CHAPTER 5

THE COMPANIES ACT, 2013

LEARNING OUTCOMES
After studying this chapter, you would be able to understand-
In this chapter, students are exposed to the aspects relating to working knowledge on the introductory part of the
Companies Act, 2013. On completion of this chapter students should be able to understand the following:
♦ Company form of Business Organisation and Corporate veil theory
♦ Classes of companies under the Companies Act
♦ Registration of companies
♦ Memorandum of Association and Articles of Association

CHAPTER OVERVIEW

© The Institute of Chartered Accountants of India

5.2 BUSINESS LAWS

INTRODUCTION
The Companies Act, 2013 was enacted to consolidate and amend the law relating to the companies. The
Companies Act, 2013 was preceded by the Companies Act, 1956.
Due to changes in the national and international economic environment and to
facilitate expansion and growth of our economy, the Central Government decided
to replace the Companies Act, 1956 with a new legislation. The Companies Act,
2013 contains 470 sections and seven schedules. The entire Act has been divided
into 29 chapters. A substantial part of this Act is in the form of Companies Rules.
The Companies Act, 2013 aims to improve corporate governance, simplify
regulations, strengthen the interests of minority investors and for the first time
legislates the role of whistle-blowers and provisions relating to class action suit.
Thus, this enactment seeks to make our corporate regulations more contemporary.
Applicability of the Companies Act, 2013:
The provisions of the Act shall apply to-
♦ Companies incorporated under this Act or under any previous company law.
♦ Insurance companies (except where the provisions of the said Act are inconsistent with the provisions
of the Insurance Act, 1938 or the IRDA Act, 1999)
♦ Banking companies (except where the provisions of the said Act are inconsistent with the provisions of
the Banking Regulation Act, 1949)
♦ Companies engaged in the generation or supply of electricity (except where the provisions of the above
Act are inconsistent with the provisions of the Electricity Act, 2003)
♦ Any other company governed by any special Act for the time being in force.
♦ Such body corporate which are incorporated by any Act for time being in force, and as the Central
Government may by notification specify in this behalf.

1. COMPANY: MEANING AND ITS FEATURES

Meaning: According to Chief Justice Marshall, “a corporation is an artificial being,
invisible, intangible, existing only in contemplation of law. Being a mere creation of law,
it possesses only those properties which the charter of its creation confers upon it, either
expressly or as accidental to its very existence.
In the words of professor Haney, “A company is an incorporated association, which is an
artificial person created by law, having a separate entity, with a perpetual succession and a common seal.” This
definition sums up the meaning as well as the features of a company succinctly.
However, the Act defines the term company a bit differently. Section 2(20) of the Companies Act, 2013 defines
the term ‘company’. “Company means a company incorporated under this Act or under any previous company
law”. As we shall progress under the chapter, the meaning of the term company will be understood by the
students.

© The Institute of Chartered Accountants of India

3 THE COMPANIES ACT, 2013 5.3

Features of a Company

We have seen the definition given to company from a layman’s point of view and legal point of view. But the
company form of organization has certain distinctive features that help us to understand the realms of a company.
Following are the main features:
I. Separate Legal Entity: There are distinctive features between different forms of organisations and the
most striking feature in the company form of organisation vis-à-vis the other forms of business
organisations is that it acquires a unique character of being a separate legal entity. In other words,
when a company is registered, it is clothed with a legal personality. It comes to have almost the same
rights and powers as a human being. Its existence is distinct and separate from that of its members. A
company can own property, have bank account, raise loans, incur liabilities and enter into contracts.
(a) It is at law, a person which is different from the subscribers to the memorandum of association.
Its personality is distinct and separate from the personality of those who compose it.
(b) Even members can contract with company, acquire right against it or incur liability to it. For the
debts of the company, only its creditors can sue it and not its members.
A company is capable of owning, enjoying and disposing of property in its own name. Although
the capital and assets are contributed by the shareholders, the company becomes the owner of
its capital and assets. The shareholders are not the private or joint owners of the company’s
property.
A member does not even have an insurable interest in the property of the company. The leading
case on this point is of Macaura Vs. Northern Assurance Co. Limited (1925):
Fact of the case
Macaura (M) was the holder of nearly all (except one) shares of a timber company. He was also a major
creditor of the company. M insured the company’s timber in his own name. The timber was lost in a fire.
M claimed insurance compensation. Held, the insurance company was not liable to him as no
shareholder has any right to any item of property owned by the company, for he has no legal or equitable
interest in them.
II Perpetual Succession: Members may die or change, but the company goes on till it is wound up on the
grounds specified by the Act. The shares of the company may change hands infinitely but that does not
affect the existence of the company. Since a company is an artificial person created by law, law alone
can bring an end to its life. Its existence is not affected by the death or insolvency of its members.

© The Institute of Chartered Accountants of India

5.4 BUSINESS LAWS

Example 1: Many companies in India are in existence for over 100 years. This is possible only due to
the fact that the company has perpetual existence. There was a company which has 7 members and all
of them died in an aircraft. Despite this the company still exists unlike partnership form of business.
III Limited Liability: The liability of a member depends upon the kind of company of which he is a member.
We know that company is a separate legal entity which is distinct from its members.
(i) Thus, in the case of a limited liability company, the debts of the company in totality do not
become the debts of the shareholders. The liability of the members of the company is limited to
the extent of the nominal value of shares held by them. In no case can the shareholders be
asked to pay anything more than the unpaid value of their shares.
(ii) In the case of a company limited by guarantee, the members are liable only to the extent of the
amount guaranteed by them and that too only when the company goes into liquidation.
(iii) However, if it is an unlimited company, the liability of its members is unlimited as well.
IV Artificial Legal Person:
(1) A company is an artificial person as it is created by a process other than natural birth. It is legal
or judicial as it is created by law. It is a person since it is clothed with all the rights of an
individual.
(2) Further, the company being a separate legal entity can own property, have banking account,
raise loans, incur liabilities and enter into contracts. Even members can contract with company,
acquire right against it or incur liability to it. It can sue and be sued in its own name. It can do
everything which any natural person can do except be sent to jail, take an oath, marry or practice
a learned profession. Hence, it is a legal person in its own sense.
(3) As the company is an artificial person, it can act only through some human agency, viz.,
directors. The directors cannot control affairs of the company and act as its agency, but they
are not the “agents” of the members of the company. The directors can either on their own or
through the common seal (of the company) can authenticate its formal acts.
(4) Thus, a company is called an artificial legal person.
V Common Seal: A company being an artificial person is not bestowed with a body of a natural being.
Therefore, it works through the agency of human beings. Common seal is the official signature of a
company, which is affixed by the officers and employees of the company on its every document. The
common seal is a seal used by a corporation as the symbol of its incorporation.
The Companies (Amendment) Act, 2015 has made the common seal optional by omitting the words “and
a common seal” from Section 9 so as to provide an alternative mode of authorization for companies who
opt not to have a common seal. Rational for this amendment is that common seal is seen as a relic of
medieval times. Even in the U.K., common seal has been made optional since 2006. This amendment
provides that the documents which need to be authenticated by a common seal will be required to be so
done, only if the company opts to have a common seal. In case a company does not have a common
seal, the authorization shall be made by two directors or by a director and the Company Secretary,
wherever the company has appointed a Company Secretary.

© The Institute of Chartered Accountants of India

5 THE COMPANIES ACT, 2013 5.5

2. CORPORATE VEIL THEORY

(i) Corporate Veil: Corporate Veil refers to a legal concept whereby the company is identified separately
from the members of the company.
The term Corporate Veil refers to the concept that members of a company are shielded from liability connected
to the company’s actions. If the company incurs any debts or contravenes any laws, the corporate veil concept
implies that members should not be liable for those errors. In other words, they enjoy corporate insulation.
Thus, the shareholders are protected from the acts of the company.
The Salomon Vs. Salomon and Co Ltd. laid down the foundation of the concept of corporate veil or independent
corporate personality.
In Salomon vs. Salomon & Co. Ltd. the House of Lords laid down that a company is a person distinct and separate
from its members. In this case one Salomon incorporated a company named “Salomon & Co. Ltd.”, with seven
subscribers consisting of himself, his wife, four sons and one daughter. This company took over the personal
business assets of Salomon for £ 38,782 and in turn, Salomon took 20,000 shares of £ 1 each, debentures worth
£ 10,000 of the company with charge on the company’s assets and the balance in cash. His wife, daughter and
four sons took up one £ 1 share each. Subsequently, the company went into liquidation due to general trade
depression. The unsecured creditors to the tune of £ 7,000 contended that Salomon could not be treated as a
secured creditor of the company, in respect of the debentures held by him, as he was the managing director of
one-man company, which was not different from Salomon and the cloak of the company was a mere sham and
fraud. It was held by Lord Mac Naughten:
“The Company is at law a different person altogether from the subscribers to the memorandum, and though it
may be that after incorporation the business is precisely the same as it was before and the same persons are
managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or
trustees for them. Nor are the subscribers, as members, liable, in any shape or form, except to the extent and in
the manner provided by the Act.”
Thus, this case clearly established that company has its own existence and as a result, a shareholder cannot be
held liable for the acts of the company even though he holds virtually the entire share capital. The whole law of
corporation is in fact based on this theory of separate corporate entity.
Now, the question may arise whether this Veil of Corporate Personality can even be lifted or pierced.
Before going into this question, one should first try to understand the meaning of the phrase “lifting the veil”. It
means looking behind the company as a legal person, i.e., disregarding the corporate entity and paying regard,
instead, to the realities behind the legal facade. Where the Courts ignore the company and concern themselves
directly with the members or managers, the corporate veil may be said to have been lifted. Only in appropriate
circumstances, the Courts are willing to lift the corporate veil and that too, when questions of control are involved
rather than merely a question of ownership.
(ii) Lifting of Corporate Veil: The following are the cases where company law disregards the principle of
corporate personality or the principle that the company is a legal entity distinct and separate from its
shareholders or members:

© The Institute of Chartered Accountants of India

5.6 BUSINESS LAWS

(1) To determine the character of the company i.e. to find out whether co-enemy or friend: In the law
relating to trading with the enemy where the test of control is adopted. The leading case in this point is
Daimler Co. Ltd. vs. Continental Tyre & Rubber Co., if the public interest is not likely to be in jeopardy,
the Court may not be willing to crack the corporate shell. But it may rend the veil for ascertaining whether
a company is an enemy company. It is true that, unlike a natural person, a company does not have mind
or conscience; therefore, it cannot be a friend or foe. It may, however, be characterised as an enemy
company, if its affairs are under the control of people of an enemy country. For this purpose, the Court
may examine the character of the persons who are really at the helm of affairs of the company.
(2) To protect revenue/tax: In certain matters concerning the law of taxes, duties and stamps particularly
where question of the controlling interest is in issue. [S. Berendsen Ltd. vs. Commissioner of Inland
Revenue]
(i) Where corporate entity is used to evade or circumvent tax, the Court can disregard the
corporate entity [Juggilal vs. Commissioner of Income Tax AIR (SC)].
(ii) In [Dinshaw Maneckjee Petit], it was held that the company was not a genuine company at all
but merely the assessee himself disguised under the legal entity of a limited company. The
assessee earned huge income by way of dividends and interest. So, he opened some
companies and purchased their shares in exchange of his income by way of dividend and
interest. This income was transferred back to assessee by way of loan. The Court decided that
the private companies were a sham and the corporate veil was lifted to decide the real owner
of the income.
(3) To avoid a legal obligation: Where it was found that the sole purpose for the formation of the company
was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the Supreme
Court upheld the piercing of the veil to look at the real transaction (The Workmen Employed in
Associated Rubber Industries Limited, Bhavnagar vs. The Associated Rubber Industries Ltd.,
Bhavnagar and another).
Workmen of Associated Rubber Industry ltd., v. Associated Rubber Industry Ltd.: The facts of the
case are that “A Limited” purchased shares of “B Limited” by investing a sum of ` 4,50,000. The dividend
in respect of these shares was shown in the profit and loss account of the company, year after year. It
was taken into account for the purpose of calculating the bonus payable to workmen of the company.
Sometime in 1968, the company transferred the shares of B Limited, to C Limited a subsidiary, wholly
owned by it. Thus, the dividend income did not find place in the Profit & Loss Account of A Ltd., with the
result that the surplus available for the purpose for payment of bonus to the workmen got reduced.
Here a company created a subsidiary and transferred to it, its investment holdings in a bid to reduce its
liability to pay bonus to its workers. Thus, the Supreme Court brushed aside the separate existence of
the subsidiary company. The new company so formed had no assets of its own except those transferred
to it by the principal company, with no business or income of its own except receiving dividends from
shares transferred to it by the principal company and serving no purpose except to reduce the gross
profit of the principal company so as to reduce the amount paid as bonus to workmen.
(4) Formation of subsidiaries to act as agents: A company may sometimes be regarded as an agent or
trustee of its members, or of another company, and may therefore be deemed to have lost its individuality
in favour of its principal. Here the principal will be held liable for the acts of that company.

© The Institute of Chartered Accountants of India

7 THE COMPANIES ACT, 2013 5.7

In the case of Merchandise Transport Limited vs. British Transport Commission (1982), a transport
company wanted to obtain licences for its vehicles but could not do so if applied in its own name. It,
therefore, formed a subsidiary company, and the application for licence was made in the name of the
subsidiary. The vehicles were to be transferred to the subsidiary company. Held, the parent and the
subsidiary were one commercial unit and the application for licences was rejected.
(5) Company formed for fraud/improper conduct or to defeat law: Where the device of incorporation is
adopted for some illegal or improper purpose, e.g., to defeat or circumvent law, to defraud creditors or
to avoid legal obligations. [Gilford Motor Co. vs. Horne]

Corporate Veil will be lifted

Where companies Where the device

Where corporate
form other of incorporation is
Trading with entity is used to To avoid a legal
companies as their adopted for some
enemy evade or obligation
subsidiaries to act illegal or improper
circumvent tax
as their agent purpose

3. CLASSES OF COMPANIES UNDER THE ACT

The growth of the economy and increase in the complexity of business operation in the corporate world has led
to the emergence of different forms of corporate organizations. To regulate them, the Companies Act, 2013 has
broadly classified the companies into various classes.
A company may be incorporated as a one-person company, private company or a public company, depending
upon the number of members joining it. Again it may either be an unlimited company, or may be limited by shares
or by guarantee or by both. On the basis of control, companies can be classified as associate company, holding
company and subsidiary company. Some other forms of classification of companies are foreign company,
government company, small company, dormant company, nidhi company and company formed for charitable
objects.
Companies may be classified into various classes on the following basis:
1. On the basis of liability:
(a) Company limited by shares: Section 2(22) of the Companies Act, 2013, defines that when the liability
of the members of a company is limited by its memorandum of association to the amount (if any) unpaid
on the shares held by them, it is known as a company limited by shares.
It thus implies that for meeting the debts of the company, the shareholder may be called upon to
contribute only to the extent of the amount, which remains unpaid on his shareholdings. His separate
property cannot be encompassed to meet the company’s debt.
It may be worthwhile to know that though a shareholder is a co-owner of the company, he is not a co-
owner of the company’s assets. The ownership of the assets remains with the company, because of its
nature as a legal person. The extent of the rights and duties of a shareholder as co-owner is measured
by his shareholdings.

© The Institute of Chartered Accountants of India

5.8 BUSINESS LAWS

(b) Company limited by guarantee: Section 2(21) of the Companies Act, 2013 defines it as the company
having the liability of its members limited by the memorandum to such amount as the members may
respectively undertake by the memorandum to contribute to the assets of the company in the event of
its being wound up.
Thus, the liability of the member of a guarantee company is limited upto a stipulated sum mentioned in
the memorandum. Members cannot be called upon to contribute beyond that stipulated sum.
The common features between a ‘guarantee company’ and ‘the company having share capital’ are legal
personality and limited liability. In the latter case, the member’s liability is limited by the amount
remaining unpaid on the share, which each member holds. Both of them have to state in their
memorandum that the members’ liability is limited.
However, the point of distinction between these two types of companies is that in the former case the
members may be called upon to discharge their liability only after commencement of the winding up and
only subject to certain conditions; but in the latter case, they may be called upon to do so at any time,
either during the company’s life-time or during its winding up.
It is clear from the definition of the guarantee company that it does not raise its initial working funds from
its members. Therefore, such a company may be useful only where no working funds are needed or
where these funds can be held from other sources like endowment, fees, charges, donations, etc.
In Narendra Kumar Agarwal vs. Saroj Maloo,
The Supreme Court has laid down that the right of a guarantee company to refuse to accept the transfer
by a member of his interest in the company is on a different footing than that of a company limited by
shares. The membership of a guarantee company may carry privileges much different from those of
ordinary shareholders.
(c) Unlimited company: Section 2(92) of the Companies Act, 2013 defines unlimited company as a
company not having any limit on the liability of its members. In such a company, the liability of a member
ceases when he ceases to be a member.
The liability of each member extends to the whole amount of the company’s debts and liabilities but he
will be entitled to claim contribution from other members. In case the company has share capital, the
Articles of Association must state the amount of share capital and the amount of each share. So long as
the company is a going concern the liability on the shares is the only liability which can be enforced by
the company. The creditors can institute proceedings for winding up of the company for their claims. The
official liquidator may call the members for their contribution towards the liabilities and debts of the
company, which can be unlimited.

© The Institute of Chartered Accountants of India

9 THE COMPANIES ACT, 2013 5.9

2. On the basis of members:

(a) One person company: The Companies Act, 2013 introduced a new class of companies which can be
incorporated by a single person.
Section 2(62) of the Companies Act, 2013 defines one person company (OPC) as a company
which has only one person as a member.
One person company has been introduced to encourage entrepreneurship and corporatization
of business. OPC differs from sole proprietary concern in an aspect that OPC is a separate
legal entity with a limited liability of the member whereas in the case of sole proprietary, the
liability of owner is not restricted and it extends to the owner’s entire assets constituting of
official and personal.
The procedural requirements of an OPC are simplified through exemptions provided under the
Act in comparison to the other forms of companies.
According to section 3(1)(c) of the Companies Act, 2013, OPC is a private limited company with the minimum
paid up share capital as may be prescribed and has at least one member.
OPC (One Person Company) - significant points
⬥ Only one person as member.
⬥ Minimum paid up capital – no limit prescribed.
⬥ The memorandum of OPC shall indicate the name of the other person, who shall, in the event of the
subscriber’s death or his incapacity to contract, become the member of the company.
⬥ The other person whose name is given in the memorandum shall give his prior written consent in
prescribed form and the same shall be filed with Registrar of companies at the time of incorporation.
⬥ Such other person may be given the right to withdraw his consent.
⬥ The member of OPC may at any time change the name of such other person by giving notice to the
company and the company shall intimate the same to the Registrar.
⬥ Any such change in the name of the person shall not be deemed to be an alteration of the memorandum.
⬥ Only a natural person who is an Indian citizen whether resident in India or otherwise and has
stayed in India for a period of not less than 120 days during the immediately preceding financial
year
• shall be eligible to incorporate a OPC;
• shall be a nominee for the sole member of a OPC.
⬥ No person shall be eligible to incorporate more than one OPC or become nominee in more than one
such company.
⬥ No minor shall become member or nominee of the OPC or can hold share with beneficial interest.
⬥ Such Company cannot be incorporated or converted into a company under section 8 of the Act. Though
it may be converted to private or public companies in certain cases.

© The Institute of Chartered Accountants of India

5.10 BUSINESS LAWS

⬥ Such Company cannot carry out Non-Banking Financial Investment activities including investment in
securities of anybody corporate.
⬥ If One Person Company or any officer of such company contravenes the provisions, they shall be
punishable with fine which may extend to ten thousand rupees and with a further fine which may extend
to one thousand rupees for every day after the first during which such contravention continues.
Here the member can be the sole member and director.

(b) Private Company [Section 2(68)]: “Private company” means a company having a minimum paid-up
share capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for
the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after the employment
ceased,
shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company;
Private company - significant points
⬥ No minimum paid-up capital requirement.
⬥ Minimum number of members – 2 (except if private company is an OPC, where it will be 1).
⬥ Maximum number of members – 200, excluding present employee-cum-members and erstwhile
employee-cum-members.
⬥ Right to transfer shares restricted.
⬥ Prohibition on invitation to subscribe to securities of the company.
⬥ Small company is a private company.
⬥ OPC can be formed only as a private company.

© The Institute of Chartered Accountants of India

11 THE COMPANIES ACT, 2013 5.11

Small Company: Small company given under the Section 2(85) of the Companies Act, 2013 which means a
company, other than a public company—
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be
prescribed which shall not be more than ten crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not
exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one
hundred crore rupees:
Exceptions: This clause shall not apply to:
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.
For the purpose of sub-clause (i) and sub-clause (ii) of clause (85) of section 2 of the Act, paid up capital
and turnover of the small company shall not exceed rupees two crores and rupees twenty crores
respectively. [(Specification of Definitions Details) Amendment Rule, 2021, w.e.f. 1-4-2021.]
Small Company –significant points
⬥ A private company
⬥ Paid up capital – not more than Rs. 50 lakhs
Or
Turnover – not more than Rs. 2 crores.
⬥ Should not be – Section 8 company
– Holding or a Subsidiary company
(c) Public company [Section 2(71)]: “Public company” means a company which—
(i) is not a private company; and
(ii) has a minimum paid-up share capital, as may be prescribed:
Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to
be public company for the purposes of this Act even where such subsidiary company continues to be a private
company in its articles;
Public company - significant points
⬥ Is not a private company (Articles do not have the restricting clauses).
⬥ Shares freely transferable.
⬥ No minimum paid up capital requirement.
⬥ Minimum number of members – 7.
⬥ Maximum numbers of members – No limit.

© The Institute of Chartered Accountants of India

5.12 BUSINESS LAWS

⬥ Subsidiary of a public company is deemed to be a public company.

According to section 3(1)(a), a company may be formed for any lawful purpose by seven or more persons, where
the company to be formed is to be a public company.
3. On the basis of control:
(a) Holding and subsidiary companies: ‘Holding and subsidiary’ companies are relative terms.
A company is a holding company in relation to one or more other companies, means a company of which
such companies are subsidiary companies. [Section 2(46)]
For the purposes of this clause, the expression “company" includes any body corporate.
Whereas section 2(87) defines “subsidiary company” in relation to any other company (that is to say the
holding company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or together
with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of
subsidiaries beyond such numbers as may be prescribed.
For the purposes of this section —
(I) a company shall be deemed to be a subsidiary company of the holding company even if the
control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the
holding company;
(II) the composition of a company’s Board of Directors shall be deemed to be controlled by another
company if that other company by exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors;
(III) the expression “company” includes anybody corporate;
(IV) “layer” in relation to a holding company means its subsidiary or subsidiaries.
Example 2: A will be subsidiary of B, if B controls the composition of the Board of Directors of A, i.e., if
B can, without the consent or approval of any other person, appoint or remove a majority of directors of
A.
Example 3: A will be subsidiary of B, if B holds more than 50% of the share capital of A.
Example 4: B is a subsidiary of A and C is a subsidiary of B. In such a case, C will be the subsidiary of
A. In the like manner, if D is a subsidiary of C, D will be subsidiary of B as well as of A and so on.
Status of private company, which is subsidiary to public company: In view of Section 2(71) of the
Companies Act, 2013 a Private company, which is subsidiary of a public company shall be deemed to
be public company for the purpose of this Act, even where such subsidiary company continues to be a
private company in its articles.

© The Institute of Chartered Accountants of India

13 THE COMPANIES ACT, 2013 5.13

(b) Associate company [Section 2(6)]: In relation to another company, means a company in which that
other company has a significant influence, but which is not a subsidiary company of the company having
such influence and includes a joint venture company.
Explanation. — For the purpose of this clause —
(a) the expression “significant influence” means control of at least twenty per cent of total voting
power, or control of or participation in business decisions under an agreement;
(b) the expression ”joint venture’’ means a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement.
The term “Total Share Capital”, means the aggregate of the -
(a) Paid-up equity share capital; and
(b) Convertible preference share capital.
This is a new definition inserted in the 2013 Act.
Vide General Circular no. 24/2014 dated 25th of June 2014, the Ministry of Corporate Affairs has clarified
that the shares held by a company in another company in a ‘fiduciary capacity’ shall not be counted for
the purpose of determining the relationship of ‘associate company’ under section 2(6) of the Companies
Act, 2013.
Example 5: A Ltd. is a Public Company and holds 23% of share capital in B Ltd. and 15% share capital
of C Ltd. By virtue of the shareholding pattern, B Ltd. will be known as the Associate Company of A Ltd.
(as the holding is more than 20%), whereas C Ltd. will not be Associate as the required 20% is not there
and hence no significant influence.
4. On the basis of access to capital:
(a) Listed company: As per the definition given in the section 2(52) of the Companies Act, 2013, it is a
company which has any of its securities listed on any recognised stock exchange.
Provided that such class of companies, which have listed or intend to list such class of securities,
as may be prescribed in consultation with the Securities and Exchange Board, shall not be
considered as listed companies.
Whereas the word securities as per the section 2(81) of the Companies Act, 2013 has been assigned
the same meaning as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act,
1956.
Example 6: Scan Steel Rods Limited is a Public Limited Company whose shares are listed in the Stock
Exchange, Kolkata. Hence Scan Steel Rods Limited is a Listed Company. The reason for calling it
“Listed” is because the company and the Stock Exchange have signed a Listing Agreement for trading
of shares in the capital market.
(b) Unlisted company means company other than listed company.
5. Other companies:
(a) Government company [Section 2(45)]: Government Company means any company in which not less
than 51% of the paid-up share capital is held by-

© The Institute of Chartered Accountants of India

5.14 BUSINESS LAWS

(i) the Central Government, or

(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State Governments,
and the section includes a company which is a subsidiary company of such a Government
company.
Explanation: For the purposes of this clause, the “paid up share capital” shall be construed as “total
voting power”, where shares with differential voting rights have been issued.

(b) Foreign Company [Section 2(42)]: It means any company or body corporate incorporated outside India
which—
(i) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(ii) conducts any business activity in India in any other manner.
(c) Formation of companies with charitable objects etc. (Section 8 company):
Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to
• promote the charitable objects of commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment etc.
• Such company intends to apply its profit in
• promoting its objects and
• prohibiting the payment of any dividend to its members.
Examples of section 8 companies are FICCI, ASSOCHAM, National Sports Club of India, CII etc.
Power of Central government to issue the license–
(i) Section 8 allows the Central Government to register such person or association of persons as
a company with limited liability without the addition of words ‘Limited’ or ‘Private limited’ to its
name, by issuing licence on such conditions as it deems fit.

© The Institute of Chartered Accountants of India

15 THE COMPANIES ACT, 2013 5.15

(ii) The registrar shall on application register such person or association of persons as a company
under this section.
(iii) On registration the company shall enjoy same privileges and obligations as of a limited
company.
Revocation of license: The Central Government may by order revoke the licence of the company where
the company contravenes any of the requirements or the conditions of this sections subject to which a
licence is issued or where the affairs of the company are conducted fraudulently, or violative of the
objects of the company or prejudicial to public interest, and on revocation the Registrar shall put ‘Limited’
or ‘Private Limited’ against the company’s name in the register. But before such revocation, the Central
Government must give it a written notice of its intention to revoke the licence and opportunity to be heard
in the matter.
Order of the Central Government: Where a licence is revoked there the Central Government may, in
the public interest order that the company registered under this section should be amalgamated with
another company registered under this section having similar objects, to form a single company with
such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities,
duties and obligations as may be specified in the order, or the company be wound up.
Penalty/punishment in contravention: If a company makes any default in complying with any of
the requirements laid down in this section, the company shall, without prejudice to any other
action under the provisions of this section, be punishable with fine which shall not be less than
ten lakh rupees but which may extend to one crore rupees and the directors and every officer of
the company who is in default shall be punishable with fine which shall not be less than twenty-
five thousand rupees but which may extend to twenty-five lakh rupees.
Provided that when it is proved that the affairs of the company were conducted fraudulently,
every officer in default shall be liable for action under section 447.
Section 8 Company- Significant points
⬥ Formed for the promotion of commerce, art, science, religion, charity, protection of environment,
sports, etc.
⬥ Requirement of minimum share capital does not apply.
⬥ Uses its profits for the promotion of the objective for which formed.
⬥ Does not declare dividend to members.
⬥ Operates under a special licence from Central Government.
⬥ Need not use the word Ltd./ Pvt. Ltd. in its name and adopt a more suitable name such as club,
chambers of commerce etc.
⬥ Licence revoked if conditions contravened.
⬥ On revocation, Central Government may direct it to
– Converts its status and change its name
– Wind – up

© The Institute of Chartered Accountants of India

5.16 BUSINESS LAWS

– Amalgamate with another company having similar object.

⬥ Can call its general meeting by giving a clear 14 days’ notice instead of 21 days.
⬥ Requirement of minimum number of directors, independent directors etc. does not apply.
⬥ Need not constitute Nomination and Remuneration Committee and Shareholders Relationship
Committee.
⬥ A partnership firm can be a member of Section 8 company.

(d) Dormant company (Section 455): Where a company is formed and registered under this Act for a future
project or to hold an asset or intellectual property and has no significant accounting transaction, such a
company or an inactive company may make an application to the Registrar in such manner as may be
prescribed for obtaining the status of a dormant company.
“Inactive company” means a company which has not been carrying on any business or operation, or
has not made any significant accounting transaction during the last two financial years, or has not filed
financial statements and annual returns during the last two financial years.
“Significant accounting transaction” means any transaction other than—
(i) payment of fees by a company to the Registrar;
(ii) payments made by it to fulfil the requirements of this Act or any other law;
(iii) allotment of shares to fulfil the requirements of this Act; and
(iv) payments for maintenance of its office and records.

© The Institute of Chartered Accountants of India

17 THE COMPANIES ACT, 2013 5.17

(e) Meaning of Nidhi Companies [Section 406(1) of the Companies Act, 2013]: In this section, “Nidhi”
or “Mutual Benefit Society” means a company which the Central Government may, by notification in the
Official Gazette, declare to be a Nidhi or Mutual Benefit Society, as the case may be.
(f) Public Financial Institutions (PFI): By virtue of Section 2(72) of the Companies Act, 2013, the following
institutions are to be regarded as public financial institutions:
(i) the Life Insurance Corporation of India, established under the Life Insurance Corporation Act, 1956;
(ii) the Infrastructure Development Finance Company Limited,
(iii) specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal)
Act, 2002;
(iv) institutions notified by the Central Government under section 4A(2) of the Companies Act, 1956
so repealed under section 465 of this Act;
(v) such other institution as may be notified by the Central Government in consultation with the
Reserve Bank of India:
Conditions for an institution to be notified as PFI: No institution shall be so notified unless—
(A) it has been established or constituted by or under any Central or State Act other than this Act
or the previous Companies Law; or
(B) not less than fifty-one per cent of the paid-up share capital is held or controlled by the Central
Government or by any State Government or Governments or partly by the Central Government
and partly by one or more State Governments.

4. MODE OF REGISTRATION/INCORPORATION OF COMPANY

PROMOTERS: The Companies Act, 2013 defines the term “Promoter” under section 2(69) which 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 indirectly whether as a shareholder, director
or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is
accustomed to act.

© The Institute of Chartered Accountants of India

5.18 BUSINESS LAWS

In simple terms we can say,

✓ Persons who form the company are known as promoters.

✓ It is they who conceive the idea of forming the company.

✓ They take all necessary steps for its registration.

✓ It should, however, be noted that persons acting only in a professional capacity e.g., the solicitor, banker,
accountant etc. are not regarded as promoters.
FORMATION OF COMPANY: Section 3 of the Companies Act, 2013 deals with the basic requirement with
respect to the constitution of the company.
In the case of a public company, any 7 or more persons can form a company for any lawful purpose by subscribing
their names to memorandum and complying with the requirements of this Act in respect of registration.
In exactly the same way, 2 or more persons can form a private company and one person where company to be
formed is one person company.

INCORPORATION OF COMPANY: Section 7 of the Companies Act, 2013 provides for the procedure to be
followed for incorporation of a company.
(1) Filing of the documents and information with the registrar: For the registration of the company
following documents and information are required to be filed with the registrar within whose jurisdiction
the registered office of the company is proposed to be situated-
⬥ the memorandum and articles of the company duly signed by all the subscribers to the
memorandum.
⬥ a declaration by person who is engaged in the formation of the company (an advocate, a
chartered accountant, cost accountant or company secretary in practice), and by a person
named in the articles (director, manager or secretary of the company), that all the requirements
of this Act and the rules made thereunder in respect of registration and matters precedent or
incidental thereto have been complied with.
⬥ a declaration from each of the subscribers to the memorandum and from persons named
as the first directors, if any, in the articles stating that-
 he is not convicted of any offence in connection with the promotion, formation or
management of any company, or

© The Institute of Chartered Accountants of India

19 THE COMPANIES ACT, 2013 5.19

 he has not been found guilty of any fraud or misfeasance or of any breach of duty to
any company under this Act or any previous company law during the last five years,
 and that all the documents filed with the Registrar for registration of the company
contain information that is correct and complete and true to the best of his knowledge
and belief;
⬥ the address for correspondence till its registered office is established;
⬥ the particulars (names, including surnames or family names, residential address, nationality)
of every subscriber to the memorandum along with proof of identity, and in the case of a
subscriber being a body corporate, such particulars as may be prescribed.
⬥ the particulars (names, including surnames or family names, the Director Identification
Number, residential address, nationality) of the persons mentioned in the articles as the
subscribers to the Memorandum and such other particulars including proof of identity as may
be prescribed; and
⬥ the particulars of the interests of the persons mentioned in the articles as the first directors
of the company in other firms or bodies corporate along with their consent to act as directors of
the company in such form and manner as may be prescribed.
Particulars provided in this provision shall be of the individual subscriber and not of the professional
engaged in the incorporation of the company [The Companies (Incorporation) Rules, 2014].
(2) Issue of certificate of incorporation on registration: The Registrar on the basis of documents and
information filed, shall register all the documents and information in the register and issue a certificate
of incorporation in the prescribed form to the effect that the proposed company is incorporated under
this Act.
(3) Allotment of Corporate Identity Number (CIN): On and from the date mentioned in the certificate of
incorporation, the Registrar shall allot to the company a corporate identity number, which shall be a
distinct identity for the company and which shall also be included in the certificate.
(4) Maintenance of copies of all documents and information: The company shall maintain and preserve
at its registered office copies of all documents and information as originally filed, till its dissolution under
this Act.
(5) Furnishing of false or incorrect information or suppression of material fact at the time of
incorporation (i.e. at the time of Incorporation): If any person furnishes any false or incorrect
particulars of any information or suppresses any material information, of which he is aware in any of the
documents filed with the Registrar in relation to the registration of a company, he shall be liable for action
for fraud under section 447.
(6) Company already incorporated by furnishing any false or incorrect information or representation
or by suppressing any material fact (i.e. post Incorporation): Where, at any time after the
incorporation of a company, it is proved that the company has been got incorporated by furnishing any
false or incorrect information or representation or by suppressing any material fact or information in any
of the documents or declaration filed or made for incorporating such company, or by any fraudulent

© The Institute of Chartered Accountants of India

5.20 BUSINESS LAWS

action, the promoters, the persons named as the first directors of the company and the persons making
declaration under this section shall each be liable for action for fraud under section 447.
(7) Order of the Tribunal: Where a company has been got incorporated by furnishing false or incorrect
information or representation or by suppressing any material fact or information in any of the documents
or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal
may, on an application made to it, on being satisfied that the situation so warrants,—
(a) pass such orders, as it may think fit, for regulation of the management of the company including
changes, if any, in its memorandum and articles, in public interest or in the interest of the
company and its members and creditors; or
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company; or
(e) pass such other orders as it may deem fit:
Provided that before making any order,—
⬥ the company shall be given a reasonable opportunity of being heard in the matter; and
⬥ the Tribunal shall take into consideration the transactions entered into by the company,
including the obligations, if any, contracted or payment of any liability.
Simplified Proforma for Incorporating Company Electronically (SPICe)
The Ministry of Corporate Affairs has taken various initiatives for ease of business. In a step towards easy setting
up of business, MCA has simplified the process of filing of forms for incorporation of a company through Simplified
Proforma for incorporating company electronically.
EFFECT OF REGISTRATION: Section 9 of the Companies Act, 2013 provides for the effect of registration of a
company.
According to Section 9, from the date of incorporation (mentioned in the certificate of incorporation), the
subscribers to the memorandum and all other persons, who may from time to time become members of the
company, shall be a body corporate by the name contained in the memorandum. Such a registered company
shall be capable of exercising all the functions of an incorporated company under this Act and having perpetual
succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and
intangible, to contract and to sue and be sued, by the said name.
From the date of incorporation mentioned in the certificate, the company becomes a legal person separate from
the incorporators; and there comes into existence a binding contract between the company and its members as
evidenced by the Memorandum and Articles of Association [Hari Nagar Sugar Mills Ltd. vs. S.S.
Jhunjhunwala]. It has perpetual existence until it is dissolved by liquidation or struck out of the register. A
shareholder who buys shares, does not buy any interest in the property of the company but in certain cases a
writ petition will be maintainable by a company or its shareholders.
A legal personality emerges from the moment of registration of a company and from that moment the persons
subscribing to the Memorandum of Association and other persons joining as members are regarded as a body
corporate or a corporation in aggregate and the legal person begins to function as an entity. A company on

© The Institute of Chartered Accountants of India

21 THE COMPANIES ACT, 2013 5.21

registration acquires a separate existence and the law recognises it as a legal person separate and distinct from
its members [State Trading Corporation of India vs. Commercial Tax Officer].
It may be noted that under the provisions of the Act, a company may purchase shares of another company and
thus become a controlling company. However, merely because a company purchases all shares of another
company it will not serve as a means of putting an end to the corporate character of another company and each
company is a separate juristic entity [Spencer & Co. Ltd. Madras vs. CWT Madras].
As has been stated above, the law recognizes such a company as a juristic person separate and distinct from its
members. The mere fact that the entire share capital has been contributed by the Central Government and all its
shares are held by the President of India and other officers of the Central Government does not make any
difference in the position of registered company and it does not make a company an agent either of the President
or the Central Government [Heavy Electrical Union vs. State of Bihar].
EFFECT OF MEMORANDUM AND ARTICLES: As per Section 10 of the Companies Act, 2013, where the
memorandum and articles when registered, shall bind the company and the members thereof to the same extent
as if they respectively had been signed by the company and by each member, and an agreement to observe all
the provisions of the memorandum and of the articles. All monies payable by any member to the company under
the memorandum or articles shall be a debt due from him to the company.

5. CLASSIFICATION OF CAPITAL
The term Capital has a variety of meanings. It means one thing to economists; another to accountants and still
another to businessmen and lawyers. In relation to a company limited by shares, the word capital means share-
capital, i.e., the capital or figure in terms of so many rupees divided into shares of fixed amount. In other words,
the contributions of persons to the common stock of the company form the capital of the company. The proportion
of the capital to which each member is entitled, is his share. A share is not a sum of money; it is rather an interest
measured by a sum of money and made up of various rights contained in the contract.
In the domain of Company Law, the term ‘capital’ is used in the following senses:
(a) Nominal or authorised or registered capital: This form of capital has been defined in section 2(8) of
the Companies Act, 2013. “Authorised capital” or “Nominal capital” means such capital as is authorised
by the memorandum of a company to be the maximum amount of share capital of the company. Thus, it
is the sum stated in the memorandum as the capital of the company with which it is to be registered
being the maximum amount which it is authorised to raise by issuing shares, and upon which it pays the
stamp duty. It is usually fixed at the amount, which, it is estimated, the company will need, including the
working capital and reserve capital, if any.
(b) Issued capital: Section 2(50) of the Companies Act, 2013 defines “issued capital” which means such
capital as the company issues from time to time for subscription. It is that part of authorised capital which
is offered by the company for subscription and includes the shares allotted for consideration other than
cash.
Schedule III to the Companies Act, 2013, makes it obligatory for a company to disclose its issued capital
in the balance sheet.

© The Institute of Chartered Accountants of India

5.22 BUSINESS LAWS

(c) Subscribed capital: Section 2(86) of the Companies Act, 2013 defines “subscribed capital” as such part
of the capital which is for the time being subscribed by the members of a company.
It is the nominal amount of shares taken up by the public. Where any notice, advertisement or other
official communication or any business letter, bill head or letter paper of a company states the authorised
capital, the subscribed and paid-up capital must also be stated in equally conspicuous characters. A
default in this regard will make the company and every officer who is in default liable to pay penalty
extending ` 10,000 and ` 5,000 respectively. [Section 60].
(d) Called-up capital: Section 2(15) of the Companies Act, 2013 defines “called-up capital” as such part of
the capital, which has been called for payment. It is the total amount called up on the shares issued.
(e) Paid-up capital is the total amount paid or credited as paid up on shares issued. It is equal to called up
capital less calls in arrears.

6. SHARES
(I) Nature of shares: Section 2(84) of the Companies Act, 2013 defines the
term ‘share’ which means a share in the share capital of a company and includes
stock. A share thus represents such proportion of the interest of the shareholders
as the amount paid up thereon bears to the total capital payable to the company.
It is a measure of the interest in the company’s assets to which a person holding
a share is entitled.
Share is an interest in the company: Farwell Justice, in Borland Trustees vs. Steel Bors. & Co. Ltd. observed
that “a share is not a sum of money but is an interest measured by a sum of money and made up of various rights
contained in the contract, including the right to a sum of money of a more or less amount”. You should note that
the shareholders are not, in the eyes of law, part owners of the undertaking. The undertaking is somewhat
different from the totality of the shareholders. The rights and obligations attaching to a share are those prescribed
by the memorandum and the articles of a company. It must, however, be remembered that a shareholder has not
only contractual rights against the company, but also certain other rights which accrue to him according to the
provisions of the Companies Act.

Share Capital

Equity Share Preference

Capital Share Capital

With uniform With differential

voting rights voting rights

© The Institute of Chartered Accountants of India

23 THE COMPANIES ACT, 2013 5.23

Shares are a movable property: According to section 44 of the Companies Act, 2013, the shares or debentures
or other interests of any member in a company shall be movable property transferable in the manner provided by
the articles of the company.
Shares shall be numbered: Section 45 provides, every share in a company having a share capital, shall be
distinguished by its distinctive number. This implies that every share shall be numbered.
However, this shall not apply to a share held by a person whose name is entered as holder of beneficial interest
in such share in the records of a depository.
(II) Kinds of share capital:- Section 43 of the Companies Act, 2013 provides the kinds of share capital.
According to the provision the share capital of a company limited by shares shall be of two kinds,
namely:—
(i) Equity share capital —
(1) with voting rights; or
(2) with differential rights as to dividend, voting or otherwise in accordance with prescribed rules;
Example 7: It is to be noted that, Tata Motors in 2008 introduced equity shares with differential voting
rights called ‘A’ equity shares in its rights issue. In the issue, every 10 ‘A’ equity shares carried only one
voting right but would get 5 percentage points more dividend than that declared on each of the ordinary
shares. Since ‘A’ equity share did not carry the similar voting rights, it was being traded at discount to
other common shares having full voting. Other companies which have issued equity shares with
differential voting rights (popularly called DVRs) are Future Retail, Jain Irrigation among others.
(ii) Preference share capital:
However, this Act shall not affect the rights of the preference shareholders who are entitled to participate
in the proceeds of winding up before the commencement of this Act.
According to explanation to section 43:
1. ‘‘Equity share capital’’, with reference to any company limited by shares, means all share
capital which is not preference share capital;
2. ‘‘Preference share capital’’, with reference to any company 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;
Capital shall be deemed to be preference capital, despite that it is entitled to either or both of the
following rights, namely:—

© The Institute of Chartered Accountants of India

5.24 BUSINESS LAWS

(a) that in respect of dividends, in addition to the preferential rights to the amounts specified as
above, it has a right to participate, whether fully or to a limited extent, with capital not entitled
to the preferential right aforesaid;
(b) that in respect of capital, in addition to the preferential right to the repayment, on a winding
up, of the amounts specified above, 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.
Exception: In case of private company - Section 43 shall not apply where memorandum or articles of
association of the private company so provides.

7. MEMORANDUM OF ASSOCIATION
The Memorandum of Association of company is in fact its charter; it defines its constitution and the scope of the
powers of the company with which it has been established under the Act. It is the very foundation on which the
whole edifice of the company is built.
Object of registering a memorandum of association:
⬥ It contains the object for which the company is formed and therefore identifies the possible scope of its
operations beyond which its actions cannot go.
⬥ It enables shareholders, creditors and all those who deal with company to know what its powers are and
what activities it can engage in.
A memorandum is a public document under Section 399 of the Companies Act, 2013. Consequently,
every person entering into a contract with the company is presumed to have the knowledge of the
conditions contained therein.
⬥ The shareholders must know the purposes for which his money can be used by the company and what
risks he is taking in making the investment.
A company cannot depart from the provisions contained in the memorandum however imperative may be the
necessity for the departure. It cannot enter into a contract or engage in any trade or business, which is beyond
the power confessed on it by the memorandum. If it does so, it would be ultra vires the company and void.
As per Section 4, Memorandum of a company shall be drawn up in such form as is given in Tables A, B,
C, D and E in Schedule I of the Companies Act, 2013.
Table A is a form for memorandum of association of a company limited by shares.
Table B is a form for memorandum of association of a company limited by guarantee and not having a share
capital.
Table C is a form for memorandum of association of a company limited by guarantee and having a share capital.
Table D is a form for memorandum of association of an unlimited company.
Table E is a form for memorandum of association of an unlimited company and having share capital.

© The Institute of Chartered Accountants of India

25 THE COMPANIES ACT, 2013 5.25

The memorandum and articles of a company must be as closed to model forms, as possible, depending upon the
circumstances.
Content of the memorandum: The memorandum of a company shall state—
(a) the name of the company (Name Clause) 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. This clause is not
applicable on the companies formed under section 8 of the Act.
The name including phrase ‘Electoral Trust’ may be allowed for Registration of companies to be formed
under section 8 of the Act, in accordance with the Electoral Trusts Scheme, 2013 notified by the Central
Board of Direct Taxes (CBDT). For the Companies under section 8 of the Act, the name shall include
the words foundation, Forum, Association, Federation, Chambers, Confederation, council, Electoral trust
and the like etc. [The Companies (Incorporation) Rules, 2014].
As per MCA notification dated 5th June, 2015, a Government company’s name must end with the word
“Limited”. In the case of One Person Company, the words “One Person Company”, should be included
below its name.
(b) the State in which the registered office of the company (Registered Office clause) is to be situated;
(c) the objects for which the company is proposed to be incorporated and any matter considered necessary
in furtherance thereof (Object clause);
If any company has changed its activities which are not reflected in its name, it shall change its name in
line with its activities within a period of six months from the change of activities after complying with all
the provisions as applicable to change of name.
(d) the liability of members of the company (Liability clause), whether limited or unlimited, and also state,—
• in the case of a company limited by shares, that the liability of its members is limited to the
amount unpaid, if any, on the shares held by them; and
• in the case of a company limited by guarantee, the amount up to which each member
undertakes to contribute—
 to the assets of the company in the event of its being wound-up while he is a
member or within one year after he ceases to be a member, for payment of the debts
and liabilities of the company or of such debts and liabilities as may have been
contracted before he ceases to be a member, as the case may be; and
 to the costs, charges and expenses of winding-up and for adjustment of the rights of
the contributories among themselves;
(e) the amount of authorized capital (Capital Clause) divided into share of fixed amounts and the number
of shares with the subscribers to the memorandum have agreed to take, indicated opposite their names,
which shall not be less than one share. A company not having share capital need not have this clause.
(f) the desire of the subscribers to be formed into a company. The Memorandum shall conclude with the
association clause. Every subscriber to the Memorandum shall take atleast one share, and shall write
against his name, the number of shares taken by him.

© The Institute of Chartered Accountants of India

5.26 BUSINESS LAWS

In the case of OPC, the name of the person who, in the event of death of the subscriber, shall become the
member of the company.
The memorandum must be printed, divided into paragraphs, numbered consecutively, and signed by at least
seven persons (two in the case of a private company and one in the case of One Person Company) in the
presence of at least one witness, who will attest the signatures. The particulars about the signatories to the
memorandum as well as the witness, as to their address, description, occupation etc., must also be entered.
It is to be noted that a company being a legal person can through its agent, subscribe to the memorandum.
However, a minor cannot be a signatory to the memorandum as he is not competent to contract. The
guardian of a minor, who subscribes to the memorandum on his behalf, will be deemed to have
subscribed in his personal capacity.
The above clauses of the Memorandum are called compulsory clauses, or “Conditions”. In addition to these a
memorandum may contain other provisions, for example rights attached to various classes of shares.
The Memorandum of Association of a company cannot contain anything contrary to the provisions of the
Companies Act. If it does, the same shall be devoid of any legal effect. Similarly, all other documents of the
company must comply with the provisions of the Memorandum.

8. DOCTRINE OF ULTRA VIRES

Doctrine of ultra vires: The meaning of the term ultra vires is simply “beyond (their) powers”. The legal phrase
“ultra vires” is applicable only to acts done in excess of the legal powers of the doers. This presupposes that the
powers in their nature are limited.
It is a fundamental rule of Company Law that the objects of a company as stated in its memorandum can be
departed from only to the extent permitted by the Act, thus far and no further. In consequence, any act done or a
contract made by the company which travels beyond the powers not only of the directors but also of the company
is wholly void and inoperative in law and is therefore not binding on the company. On this account, a company
can be restrained from employing its fund for purposes other than those sanctioned by the memorandum.
Likewise, it can be restrained from carrying on a trade different from the one it is authorised to carry on.
The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires transaction, nor
can it sue on it. Since the memorandum is a “public document”, it is open to public inspection. Therefore, when
one deals with a company one is deemed to know about the powers of the company. If in spite of this you enter
into a transaction which is ultra vires the company, you cannot enforce it against the company.
Example 8: If you have supplied goods or performed service on such a contract or lent money, you cannot obtain
payment or recover the money lent. But if the money advanced to the company has not been expended, the
lender may stop the company from parting with it by means of an injunction; this is because the company does
not become the owner of the money, which is ultra vires the company. As the lender remains the owner, he can
take back the property in specie. If the ultra vires loan has been utilised in meeting lawful debt of the company
then the lender steps into the shoes of the debtor paid off and consequently he would be entitled to recover his
loan to that extent from the company.
An act which is ultra vires the company being void, cannot be ratified by the shareholders of the company.
Sometimes, act which is ultra vires can be regularised by ratifying it subsequently. For instance, if the act is ultra

© The Institute of Chartered Accountants of India

27 THE COMPANIES ACT, 2013 5.27

vires the power of the directors, the shareholders can ratify it; if it is ultra vires the articles of the company, the
company can alter the articles; if the act is within the power of the company but is done irregularly, shareholder
can validate it.
The leading case through which this doctrine was enunciated is that of Ashbury Railway Carriage and Iron
Company Limited v. Riche-(1875).
The facts of the case are:
The main objects of a company were:
(a) To make, sell or lend on hire, railway carriages and wagons;
(b) To carry on the business of mechanical engineers and general contractors.
(c) To purchase, lease, sell and work mines.
(d) To purchase and sell as merchants or agents, coal, timber, metals etc.
The directors of the company entered into a contract with Riche, for financing the construction of a railway line
in Belgium, and the company further ratified this act of the directors by passing a special resolution. The company
however, repudiated the contract as being ultra-vires. And Riche brought an action for damages for breach of
contract. His contention was that the contract was well within the meaning of the word general contractors and
hence within its powers. Moreover it had been ratified by a majority of share-holders. However, it was held by
the Court that the contract was null and void. It said that the terms general contractors was associated with
mechanical engineers, i.e. it had to be read in connection with the company’s main business. If, the term general
contractor’s was not so interpreted, it would authorize the making of contracts of any kind and every description,
for example, marine and fire insurance.
An ultra vires contract can never be made binding on the company. It cannot become “Intravires” by
reasons of estoppel, acquiescence, Iapse of time, delay or ratification.
The whole position regarding the doctrine of ultra vires can be summed up as:
(i) When an act is performed, which though legal in itself, is not authorized by the object clause of the
memorandum, or by the statute, it is said to be ultravires the company, and hence null and void.
(ii) An act which is ultravires, the company cannot be ratified even by the unanimous consent of all the
shareholders.
(iii) An act which is ultravires the directors, but intravires the company can be ratified by the members of the
company through a resolution passed at a general meeting.
(iv) If an act is ultravires the Articles, it can be ratified by altering the Articles by a Special Resolution at a
general meeting.
However, the disadvantages of this doctrine outweigh its main advantage, namely to provide protection
to the shareholders and creditors. Although it may be useful to members in restraining the activities of the
directors, it is only a nuisance in so far as it prevents the company from changing its activities in a
direction which is agreed by all. Again, the purpose of doctrine of ultravires has been defeated as now the
object clause can be easily altered, by passing just a special resolution of the shareholders.

© The Institute of Chartered Accountants of India

5.28 BUSINESS LAWS

9. ARTICLES OF ASSOCIATION
The articles of association of a company are its rules and regulations, which are framed to manage its internal
affairs. Just as the memorandum contains the fundamental conditions upon which the company is allowed to be
incorporated, so also the articles are the internal regulations of the company (Guiness vs. Land Corporation of
Ireland). These general functions of the articles have been aptly summed up by Lord Cairns in Ashbury Carriage
Co. vs. Riches as follows: “The articles play a part subsidiary to memorandum of association. They accept the
memorandum as the charter of incorporation, and so accepting it the articles proceed to define the duties, the
rights and powers of the governing body as between themselves and the company and the mode and form in
which the business of the company is to be carried on, and the mode and form in which changes in the internal
regulation of the company may from time to time be made.”
The document containing the articles of association of a company (the Magna Carta) is a business document;
hence it has to be construed strictly. It regulates domestic management of a company and creates certain rights
and obligations between the members and the company [S.S. Rajkumar vs. Perfect Castings (P) Ltd.].
The articles of association are in fact the bye-laws of the company according to which director and other officers
are required to perform their functions as regards the management of the company, its accounts and audit. It is
important therefore that the auditor should study them and, while doing so he should note the provisions therein
in respect of relevant matters.
Section 5 of the Companies Act, 2013 seeks to provide the contents and model of articles of association.
The section lays the following law-
(1) Contains regulations: The articles of a company shall contain the regulations for management of the
company.
(2) Inclusion of matters: The articles shall also contain such matters, as are prescribed under the rules.
However, a company may also include such additional matters in its articles as may be considered
necessary for its management.
(3) Contain provisions for entrenchment: The articles may contain provisions for entrenchment (to protect
something) to the effect that specified provisions of the articles may be altered only if conditions or
procedures as that are more restrictive than those applicable in the case of a special resolution, are met
or complied with.
(4) Manner of inclusion of the entrenchment provision: The provisions for entrenchment shall only be
made either on formation of a company, or by an amendment in the articles agreed to by all the members
of the company in the case of a private company and by a special resolution in the case of a public
company.
(5) Notice to the registrar of the entrenchment provision: Where the articles contain provisions for
entrenchment, whether made on formation or by amendment, the company shall give notice to the
Registrar of such provisions in such form and manner as may be prescribed.
(6) Forms of articles: The articles of a company shall be in respective forms specified in Tables, F, G, H,
I and J in Schedule I as may be applicable to such company.

© The Institute of Chartered Accountants of India

29 THE COMPANIES ACT, 2013 5.29

(7) Model articles: A company may adopt all or any of the regulations contained in the model articles
applicable to such company.
(8) Company registered after the commencement of this Act: In case of any company, which is
registered after the commencement of this Act, in so far as the registered articles of such company do
not exclude or modify the regulations contained in the model articles applicable to such company, those
regulations shall, so far as applicable, be the regulations of that company in the same manner and to
the extent as if they were contained in the duly registered articles of the company.
The following are the key differences between the Memorandum of Association vs. Articles of
Association:
1. Objectives: Memorandum of Association defines and delimits the objectives of the company whereas
the Articles of association lays down the rules and regulations for the internal management of the
company. Articles determine how the objectives of the company are to be achieved.
2. Relationship: Memorandum defines the relationship of the company with the outside world and Articles
define the relationship between the company and its members.
3. Alteration: Memorandum of association can be altered only under certain circumstances and in the
manner provided for in the Act. In most cases permission of the Regional Director, or the Tribunal is
required. The articles can be altered simply by passing a special resolution.
4. Ultra Vires: Acts done by the company beyond the scope of the memorandum are ultra-vires and void.
These cannot be ratified even by the unanimous consent of all the shareholders. The acts ultra-vires the
articles can be ratified by a special resolution of the shareholders, provided they are not beyond the
provisions of the memorandum.

10. DOCTRINE OF INDOOR MANAGEMENT

Doctrine of Constructive Notice: Section 399 of the Companies Act, 2013 provides that any person can inspect
by electronic means any document kept by the Registrar, or make a record of the same, or get a copy or extracts
of any document, including certificate of incorporation of any company, on payment of prescribed fees.
The memorandum and articles of association of a company when registered with Registrar of Companies,
become public documents, and they are available for inspection to any person, on the payment of a nominal fees.
In other words, Section 399 confers the right of inspection to all. It is, therefore, the duty of every person dealing
with a company to inspect its documents and make sure that his contract is in conformity with their provisions but
whether a person reads them or not, it will be presumed that he knows the contents of the documents. This kind
of presumed/implied notice is called constructive notice.
By constructive notice is meant:
(i) Whether a person reads the documents or not, he is presumed to have knowledge of the contents of the
documents,
He is not only presumed to have read the documents but also understood them in their true perspective,
and

© The Institute of Chartered Accountants of India

5.30 BUSINESS LAWS

(ii) Every person dealing with the company not only has the constructive notice of the memorandum and
articles, but also of all the other related documents, such as Special Resolutions etc., which are required
to be registered with the Registrar.
Thus, if a person enters into a contract which is beyond the powers of the company as defined in the
memorandum, or outside the authority of directors as per memorandum or articles, he cannot acquire any rights
under the contract against the company.
Doctrine of Indoor Management: The Doctrine of Indoor Management is the exception to the doctrine of
constructive notice. The aforesaid doctrine of constructive notice does in no sense mean that outsiders are
deemed to have notice of the internal affairs of the company. For instance, if an act is authorised by the articles
or memorandum, an outsider is entitled to assume that all the detailed formalities for doing that act have been
observed. This can be explained with the help of a landmark case The Royal British Bank vs. Turquand. This
is the doctrine of indoor management popularly known as Turquand Rule.
FACTS of the Royal British Bank vs. Turquand
Mr. Turquand was the official manager (liquidator) of the insolvent Cameron’s Coalbrook Steam, Coal and
Swansea and Loughor Railway Company. It was incorporated under the Joint Stock Companies Act, 1844. The
company had given a bond for £ 2,000 to the Royal British Bank, which secured the company’s drawings on its
current account. The bond was under the company’s seal, signed by two directors and the secretary. When the
company was sued, it alleged that under its registered deed of settlement (the articles of association), directors
only had power to borrow up to an amount authorized by a company resolution. A resolution had been passed
but not specifying how much the directors could borrow.
Held, it was decided that the bond was valid, so the Royal British Bank could enforce the terms. He said the
bank was deemed to be aware that the directors could borrow only up to the amount resolutions allowed. Articles
of association were registered with Companies House, so there was constructive notice. But the bank could not
be deemed to know which ordinary resolutions passed, because these were not registrable. The bond was valid
because there was no requirement to look into the company’s internal workings. This is the indoor management
rule, that the company’s indoor affairs are the company’s problem.
Exceptions to the doctrine of Indoor Management: Thus, you will notice that the aforementioned rule of Indoor
Management is important to persons dealing with a company through its directors or other persons. They are
entitled to assume that the acts of the directors or other officers of the company are validly performed, if they are
within the scope of their apparent authority. So long as an act is valid under the articles, if done in a particular
manner, an outsider dealing with the company is entitled to assume that it has been done in the manner required.
The above mentioned doctrine of Indoor Management or Turquand Rule has limitations of its own. That is to say,
it is inapplicable to the following cases, namely:
(a) Actual or constructive knowledge of irregularity: The rule does not protect any person when the
person dealing with the company has notice, whether actual or constructive, of the irregularity.
In Howard vs. Patent Ivory Manufacturing Co. where the directors could not defend the issue of
debentures to themselves because they should have known that the extent to which they were lending
money to the company required the assent of the general meeting which they had not obtained.

© The Institute of Chartered Accountants of India

31 THE COMPANIES ACT, 2013 5.31

Likewise, in Morris v Kansseen, a director could not defend an allotment of shares to him as he
participated in the meeting, which made the allotment. His appointment as a director also fell through
because none of the directors appointed him was validly in office.
(b) Suspicion of Irregularity: The doctrine in no way, rewards those who behave negligently. Where the
person dealing with the company is put upon an inquiry, for example, where the transaction is unusual
or not in the ordinary course of business, it is the duty of the outsider to make the necessary enquiry.
The protection of the “Turquand Rule” is also not available where the circumstances surrounding the
contract are suspicious and therefore invite inquiry. Suspicion should arise, for example, from the fact
that an officer is purporting to act in matter, which is apparently outside the scope of his authority. Where,
for example, as in the case of Anand Bihari Lal vs. Dinshaw & Co. the plaintiff accepted a transfer of
a company’s property from its accountant, the transfer was held void. The plaintiff could not have
supposed, in absence of a power of attorney that the accountant had authority to effect transfer of the
company’s property.
Similarly, in the case of Haughton & Co. v. Nothard, Lowe & Wills Ltd. where a person holding
directorship in two companies agreed to apply the money of one company in payment of the debt to
other, the court said that it was something so unusual “that the plaintiff were put upon inquiry to ascertain
whether the persons making the contract had any authority in fact to make it.” Any other rule would
“place limited companies without any sufficient reasons for so doing, at the mercy of any servant or
agent who should purport to contract on their behalf.”
(c) Forgery: The doctrine of indoor management applies only to irregularities which might otherwise affect
a transaction but it cannot apply to forgery which must be regarded as nullity.
Forgery may in circumstances exclude the ‘Turquand Rule’. The only clear illustration is found in the
Ruben v Great Fingall Consolidated. In this case the plaintiff was the transferee of a share certificate
issued under the seal of the defendant’s company. The company’s secretary, who
had affixed the seal of the company and forged the signature of the two directors, issued the certificate.
The plaintiff contended that whether the signature were genuine or forged was apart of the internal
management, and therefore, the company should be estopped from denying genuineness of
the document. But it was held, that the rule has never been extended to cover such a complete forgery.

SUMMARY
Company
⬥ An artificial person created under the Companies Act, 2013 with distinct characteristics of separate legal
entity and perpetual succession.
⬥ The capital of the company is divided into transferable shares and shareholders called as members
because their name is entered into the Register of members.
⬥ The member of the company generally has limited liability upto the extent of unpaid nominal value of
shares held by him.

© The Institute of Chartered Accountants of India

5.32 BUSINESS LAWS

Corporate veil theory

⬥ Saloman vs. Saloman & Co. Ltd. laid that company is a juristic person different and separate from its
members.
⬥ Under certain situations the courts may lift the corporate veil/ veil of incorporation and thus disregard
the separate legal entity of the company. This is called lifting the corporate veil.
Incorporation of company
⬥ A company is said to come into existence only after its registration and issue of Certificate of
Incorporation.
⬥ The company to be incorporated must be validly constituted and be an association for a lawful purpose.
After all the formalities are compiled and the Registrar is satisfied, the company is registered under the
Act.
⬥ On registration the Registrar shall issue a Certificate of Incorporation to the company.
⬥ To provide an integrated process of incorporation, the MCA has introduced SPICe for simplifying the
filing of forms.
Effect of registration
⬥ From the date of incorporation the company becomes a legal person by the name contained in the
Memorandum and capable of exercising all the functions of an incorporated company.
⬥ The issue of Certificate of Incorporation is considered as conclusive evidence as to compliance of all the
legal formalities in respect of registration of company.
Capital
⬥ Nominal or authorized share capital: Authorized by memorandum to be the maximum amount of share
capital
⬥ Issued share capital: That part of authorized capital which us offered by the company for subscription.
⬥ Subscribed share capital: Such part of the capital which us for the time being subscribed by the
members of a company.
⬥ Called up capital: Such part of the capital that has been called for payment.
⬥ Paid up capital: It is the total amount paid or credited as paid up on shares issued. Paid up capital=
Called up capital – calls in arrears.
Share Capital
⬥ Equity share capital: with reference to any company limited by shares, means all share capital which
is not preference share capital.
⬥ Preference share capital: with reference to any company 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—
payment of dividend and repayment.

© The Institute of Chartered Accountants of India

33 THE COMPANIES ACT, 2013 5.33

Memorandum of Association
⬥ It is known as charter of the company.
⬥ It is fundamental document of a company containing the fundamental conditions upon which a company
is to be incorporated.
⬥ It lays object and scope of activities and limitations on the power of a company beyond which the
company cannot go.
⬥ Any act done or contracts made by a company which are beyond the express or implied scope of its
memorandum, are said to be null and void. This is termed as doctrine of ultra vires.
⬥ The conditions and the provisions of the memorandum can be altered to the extent and in the manner
provided by the Act which allows alterations by special resolution and confirmation by Central
Government/Registrar of Companies.
Article of Association
⬥ Document containing rules, regulations or bye-laws of a company.
⬥ It lays down the form in which the business of the company is to be carried on.
⬥ It also lays down the powers of directors and officers of the company and thus forming the basis of a
contract between the company and the members and between the members Inter se (among
themselves).
⬥ Every company have an absolute power to alter its Articles of Association by a special resolution subject
to the provisions of the Act and conditions of the memorandum of the company.
Doctrine of Constructive Notice
⬥ As memorandum and article is a public document so it is considered that every person dealing with the
company is deemed to have notice of the contents of memorandum and articles of the company.
⬥ It is presumed that person have not only read these documents but have also understood their proper
meaning.
Doctrine of Indoor Management/ Turquand Rule
⬥ This is an exception to doctrine of Constructive Notice.
⬥ This protects the outsiders against the company, who acts in good faith.
⬥ It says that person who deals with the company are not bound to enquire into the regularity of the internal
procedure of the company. They assume that everything is done in accordance with the procedure laid
down in the article of the company and thus not affecting adversely the rights of the dealing parties in
any way by irregularity of the internal procedure.

© The Institute of Chartered Accountants of India

5.34 BUSINESS LAWS

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. Maximum number of members under a private company as provided under the Companies Act, 2013.
(a) 50 (b) 150
(c) 200 (d) No limit
2. Document that regulates the management of internal affairs of a company are-
(a) Memorandum of Association (b) Prospectus
(c) Article of Association (d) Certificate of incorporation
3. Under the Companies Act, 2013, “Significant influence” constitutes how much % of total share capital or
of business decisions under an agreement?
(a) At least 2% (b) At least 2.5%
(c) At least 10% (d) At least 20%
4. A Private Company which is subsidiary of a Public Company is treated as-
(a) Public Company (b) Private Company
(c) Holding Company (d) Dormant Company
5. Which one of the following is not the content of the Memorandum of Association?
(a) Name clause (b) Registered office clause
(c) Objects clause (d) Board of Directors clause.
6. An Act is said to be ultra vires a company when it is beyond the powers.
(a) Of the Company
(b) Of the Directors
(c) Of the Directors but not the company
(d) Conferred on the company by the Articles of Association.
7. Turquand Rule is related to:
(a) Doctrine of ultra vires (b) Doctrine of constructive notice
(c) Doctrine of indoor management (d) Doctrine of subrogation
8. The minimum number of members in a private company and public company are
(a) Three and Seven respectively (b) Two and seven respectively
(c) Two and nine respectively (d) None of the above

© The Institute of Chartered Accountants of India

35 THE COMPANIES ACT, 2013 5.35

9. Only a natural person who is an Indian citizen and who has stayed in India for a period of at least _____
days during the immediately preceding financial year shall be eligible to incorporate an OPC.

(a) 180 days (b) 181 days

(c) 120 days (d) 183 days
10. XYZ Limited is having 15% share capital held by X Limited and 50% held by Central Government and
10% held by State Government and 25% held by other people then that company will be _________ .
(a) Government Company (b) Private Company
(c) Public Company (d) Dormant company
11. The Doctrine of indoor management is a protection that is available to:
(a) Shareholders (b) Outsiders who deal with the company
(c) Board of Directors (d) Creditors
12. The doctrine which advocates the fact that company cannot act beyond the scope of its memorandum
of association is:
(a) Doctrine of constructive notice (b) Doctrine of indoor management
(c) Doctrine of ultra vires (d) Doctrine of intra vires

Answers to MCQs
1. (c) 2. (c) 3. (d) 4. (a) 5. (d)

6. (a) 7. (c) 8. (b) 9. (c) 10. (a)

11. (b) 12. (c)

Descriptive Questions
1. What is meant by a Guarantee Company? State the similarities and dissimilarities between a Guarantee
Company and a Company having Share Capital.
2. Can a non-profit organization be registered as a company under the Companies Act, 2013? If so, what
procedure does it have to adopt?
3. Briefly explain the doctrine of “ultravires” under the Companies Act, 2013. What are the consequences
of ultravires acts of the company?
4. Explain clearly the doctrine of ‘Indoor Management’ as applicable in cases of companies registered
under the Companies Act, 2013. Explain the circumstances in which an outsider dealing with the
company cannot claim any relief on the ground of ‘Indoor Management’.
5. A, an assessee, had large income in the form of dividend and interest. In order to reduce his tax liability,
he formed four private limited company and transferred his investments to them in exchange of their
shares. The income earned by the companies was taken back by him as pretended loan. Can A be
regarded as separate from the private limited company he formed?

© The Institute of Chartered Accountants of India

5.36 BUSINESS LAWS

6. Sound Syndicate Ltd., a public company, its articles of association empowers the managing agents to
borrow both short and long term loans on behalf of the company, Mr. Liddle, the director of the company,
approached Easy Finance Ltd., a non banking finance company for a loan of ` 25,00,000 in name of the
company.
The Lender agreed and provided the above said loan. Later on, Sound Syndicate Ltd. refused to repay
the money borrowed on the pretext that no resolution authorizing such loan have been actually passed
by the company and the lender should have enquired about the same prior providing such loan hence
company not liable to pay such loan.
Analyse the above situation in terms of the provisions of Doctrine of Indoor Management under the
Companies Act, 2013 and examine whether the contention of Sound Syndicate Ltd. is correct or not?
7. Naveen incorporated a “One Person Company” making his sister Navita as the nominee. Navita is
leaving India permanently due to her marriage abroad. Due to this fact, she is withdrawing her consent
of nomination in the said One Person Company. Taking into considerations the provisions of the
Companies Act, 2013 answer the questions given below.
(a) If Navita is leaving India permanently, is it mandatory for her to withdraw her nomination in the
said One Person Company?
(b) If Navita maintained the status of Resident of India after her marriage, then can she continue
her nomination in the said One Person Company?
8. Examine the following whether they are correct or incorrect along with reasons:
(a) A company being an artificial person cannot own property and cannot sue or be sued.
(b) A private limited company must have a minimum of two members, while a public limited
company must have at least seven members.

Answer to Descriptive Questions

1. Company limited by guarantee: Section 2(21) of the Companies Act, 2013 defines it as the company
having the liability of its members limited by the memorandum to such amount as the members may
respectively undertake by the memorandum to contribute to the assets of the company in the event of
its being wound up. Thus, the liability of the member of a guarantee company is limited upto a stipulated
sum mentioned in the memorandum. Members cannot be called upon to contribute beyond that stipulated
sum.
Similarities and dis-similarities between the Guarantee Company and the Company having share
capital:
The common features between a ‘guarantee company’ and ‘share company’ are legal personality and
limited liability. In the latter case, the member’s liability is limited by the amount remaining unpaid on the
share, which each member holds. Both of them have to state in their memorandum that the members’
liability is limited.
However, the point of distinction between these two types of companies is that in the former case the
members may be called upon to discharge their liability only after commencement of the winding up and
only subject to certain conditions; but in the latter case, they may be called upon to do so at any time,
either during the company’s life-time or during its winding up.

© The Institute of Chartered Accountants of India

37 THE COMPANIES ACT, 2013 5.37

2. Yes, a non-profit organization be registered as a company under the Companies Act, 2013 by following
the provisions of section 8 of the Companies Act, 2013. Section 8 of the Companies Act, 2013 deals with
the formation of companies which are formed to
• promote the charitable objects of commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment etc.
Such company intends to apply its profit in
• promoting its objects and
• prohibiting the payment of any dividend to its members.
The Central Government has the power to issue license for registering a section 8 company.
(i) Section 8 allows the Central Government to register such person or association of persons as
a company with limited liability without the addition of words ‘Limited’ or ‘Private limited’ to its
name, by issuing licence on such conditions as it deems fit.
(ii) The registrar shall on application register such person or association of persons as a company
under this section.
(iii) On registration the company shall enjoy same privileges and obligations as of a limited
company.
3. Doctrine of ultra vires: The meaning of the term ultra vires is simply “beyond (their) powers”. The legal
phrase “ultra vires” is applicable only to acts done in excess of the legal powers of the doers. This
presupposes that the powers are in their nature limited. To an ordinary citizen, the law permits whatever
does the law not expressly forbid.
It is a fundamental rule of Company Law that the objects of a company as stated in its memorandum can
be departed from only to the extent permitted by the Act - thus far and no further [Ashbury Railway
Company Ltd. vs. Riche]. In consequence, any act done or a contract made by the company which
travels beyond the powers not only of the directors but also of the company is wholly void and inoperative
in law and is therefore not binding on the company. On this account, a company can be restrained from
employing its fund for purposes other than those sanctioned by the memorandum. Likewise, it can be
restrained from carrying on a trade different from the one it is authorised to carry on.
The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires
transaction, nor can it sue on it. Since the memorandum is a “public document”, it is open to public
inspection. Therefore, when one deals with a company one is deemed to know about the powers of the
company. If in spite of this you enter into a transaction which is ultra vires the company, you cannot
enforce it against the company. For example, if you have supplied goods or performed service on such
a contract or lent money, you cannot obtain payment or recover the money lent. But if the money
advanced to the company has not been expended, the lender may stop the company from parting with
it by means of an injunction; this is because the company does not become the owner of the money,
which is ultra vires the company. As the lender remains the owner, he can take back the property in
specie. If the ultra vires loan has been utilised in meeting lawful debt of the company then the lender
steps into the shoes of the debtor paid off and consequently he would be entitled to recover his loan to
that extent from the company.
An act which is ultra vires the company being void, cannot be ratified by the shareholders of the
company. Sometimes, act which is ultra vires can be regularised by ratifying it subsequently. For
instance, if the act is ultra vires the power of the directors, the shareholders can ratify it; if it is ultra vires

© The Institute of Chartered Accountants of India

5.38 BUSINESS LAWS

the articles of the company, the company can alter the articles; if the act is within the power of the
company but is done irregularly, shareholder can validate it.
4. Doctrine of Indoor Management (the Companies Act, 2013): According to the “doctrine of indoor
management” the outsiders, dealing with the company though are supposed to have satisfied themselves
regarding the competence of the company to enter into the proposed contracts are also entitled to
assume that as far as the internal compliance to procedures and regulations by the company is
concerned, everything has been done properly. They are bound to examine the registered documents
of the company and ensure that the proposed dealing is not inconsistent therewith, but they are not
bound to do more. They are fully entitled to presume regularity and compliance by the company with the
internal procedures as required by the Memorandum and the Articles. This doctrine is a limitation of the
doctrine of “constructive notice” and popularly known as the rule laid down in the celebrated case of
Royal British Bank v. Turquand. Thus, the doctrine of indoor management aims to protect outsiders
against the company.
The above mentioned doctrine of Indoor Management or Turquand Rule has limitations of its own. That
is to say, it is inapplicable to the following cases, namely:
(a) Actual or constructive knowledge of irregularity: The rule does not protect any person when
the person dealing with the company has notice, whether actual or constructive, of the
irregularity.
In Howard vs. Patent Ivory Manufacturing Co. where the directors could not defend the issue
of debentures to themselves because they should have known that the extent to which they
were lending money to the company required the assent of the general meeting which they had
not obtained.
Likewise, in Morris v Kansseen, a director could not defend an allotment of shares to him as
he participated in the meeting, which made the allotment. His appointment as a director also
fell through because none of the directors appointed him was validly in office.
(b) Suspicion of Irregularity: The doctrine in no way, rewards those who behave negligently.
Where the person dealing with the company is put upon an inquiry, for example, where the
transaction is unusual or not in the ordinary course of business, it is the duty of the outsider to
make the necessary enquiry.
The protection of the “Turquand Rule” is also not available where the circumstances surrounding
the contract are suspicious and therefore invite inquiry. Suspicion should arise, for example,
from the fact that an officer is purporting to act in matter, which is apparently outside the scope
of his authority. Where, for example, as in the case of Anand Bihari Lal vs. Dinshaw & Co.
the plaintiff accepted a transfer of a company’s property from its accountant, the transfer was
held void. The plaintiff could not have supposed, in absence of a power of attorney that the
accountant had authority to effect transfer of the company’s property.
Similarly, in the case of Haughton & Co. v. Nothard, Lowe & Wills Ltd. where a person holding
directorship in two companies agreed to apply the money of one company in payment of the
debt to other, the court said that it was something so unusual “that the plaintiff were put upon
inquiry to ascertain whether the persons making the contract had any authority in fact to make
it.” Any other rule would “place limited companies without any sufficient reasons for so doing,
at the mercy of any servant or agent who should purport to contract on their behalf.”
(c) Forgery: The doctrine of indoor management applies only to irregularities which might
otherwise affect a transaction but it cannot apply to forgery which must be regarded as nullity.

© The Institute of Chartered Accountants of India

39 THE COMPANIES ACT, 2013 5.39

Forgery may in circumstances exclude the ‘Turquand Rule’. The only clear illustration is found
in the Ruben v Great Fingall Consolidated. In this case the plaintiff was the transferee of a
share certificate issued under the seal of the defendant’s company. The company’s secretary,
who had affixed the seal of the company and forged the signature of the two directors, issued
the certificate.
The plaintiff contended that whether the signature were genuine or forged was apart of the
internal management, and therefore, the company should be estopped from denying
genuineness of the document. But it was held, that the rule has never been extended to cover
such a complete forgery.
5. The House of Lords in Salomon Vs Salomon & Co. Ltd. laid down that a company is a person distinct
and separate from its members, and therefore, has an independent separate legal existence from its
members who have constituted the company. But under certain circumstances the separate entity of the
company may be ignored by the courts. When that happens, the courts ignore the corporate entity of the
company and look behind the corporate façade and hold the persons in control of the management of
its affairs liable for the acts of the company. Where a company is incorporated and formed by certain
persons only for the purpose of evading taxes, the courts have discretion to disregard the corporate
entity and tax the income in the hands of the appropriate assesse.
In Dinshaw Maneckjee Petit case it was held that the company was not a genuine company at all but
merely the assessee himself disguised that the legal entity of a limited company. The assessee earned
huge income by way of dividends and interest. So, he opened some companies and purchased their
shares in exchange of his income by way of dividend and interest. This income was transferred back to
assessee by way of loan. The court decided that the private companies were a sham and the corporate
veil was lifted to decide the real owner of the income.
In the instant case, the four private limited companies were formed by A, the assesse, purely and simply
as a means of avoiding tax and the companies were nothing more than the façade of the assesse himself.
Therefore, the whole idea of Mr. A was simply to split his income into four parts with a view to evade tax.
No other business was done by the company.
Hence, A cannot be regarded as separate from the private limited companies he formed.
6. Doctrine of Indoor Management
According to this doctrine, persons dealing with the company need not inquire whether internal
proceedings relating to the contract are followed correctly, once they are satisfied that the transaction is
in accordance with the memorandum and articles of association.
Stakeholders need not enquire whether the necessary meeting was convened and held properly or
whether necessary resolution was passed properly. They are entitled to take it for granted that the
company had gone through all these proceedings in a regular manner.
The doctrine helps protect external members from the company and states that the people are entitled
to presume that internal proceedings are as per documents submitted with the Registrar of Companies.
Thus,
1. What happens internal to a company is not a matter of public knowledge. An outsider can only
presume the intentions of a company, but do not know the information he/she is not privy to.
2. If not for the doctrine, the company could escape creditors by denying the authority of officials
to act on its behalf.

© The Institute of Chartered Accountants of India

5.40 BUSINESS LAWS

In the given question, Easy Finance Ltd. being external to the company, need not enquire whether the
necessary resolution was passed properly. Even if the company claim that no resolution authorizing the
loan was passed, the company is bound to pay the loan to Easy Finance Ltd.
7. (A) Yes, it is mandatory for Navita to withdraw her nomination in the said OPC as she is leaving
India permanently as only a natural person who is an Indian citizen and resident in India shall
be a nominee in OPC.
(B) Yes, Navita can continue her nomination in the said OPC, if she maintained the status of
Resident of India after her marriage by staying in India for a period of not less than 120 days
during the immediately preceding financial year.
8. (a) A company being an artificial person cannot own property and cannot sue or be sued
Incorrect: A company is an artificial person as it is created by a process other than natural
birth. It is legal or judicial as it is created by law. It is a person since it is clothed with all the
rights of an individual.
Further, the company being a separate legal entity can own property, have banking account, raise
loans, incur liabilities and enter into contracts. Even members can contract with company,
acquire right against it or incur liability to it. It can sue and be sued in its own name. It can do
everything which any natural person can do except be sent to jail, take an oath, marry or practice
a learned profession. Hence, it is a legal person in its own sense.
(b) A private limited company must have a minimum of two members, while a public limited
company must have at least seven members.
Correct: Section 3 of the Companies Act, 2013 deals with the basic requirement with respect
to the constitution of the company. In the case of a public company, any 7 or more persons can
form a company for any lawful purpose by subscribing their names to memorandum and
complying with the requirements of this Act in respect of registration. In exactly the same way,
2 or more persons can form a private company.

© The Institute of Chartered Accountants of India