COMPANY LAW

1. PRE INCORPORATION CONTRACTS

Pre incorporation contracts or preliminary contracts are made by promoters of
the company on behalf of the company before its incorporation for acquiring
some property or rights for the company. Pre incorporation contract is binding
on a company or promoters after incorporation when it is according to the
object of the company and it is accepted after incorporation. Pre incorporation
contracts are those contracts that are necessary to run a business or
incorporation. When promoters make pre-incorporation contracts, the company
is just an artificial entity which means at that time, the company does not exist.
So basically, it cannot be executed at the time of incorporation. It will only be
executed after the incorporation is formed

SIGNIFICANCE OF PRE- INCORPORATION CONTRACTS

 the incorporation of a company gives various advantages to a person in a

corporate structure as it helps individual owners or shareholders to protect
themselves from financial liabilities as, after incorporation, it is the company
that goes into debt.

Internal arrangements
Before the incorporation of the concerned company through this agreement, we
can decide about the roles, functions, and liabilities of each and every
incorporator such as who will be directors, financial head, legal head, etc.

Business agreements 

When we incorporate any company, then it is obvious that the company goes
and deals with various other firms and companies on a regular basis. So, a pre-
incorporation contract will protect your company’s operations before its
incorporation as this contract may specify that this company is of limited liability
or not before its actual issuance of incorporation details. 

Enforceability of pre-incorporation contracts

According to the Indian Contract Act, 1872, pre-incorporation contracts are not
valid as for the formation of any contract there should be two parties and in the
case of a pre-incorporation contract, the company is not incorporated at the
time of agreement. Hence, no legal entity is there in the contract on whose
behalf the contract is going to be made.

Therefore, enforcement of pre-incorporation contracts in India comes from

the Specific Relief Act 1963. Section 15(h) of the Specific Relief Act, 1963 says
that when promoters of any company form a contract for the purpose of the
company before its incorporation, it is said that the company has accepted the
agreement and warranted it, and also communicated this to other parties. This
section means that if promoters of the company on behalf of it then it is said
that the company has accepted the agreement and will incur all the liabilities of
the contract and it was also assumed that promoters have communicated the
same to other parties. Hence, this section basically gives the concept of a pre-
incorporation contract

Kelner v. Baxter 
In this case, the promoters of a hotel company entered into a pre-incorporation
contract for the purchase of wine. The court held that as the company was not
incorporated at the time of the contract that’s why it can not relieve them from
the responsibility and hence were personally promoters were liable to
compensate the other party.

OPPRESSION AND MISMANAGEMENT :- The terms oppression and

mismanagement are not defined under the Companies Act, 2013. These terms are to be
interpreted by the court depending upon the facts of each case. Mismanagement refers
to practices of managing the company incompetently and dishonestly. Violation of
Memorandum of Association, Articles of Association, or other statutory provisions would
amount to mismanagement.

Chapter XVI of the Companies Act, 2013 deals with the prevention of  oppression and
mismanagement. The majority rule is normally followed in the company and thereby,
courts do not interfere to protect minority rights. However, prevention of  oppression and
mismanagement is an exception to the rule. 

PREVENTION OF OPPRESSION AND MISMANAGEMENT :- Landmark case foos v.

Harbottle :- court for the first time enumerated upon the aspect of rule of majority. Then
the same was rebutted in the case of daniels v. daniels and on the ground of fraud
on minority.

OPPRESSION – not defined in the company’s act. Analysis of Lord cooper in elder v. elder
and Watson ltd. “oppression is a misdemeanor committed by majority shareholders who
under the color of their majority power, wrongfully inflict upon the minority shareholders
an harm or injury.,

SECTION 421
When can an application be made:

First, if the affairs of the company have been conducted in a manner prejudicial to public
interest or in a manner prejudicial to the interests of the company.

Secondly, if there is a material change in the management and control of the company by
an alteration in the board of directors, membership or share capital, or in any other
manner, and the change is likely to cause the affairs of the company to be conducted in a
manner prejudicial to the affairs of the company or to its members or any class of
members.

SECTION 242 Power of TrIBUNAL

The first power granted upon it by the legislation is to pass an order. Such order
may be passed if it is of the opinion that the affairs of the company have been
or are being conducted in a prejudicial manner.

 Restriction on the transfer/allotment of the shares

 Regarding the management of the company which is a crucial part of a
company, a tribunal may terminate or modify agreements made between
company and management or agreement between the company and any
other person.  
 The tribunal in case of management of the company may even remove
the Managing Director, Manager, and Director, the tribunal may recover
undue gains made by such official and also appoint another MD, manager,
and director. 
 Lastly, the tribunal has certain other powers such as regulation of the
conduct of the affairs of the company, setting aside the transfers of any
property of the company and the tribunal may even impose costs

Rajanmundary

Discussion of oppression and mismanagement is a part of the aspect of the lifting of the
corporate veil.

SECTION 244, WHO CAN APPLY

1. Company having share capital 2. Company not having share capital

Who can file an application against Oppression and Mismanagement?

The share capital of the member complaining, may be calculated based upon
share capital’s number or its value. When it comes to number, it should be 100
or 1/10 of the total members and when it comes to the value, it must be the
members holding 1/10th of the share capital value.  In companies not having a
share capital, 1/5th of the total members may apply.

EXAMPLES OF OPPRESSION

1. Not calling general meeting

2. Non-maintenance of statutory records
3. Depriving a member of the right to dividend
4. Transfer of shares
5. Allotment of shares

EXAMPLES OF MISMANAGEMENT

1. Board of directors is not legal

2. Gross neglect of interest
3. Diversion of funds of the company
4. Advance of loans without execution of a document

CORPORATE CRIMINAL LIABILITY

Generally, the question which is asked with respect to corporate liability (liability of
corporates in case of a crime) is that a corporate being an artificial person is capable of
committing a crime and whether a corporation is criminally liable for the said criminal
act.  Traditionally, it was held that corporations cannot do a crime as the main test of a
criminal activities lies in the intent. However, the concept of corporate criminal
liability under the Companies Act has been recognized.
Corporate criminal liability in India as a concept has gained importance in preceding
years especially in the spheres of social standing such as consumer protection,
environmental law, occupational health, and safety norms. The concept of corporate
liability is closely concerned with the corporate governance policy of an organization as
if a corporate follows good governance structure then the possibility of crime negates
and the question of corporate criminal liability does not arise.
Over the times even the Indian judiciary has also pointed out that a corporation can
also be a part of a criminal conspiracy and can be held liable criminally. This for the first
time was said in the by the Supreme Court in the case of Iridium India Telecom Limited
vs. Motorola Incorporated & Ors. Thus, it can be said that corporate criminal
liability has been recognized as one of the corporate liability in India under the
Companies Act as well as under criminal laws.

Corporate Criminal Liability Under Companies Act, 2013

Companies Act, 2013 which has replaced the Companies Act, 1956 has increased the
corporate liability of the directors. The Act has also increased the monetary penalties
and imprisonment. Not only corporate criminal liability under Companies Act, 2013 is
recognized but the act also recognizes civil liabilities.

Doctrines established in Corporate Criminal Liability:

Doctrine of Vicarious liability: In Vicarious liability, the accused is blamed for the offence
of another. This doctrine is based on the principle of Respondeat Superior which means
let the master answer. This doctrine is applicable in criminal as well wherein corporate may
be held liable in the case of Ranger vs. The great western railway company [1859] 4 De
G & J 74, company is held vicariously liable for the acts committed by its employee if it is
done in the course of its employment. For vicarious liability, the act and intent of the
employee must be imputed to the company and the employee should act within the course
of employment.

Doctrine of Identification: It requires that corporations should take responsibility for the
persons having decision making authority for the policy of the corporation. The doctrine
focuses on the fact that the intention and action of the company are the results of the
employees of the company. The underlying principle of this doctrine is the detection of the
guilty mind.

Doctrine of Collective Blindness: Under the doctrine of Collective Blindness, courts have
held that corporations will be held liable even if single individual was not at fault and
considered sum total knowledge of all employees in order to make a corporation liable.

Doctrine of Willful Blindness: Under such doctrine if any illegal or criminal act is
committed and the corporate agent does not take action or measures to prevent
happening of such activities then doctrine of willful blindness is applicable.

Doctrine of Attribution: Under the doctrine of Attribution, as in case of sentencing or

imprisonment in event of act or omission leading to violation of criminal law, the mens rea
i.e. the guilty mind is attributed towards the directing mind and will of the corporations.

Doctrine of Alter Ego THE owners and persons who manage the company are considered
as the Alter Ego of the company. The directors and other persons who manage the affairs
of the company can be held liable for the acts committed by or on the behalf of the
company under this doctrine since the corporation has no mind, body or soul so the
people are the directing mind and will.

Establishing Corporate Criminal Liability in India

To establish corporate criminal liability in India following requirements should be
fulfilled :
  Criminal act has to be  in the scope of employment : the employee who has
committed the criminal act it is necessary that such action has to be committed
in the scope of his employment. It is said that an act when performed under the
scope of employment the company becomes the principal of the person
committing the act and thus by virtue of agent-principal relationship the
corporate criminal liability can be invoked.
 The benefit to corporation:  the next requirement to establish the corporate
criminal liability in India is that the criminal act of the employee must have given
some benefit to the organization. It is just that the illegal or unlawful act of the
employee is not contrary to the organization.
LEGAL POSITION

In the case of Standard Chartered Bank vs. Directorate of Enforcement, AIR 2005

SC 2622, it was held that the company is liable to be prosecuted and punished for
criminal offences. The Supreme Court rejected the notion that the company could avoid
criminal prosecution in cases where a custodial sentence is mandatory. As the company
cannot be sentenced to imprisonment, the court cannot impose that punishment, but
fine are prescribed as punishment the court can impose the punishment of fine which
could be enforces against the company

Conclusion:

It is a well settled law principle in criminal law jurisprudence regarding criminal liability on
the corporations. A corporation may commit a crime and held liable for criminal offence.