture of shares in India are governed by the Companies Act, 2013.

B) Sections Related to Forfeiture of Shares :-

1. Section 123: Power to Forfeit Shares :-
- This section provides companies with the authority to forfeit shares for non-payment of
calls or other amounts due, as specified in the articles of association.
 11

Illustration 1: Forfeiture for Non-payment of Calls :-

- XYZ Ltd. issued 1,000 shares to Mr. A, who was required to pay three calls of INR 100
each. If Mr. A fails to pay the second call of INR 100, the company can exercise its power to forfeit
the shares.

2. Section 124: Notice for Forfeiture :-

- Before forfeiting shares, the company must send a notice to the defaulting shareholder
specifying the amount due and providing a reasonable opportunity for payment.

Illustration 2: Notice for Forfeiture :-

- After Mr. A fails to pay the second call, XYZ Ltd. sends him a notice, stating that the
amount of INR 100 is due and must be paid within a specified period. If Mr. A does not comply, the
company can proceed with forfeiture.

3. Section 125: Forfeiture of Shares :-

- This section outlines the procedure for the forfeiture of shares, including the resolution
passed by the board, the cancellation of shares, and the disposal of forfeited shares.

Illustration 3: Forfeiture Procedure :-

- Following the notice period, the board of XYZ Ltd. passes a resolution to forfeit Mr. A's
shares. These forfeited shares are canceled, and the company may decide to reissue them or
hold them as treasury shares.

4. Section 126: Effect of Forfeiture :-

- Upon forfeiture, the shareholder loses all rights and interest in the forfeited shares, and the
company may sell, reissue, or otherwise dispose of these shares.

Illustration 4: Effect of Forfeiture :-

- After forfeiture, Mr. A no longer has any ownership or voting rights in the forfeited shares.
XYZ Ltd. can choose to reissue these shares to a new shareholder or sell them in the market.

C) Conclusion :-
Forfeiture of shares is a legal mechanism provided by the Companies Act, 2013, to deal with non-
compliant shareholders who fail to meet their financial obligations, such as the payment of calls on
shares. The process involves sending notices to defaulting shareholders, board resolutions for
forfeiture, and the subsequent cancellation and disposal of forfeited shares. This mechanism helps
companies maintain financial discipline and ensure that shareholders meet their financial
obligations.

13) Quorum

A) Introduction :-
Quorum refers to the minimum number of members required to be present at a company meeting
for the meeting to be considered valid and capable of conducting business. Quorum requirements
are an essential aspect of company law in India and are specified in the Companies Act, 2013.
Below is a short note on quorum in company meetings, including relevant sections and
illustrations:

B) Sections Related to Quorum :-

1) Section 103: Quorum for Meetings :-
- Section 103 of the Companies Act, 2013, provides the basic framework for quorum
requirements in different types of meetings, including general meetings of shareholders and board
meetings.
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Illustration 1: Quorum for Shareholders' Meeting :-

- ABC Ltd., a public company, has 1,000 shareholders. According to its articles of
association, the quorum for a general meeting is 100 shareholders personally present.
Therefore, at least 100 shareholders must be physically present for the meeting to
proceed.

2) Section 174: Quorum for Board Meetings :-

- This section specifies the quorum for board meetings, which are meetings of
the company's board of directors.

Illustration 2: Quorum for Board Meeting :-

- XYZ Ltd. has a board of directors consisting of seven members. According to
the company's articles, a quorum for board meetings is a minimum of four directors.
Therefore, at least four directors must be present for a board meeting to commence.

3) Section 174(4): Quorum Not Present Within Scheduled Time :-

- If a board meeting does not have the required quorum within 30 minutes of the
scheduled time, the meeting is automatically adjourned to the same day in the next
week at the same time and place or to such other date, time, and place as
determined by the board.

Illustration 3: Adjournment of a Board Meeting :-

- If only three directors of XYZ Ltd. are present for a board meeting at the
scheduled time, the meeting cannot proceed.
It is adjourned to the same time and place next week, as per Section 174(4).

C) Conclusion :-
Quorum requirements are crucial for ensuring that company meetings have sufficient
participation for meaningful decision-making and deliberations. These requirements
are outlined in Sections 103 and 174 of the Companies Act, 2013, and vary based on
the type of meeting and the company's articles of association. Adhering to quorum
rules is essential to maintain transparency and accountability in the functioning of
companies and to validate the decisions made during meetings.

14) Equity shares

A) Introduction :-
Equity shares, also known as ordinary shares, represent ownership in a company and
carry voting rights, allowing shareholders to participate in the company's decision-
making. Equity shares are an integral part of company law in India and are governed
by the Companies Act, 2013.

B) Sections Related to Equity Shares :-

1) Section 43: Types of Share Capital :-
This section defines the various types of share capital that a company can issue,
including equity share capital.

Illustration 1: Types of Share Capital :-

ABC Ltd. can issue two types of share capital: equity share capital and preference
share capital. Equity share capital represents ownership in the company, while
preference share capital carries specific dividend rights.

2) Section 47: Voting Rights :-

Section 47 specifies that equity shareholders have voting rights in proportion to their
shareholding.

Illustration 2: Voting Rights :-

● Mr. X holds 1,000 equity shares in DEF Ltd., and Ms. Y holds 500 equity shares.
 13

Mr. X has twice as many voting rights as Ms. Y in the company's decision-making
processes.

3) Section 62(1)(a): Increase in Share Capital :-

This section outlines the procedure for increasing the authorized share capital of a
company, including the issuance of additional equity shares.

● Illustration 3: Increase in Share Capital :-

PQR Ltd. decides to expand its operations and needs additional funds. It follows the
procedure outlined in Section 62(1)(a) to increase its authorized share capital and
issues new equity shares to raise capital.

4) Section 63: Issue of Bonus Shares :-

Section 63 allows a company to issue bonus shares to its existing equity shareholders
as a form of reward without any consideration.

Illustration 4: Issue of Bonus Shares :-

● XYZ Ltd. has been profitable, and its board decides to issue bonus shares to its
existing equity shareholders at a certain ratio, say 1:1. Shareholders receive one
additional share for each share they already own without paying extra.

5) Section 68: Buyback of Equity Shares :-

This section governs the buyback of equity shares by a company, subject to certain
conditions and restrictions.

Illustration 5: Buyback of Equity Shares :-

● MNO Ltd. has excess cash and decides to buy back a portion of its equity
shares from existing shareholders. It follows the procedure outlined in Section 68 to
repurchase its shares.

C) Conclusion :-
Equity shares are a fundamental instrument of ownership in a company, offering
shareholders the right to vote and participate in the company's profits and losses. The
Companies Act, 2013, provides the legal framework for the issuance, voting rights,
and management of equity shares, ensuring transparency and accountability in
corporate governance in India.

.
16) Registration of company

a) Introduction:
The registration of a company is a fundamental step in establishing a legal entity for
conducting business in India. The Companies Act, 2013, prescribes the legal
framework for company registration in India. Below is a short note on the registration
of a company, including relevant sections and illustrative examples:

b) Sections Related to Registration of a Company:

1) Section 3: Formation of a Company:

- This section lays down the basic requirements for the formation of a company,
including having a minimum number of members (2 for a private company and 7 for a
public company).

Illustration 1: Minimum Number of Members

- Mr. A and Mr. B wish to start a software company in India. They meet the
minimum requirement of two members, making it eligible for registration.
-
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2) Section 4: Memorandum of Association (MOA):

- Section 4 outlines the importance of the MOA, which is a charter of the
company, defining its objectives, powers, and limitations.

Illustration 2: Memorandum of Association

- ABC Ltd. intends to engage in the business of manufacturing and selling
electronics. The MOA of ABC Ltd. explicitly states its primary objectives and the scope
of its activities.

3) Section 7: Incorporation of a Company:

- This section deals with the procedure for incorporation, including the
submission of the application for incorporation to the Registrar of Companies (RoC).

Illustration 3: Incorporation Process

- XYZ Pvt. Ltd. follows the procedure outlined in Section 7, submitting the
necessary documents, including the MOA and articles of association, to the RoC for
incorporation.

4) Section 12: Registered Office of the Company:

- Section 12 mandates that a company must have a registered office from the
date of incorporation.

Illustration 4: Registered Office

- DEF Ltd. specifies its registered office address in the incorporation documents
filed with the RoC. It must maintain a physical office at this address.

5) Section 13: Alteration of Memorandum:

- This section allows a company to alter its MOA, subject to compliance with legal
requirements.

Illustration 5: Alteration of MOA

- GHI Ltd. decides to expand its business scope beyond its original objectives
outlined in the MOA. It follows the procedure under Section 13 to alter the MOA.

c) Conclusion:
Registration is a pivotal step in establishing a company in India, and it ensures that
the company operates within the legal framework outlined by the Companies Act,
2013. Compliance with the relevant sections and provisions is essential to maintain
transparency, legal standing, and accountability in corporate operations in India.

18) Transfer and Transmission shares

A) Introduction:
Transfer and transmission of shares are two essential processes in company law in
India that govern the ownership and transfer of shares from one party to another.
These processes are regulated by the Companies Act, 2013. Below is a short note on
transfer and transmission of shares, including relevant sections and illustrative
examples:

B) Sections Related to Transfer and Transmission of Shares :-

1) Section 44: Nature of Shares:
- This section defines shares as movable property and highlights their
transferability.

Illustration 1: Nature of Shares :

- Mr. A, a shareholder of XYZ Ltd., decides to sell his shares to Mr. B. The shares
are considered movable property and can be transferred to Mr. B.
 15

2) Section 56: Transfer and Transmission of Securities:

- Section 56 provides the framework for the transfer and transmission of
securities (shares and debentures) and the related procedural requirements.

Illustration 2: Transfer of Shares

- Mr. C wishes to transfer his shares in ABC Ltd. to his daughter, Ms. D. Both
parties complete the necessary documentation and follow the procedure outlined in
Section 56 for the transfer.

3) Section 56(2): Refusal to Register Transfer:

- Subsection (2) of Section 56 allows a company to refuse to register the transfer
of shares under certain circumstances, such as non-compliance with transfer
procedures or unpaid calls.

Illustration 3: Refusal to Register Transfer

- ABC Ltd. refuses to register the transfer of shares from Mr. E to Mr. F because
Mr. E has unpaid calls, which is a legitimate reason for refusal.

4) Section 56(4): Transmission of Shares:

- This subsection deals with the transmission of shares upon the death,
insolvency, or other events affecting the title of a shareholder.

Illustration 4: Transmission of Shares

- In the event of the demise of Mr. G, his shares in LMN Ltd. are transmitted to
his legal heirs as per the provisions of Section 56(4).

C) Conclusion:
Transfer and transmission of shares are crucial processes that allow for the buying
and selling of ownership interests in a company. These processes are governed by the
Companies Act, 2013, and involve specific procedures and documentation. While
transfers are typically voluntary and involve living individuals or entities, transmission
occurs in cases of events such as death or insolvency, where the ownership of shares
is passed to legal heirs or assignees. Understanding and adhering to the legal
requirements for these processes is essential to maintain transparency and legality in
the shareholding structure of companies in India.

19) Memorandum of Association

A) Introduction:
The Memorandum of Association (MOA) is a foundational document that plays a
crucial role in the formation and functioning of a company in India. It defines the
company's objectives, powers, and scope of operations. The MOA is governed by the
Companies Act, 2013. Below is a short note on the MOA, including relevant sections
and illustrative examples:

B) Sections Related to Memorandum of Association:

1) Section 4(6): Contents of MOA:
- This section specifies the key elements that must be included in the MOA, such
as the name clause, registered office clause, objects clause, liability clause, and
capital clause.

Illustration 1: Key Elements in MOA

- ABC Ltd.'s MOA contains information about its name, registered office location,
business objectives, liability of members, and authorized capital, as required by
Section 4(6).

2) Section 4(7): Alteration of MOA:

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- Section 4(7) outlines the procedure for altering the MOA, which requires
approval from the company's shareholders and regulatory authorities.

Illustration 2: Alteration of MOA

- DEF Ltd. decides to expand its business operations beyond what is specified in
its current MOA. To do so, it follows the prescribed procedure under Section 4(7) to
amend the MOA with the consent of shareholders and regulatory authorities.

3) Section 13(1): MOA as Charter of the Company:

- Section 13(1) emphasizes that the MOA is the company's charter, and it binds
both the company and its members.
-
Illustration 3: MOA as a Binding Charter
- GHI Pvt. Ltd.'s MOA outlines its objectives, which include manufacturing and
selling pharmaceuticals. Any action taken by the company must align with the
objectives specified in the MOA.

4) Section 8: Formation of Companies with Charitable Objects:

- Section 8 allows the formation of companies with charitable objects, and their
MOA must specify their nonprofit nature and charitable purposes.

Illustration 4: Charitable Object Clause

- JKL Foundation, a nonprofit company, includes a charitable object clause in its
MOA, stating that its primary aim is to promote education among underprivileged
children.

C) Conclusion:
The Memorandum of Association is a vital document in the corporate landscape of
India. It sets the foundation for a company's existence by defining its identity,
objectives, and limitations. Complying with the provisions of the Companies Act, 2013,
related to the MOA is essential to ensure that a company's operations remain within
the boundaries defined by this document and that any changes are made in a legally
compliant manner.

20) Extraordinary General Meeting

A) Introduction :
An Extraordinary General Meeting (EGM) is a significant corporate event in company
law in India. It is convened by a company outside the regular annual general meeting
to discuss and decide on specific matters that require immediate attention. The
Companies Act, 2013, provides the legal framework for conducting EGMs in India.
Below is a short note on EGMs, including relevant sections and illustrative examples:

B) Sections Related to Extraordinary General Meeting:

1) Section 100: Calling of Extraordinary General Meeting:
- Section 100 specifies the situations in which an EGM can be called. These
include cases where the board of directors deems it necessary, upon requisition by
shareholders, or as required by the Central Government or the Tribunal (e.g., National
Company Law Tribunal or NCLT).

Illustration 1: Calling an EGM

- ABC Ltd.'s board of directors decides to call an EGM to seek shareholder
approval for a proposed merger with another company. They follow the procedure
outlined in Section 100.

2) Section 101: Notice of Meeting:

- This section lays down the requirements for giving notice of an EGM, including
the time, place, and agenda of the meeting. Notice must be sent to all members,
 17

directors, and the auditor of the company.

Illustration 2: Notice of EGM

- XYZ Ltd. sends a notice to its shareholders, directors, and auditor, providing
details of the EGM, including the date, time, venue, and the agenda items to be
discussed, as required by Section 101.

3) Section 103: Quorum for Meetings:

- Section 103 specifies the minimum number of members required for a quorum
at an EGM. This ensures that a sufficient number of members are present for valid
decision-making.

Illustration 3: Quorum at EGM

- PQR Pvt. Ltd. is holding an EGM. As per Section 103, the company's articles
state that a minimum of 20% of the total shareholders must be present to constitute a
quorum.

4) Section 110: Voting by Electronic Means:

- Section 110 allows companies to conduct voting at EGMs through electronic

means, making it more convenient for shareholders to participate.

Illustration 4: Electronic Voting

- MNO Ltd. offers its shareholders the option to vote electronically for resolutions
proposed at the EGM, as permitted by Section 110.

C) Conclusion:
EGMs serve as a mechanism for companies to address urgent matters and make
important decisions outside of their regular annual general meetings. The Companies
Act, 2013, outlines the procedures, requirements, and regulations that govern these
meetings to ensure transparency, accountability, and proper decision-making in
corporate affairs in India.