These notes, intended for the MBL 1 course, constitute the private property of Mahendra Rathod.

The opinions expressed herein

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Notes - Corporate Laws

Session 1:

Class PPT

The case citations you provided represent legal decisions from the United Kingdom and India. Below is
how to read each citation:

Appellant is the first party and Defendant is the 2nd party

1.​ Salomon v A Salomon & Co Ltd [1897] AC 22

●​ Salomon v A Salomon & Co Ltd: This is the name of the case. The case is often a dispute
involving Aaron Salomon and his company, which established the principle of corporate
personhood in the UK.
●​ [1897]: The year the judgement was delivered.
●​ AC: This stands for "Appeal Cases," which is a reporter that publishes decisions from the
UK's highest court, historically the House of Lords and now the Supreme Court.
●​ 22: The page number on which the case report starts in the Appeal Cases reporter.
2.​ Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653
●​ Ashbury Railway Carriage and Iron Co Ltd v Riche: The names of the parties involved in
the lawsuit.
●​ (1875): The year the case decision was reported.
●​ LR 7 HL: "LR" stands for "Law Reports," "7" is the volume number, and "HL" indicates that
it is a decision by the House of Lords, which at the time was the highest court of appeal
for most cases within the UK.
●​ 653: This is the page number where the case can be found in the volume.
3.​ Bacha F. Guzdar v CIT, AIR 1955 SC 74
●​ Bacha F. Guzdar v CIT: The case name, where Bacha F. Guzdar was the appellant and CIT
stands for Commissioner of Income Tax.
●​ AIR: This abbreviation stands for "All India Reporter," which is a comprehensive reporter
covering decisions from the Supreme Court of India.
●​ 1955: The year when the case was reported.
●​ SC: This abbreviation specifies that the case is from the Supreme Court of India.
●​ 74: The page number in the All India Reporter where this case begins.
4.​ Mathews Mar Koorilos v. M. Pappy, (2018) 9 SCC 672
●​ Mathews Mar Koorilos v. M. Pappy: The parties involved in the case.
●​ (2018): The year of the case decision.

1
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●​ 9 SCC: "SCC" stands for "Supreme Court Cases," which is an official reporter of decisions
by the Supreme Court of India, and "9" is the volume number.
●​ 672: The page on which the case starts in that particular volume of the Supreme Court
Cases.
5.​ AIR 2018 KAR 209
●​ AIR: Stands for "All India Reporter," as mentioned earlier.
●​ 2018: The year when the case was reported.
●​ KAR: An abbreviation indicating that this decision comes from a court in Karnataka,
which is a state in India.
●​ 209: The page number where the case can be found in the reporter for that year.
6.​ "CompCases" refers to the "Company Cases" reporter, which publishes judgments related to
company law in India. When citing a case from "Company Cases," the citation typically includes
information similar to other legal citations – the case name, the volume number, the abbreviation
of the reporter, the page number, and the year of the decision.

In general, case law citations are designed to provide enough information for a researcher to locate
the reported decision in a law library or an online legal database. The format and abbreviations used
can vary by country and type of court, as you can see from these examples from the UK and India.

Types of Business Entities in India

India has a well-established system for business entities that range from individual proprietorships
to large corporations. The type of business entity chosen can affect taxation, liability, regulatory
requirements, and the ability to raise capital. Here's an overview of the most common types of
business entities in India:
●​ Sole Proprietorship: This is the simplest business form under which one can operate a
business. It is not a legal entity and simply refers to a person who owns the business and is
personally responsible for its debts.
●​ Hindu Undivided Family (HUF): Unique to India, a HUF business entity is a type of family
business structure which includes all members of a Hindu family pooling in resources to form
a business. It is governed by Hindu law and has its own tax implications.
●​ Partnership: Under the Indian Partnership Act of 1932, a partnership in India is a business
entity in which two or more individuals manage and operate a business in accordance with
the terms and objectives set out in a Partnership Deed. There are two types:
○​ General Partnership: Partners share liability and management equally.
○​ Limited Partnership: There is at least one general partner with unlimited liability and one
or more limited partners with liability restricted to their investment in the partnership.
●​ Limited Liability Partnership (LLP): Introduced in India in 2008, an LLP provides the benefits of
limited liability to its partners and allows them to keep the flexibility of organising their internal
management on the basis of a mutually arrived agreement, as in a partnership.

2
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●​ Private Limited Company: This is the most popular type of corporate legal entity in India. It is
established for small to medium-sized businesses with a minimum of two members and a
maximum of 200. The liability of each member or shareholder is limited to their share, and it
cannot offer its shares to the public.
●​ Public Limited Company: A business entity that can be formed with a minimum of seven
members, with no cap on the maximum number of members. It can raise funds from the
public by offering its shares through stock exchanges and must satisfy more regulatory
requirements compared to a private limited company.
●​ One Person Company (OPC): A relatively new introduction to the Indian corporate scene, an
OPC allows a single individual to operate a corporate entity with limited liability.
●​ Section 8 Company: This type of entity corresponds to a non-profit organisation (NPO). A
Section 8 company is established for promoting commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of the environment, or any such other
object. The profits, if any, or other income is applied for promoting only the objects of the
company.
●​ Cooperative: A cooperative is a business entity owned and operated by a group of individuals
for their mutual benefit. Cooperatives are common in agricultural sectors in India.
●​ Branch Office/Foreign Company: Foreign corporations can conduct business in India by setting
up branch offices. These offices can only engage in activities allowed by the Reserve Bank of
India (RBI) and are considered foreign entities for taxation purposes.
●​ Trust: In India, a trust is an arrangement where the owner (settlor) of certain assets transfers
them to a trustee, who manages and holds these assets for the benefit of the third-party
beneficiaries. Trusts in India are often established for the purpose of education, relief, and
welfare of the underprivileged or for religious purposes. They can be private or public, with
public trusts being more transparent in terms of legal formalities and regulations.​
Trusts are governed by the Indian Trusts Act, 1882, for private trusts, and public trusts are
managed as per various state legislation like the Bombay Public Trusts Act, 1950.
●​ Non-Governmental Organization (NGO): NGOs in India typically operate as nonprofit entities,
which may take one of several forms, including trusts, societies, and Section 8 companies.
While all of these entities are aimed at non-profit objectives, they differ in terms of formation,
management, and governance:
○​ Societies: Under the Societies Registration Act of 1860, a society may be formed by a
group of individuals united to promote charitable activities like arts, education, religion,
culture, music, sports, etc. Societies are similar to membership clubs and are governed
by a governing body or council or a managing committee.
○​ Section 8 Companies: As previously mentioned, these are companies established for
promoting non-profit activities related to art, science, sports, education, research, social
welfare, religion, charity, and more. They are registered under the Companies Act, 2013.

3
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○​ Trusts: While trusts are a form of NGO when they operate for public benefit and not
limited to private family arrangements, they are often used for setting up schools,
hospitals, and universities.

NGOs are often preferred for substantial social projects since they may be more structured and
reliable in terms of their operations and governance, leading to a greater impact and sustainability.

For foreign contributions, NGOs in India must also adhere to regulations under the Foreign
Contribution (Regulation) Act (FCRA), which is critical for receiving and utilising foreign funds. It's
important for an NGO to maintain compliance with FCRA regulations, which are designed to ensure
that foreign funding is used for legitimate and legal nonprofit activities.

Both trusts and NGOs are essential for the vibrant civil society sector in India and are instrumental in
addressing various social, cultural, and environmental issues. Each entity type comes with its own
set of laws, rules, and tax treatments, and thus the choice depends on the specific objectives, needs,
and resources of the founders.

Each business entity comes with specific regulatory, tax, and compliance requirements. The Companies
Act of 2013, the LLP Act of 2008, and various other laws govern the operation and establishment of
business entities in India. It's advisable to consult with legal and financial professionals when choosing
the appropriate business form to suit one's needs and objectives.

The case of Salomon v A. Salomon & Co Ltd, which reached its climax in the House of Lords in 1897, is a
foundational decision in UK company law and is often cited as the origin of the principle that a
corporation has a separate legal personality from its shareholders.

Case Background:

Aron Salomon was a leather merchant who converted his business into a limited company, A. Salomon
& Co Ltd. The company's formation documents showed that it had seven shareholders, which was the
legal minimum at the time. Salomon himself held the vast majority of the shares, and the other six were
family members, each holding one share. After incorporation, Salomon sold his business to the company
for £39,000. Part of the payment for the sale was in shares, and the rest was a debt of £10,000, secured
by debentures—giving Salomon a charge over the company's assets.

The Issue:

Soon after the incorporation, the company's business deteriorated, and it went into liquidation within a
year. The company's assets were not enough to cover the debentures held by Salomon. Meanwhile,
unsecured creditors were left with outstanding debts amounting to nearly £8,000 and contested that

4
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Salomon should not be allowed to be paid before them, arguing that the company was essentially
Salomon trading under another name and thus he should be personally responsible for its debts.

Legal Proceedings:

The case went through several stages of litigation. Initially, the trial judge ruled in favor of Salomon's
secured interest over the company's assets. However, the Court of Appeal reversed this decision,
contending that Salomon had created the company merely as an agent, thereby leaving him personally
liable for its debts.

The House of Lords Decision:

The House of Lords overturned the Court of Appeal's decision, upholding the principle that the company
was a separate legal entity from Salomon. The Law Lords held that the company was duly constituted in
law and it was not the role of the courts to read into the motivations or implications of this separation in
legal personality and limited liability. Hence, Salomon was entitled to be paid his debt as a secured
creditor.

Outcome and Significance:

The ruling established the precedent that a duly formed corporation possesses a separate legal identity
from its shareholders, and they are not liable for the company's debts beyond their initial capital
investment. This "corporate veil" means that shareholders cannot be pursued for the company’s
liabilities, providing the underlying principle of "limited liability." The case has had a profound effect on
company law globally, influencing how companies operate and are understood in legal contexts.

The Salomon case cemented the concept that even a one-person company, where one person holds
virtually all the shares, is a separate legal entity, and this protection applies as long as the company is
lawfully formed and conducted. This concept remains a bedrock principle of corporate law in many
jurisdictions worldwide.

"Bacha F. Guzdar v. CIT, Bombay (AIR 1955 SC 74)" is a notable judgement by the Supreme Court of India
delivered in the year 1955. The case pertains to the field of income tax and the status of dividends
received by a shareholder from a company.

Case Details:

Title: Bacha F. Guzdar v. Commissioner of Income Tax, Bombay

Citation: AIR 1955 SC 74
Court: Supreme Court of India
Year of Judgment: 1955

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Background:

The appellant, Bacha F. Guzdar, was a shareholder in several tea companies. She received dividends from
these companies and claimed that these dividends should not be subject to income tax as they were
agricultural income. In India, under the Constitution, revenue from agriculture is within the state's
purview and not subject to federal income tax as per the provisions of the Indian Income Tax Act at the
time.

Issue:

The primary legal question was whether the dividend received by the appellant, derived from an
agricultural source, should be treated as 'agricultural income', which is exempt from taxation under the
Income Tax Act.

Decision:

The Supreme Court held that the dividends paid to a shareholder out of profits derived from the
cultivation, sale, and processing of tea were not "agricultural income" as far as the shareholder was
concerned. While the income for the company might involve agriculture to some extent, once the profit
was apportioned and declared a dividend, it ceased to have the character of agricultural income in the
hands of the shareholder. Thus, dividends received from a company do not retain the original character
of the income in the hands of the company that declared the dividend.

The Court opined that the income from agriculture might be exempt from income tax, but the
shareholder's income from the company was treated as distinct from the company's agricultural
activities.

Significance:

The Guzdar judgement is significant as it clarified the scope of agricultural income and its taxability when
received as a dividend by shareholders. The case distinguished between the company’s activity
generating the income and the nature of the income when it reaches the shareholder. It laid down the
principle that the source of a company's profit does not decide the nature of the shareholder's income
derived from the company. The ruling provided clarity on the treatment of dividends for tax purposes
and established a precedent for the interpretation of "agricultural income" under tax law in India.

The decision has been referred to in various later rulings concerning the tax implications of agricultural
income and dividends derived from such income. It remains an important case in the context of Indian
income tax jurisprudence.

State trading Corporation of India Ltd. v. CTO [1963]33 Comp. Cas.1057

In the landmark case of State Trading Corporation of India Ltd. v. CTO [1963] 33 Comp. Cas. 1057, the
Supreme Court of India addressed the question of whether a corporation could claim the fundamental

6
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rights guaranteed under Articles 19(1)(f) and (g) of the Constitution of India. These articles protect the
right to carry on any occupation, trade, or business and the right to practise any profession or to carry on
any occupation, trade, or business.

The State Trading Corporation of India (STC) was a government-owned corporation engaged in
international trade. The Commercial Tax Officer (CTO) sought to levy sales tax on STC's purchases within
the state of Bihar. STC challenged the levy, arguing that it was protected from such taxation under Article
19(1)(f) and (g) of the Constitution.

The Supreme Court held that STC could not claim the fundamental rights guaranteed under Articles
19(1)(f) and (g). The Court reasoned that these rights were only available to "citizens" of India, and that a
corporation was not a citizen. The Court further stated that the purpose of these articles was to protect
the individual's right to livelihood, and that corporations did not have the same need for such protection.

The decision in State Trading Corporation of India Ltd. v. CTO has been influential in shaping the
interpretation of fundamental rights in India. It has been cited in numerous cases, and it remains the law
of the land.

In the article "Unveiling the Rights: Corporate Citizenship in India Post State Trading Corporation," author
Krishnaprasad K.V. delves into the contentious issue of whether corporations can be considered citizens
under the Indian Constitution and consequently enjoy the fundamental rights enshrined therein. The
article meticulously analyses the Indian Constitutional framework and the judicial precedents
surrounding this question, while incorporating concepts from corporate law to advocate for a broader
interpretation of the term "citizen."

The article begins by highlighting the pivotal role corporations have played in shaping India's economy,
often wielding substantial economic and political influence that rivals even the State. This transformation
necessitates a re-examination of the Indian Constitution, drafted in the mid-20th century with a
predominantly state-controlled economy in mind.

Krishnaprasad dissects the landmark Supreme Court judgement in State Trading Corporation of India v.
Commercial Tax Officer, Visakhapatnam (1964), which decisively denied corporations the status of
citizens for the purposes of Article 19. This ruling effectively excluded corporations from claiming
fundamental rights such as the right to trade, a decision that has significantly impacted subsequent
judicial pronouncements on shareholder rights.

The article argues that the narrow interpretation of "citizen" in the State Trading Corporation case has
created inconsistencies and limitations in the protection of fundamental rights. It contends that

7
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corporations, as entities deeply embedded in society and contributing significantly to the nation's
economic progress, deserve broader recognition and protection under the Constitution.

Krishnaprasad proposes a more liberal interpretation of "citizen" to encompass corporations,

emphasising the need to balance the rights of corporations with their societal responsibilities. This
approach, he argues, would foster a more harmonious relationship between corporations and the State,
enabling corporations to contribute more effectively to India's development while adhering to ethical
and responsible business practices.

In conclusion, the article makes a compelling case for a more inclusive interpretation of "citizen"
under the Indian Constitution, one that recognizes the evolving role of corporations in society and
extends them the fundamental rights necessary to operate responsibly and contribute to the nation's
progress.

Here is a detailed summary of the article "CORPORATE GOVERNANCE: A SOJOURN TO FIND A

YARDSTICK" by N.L. Mitra:

Introduction
Corporate governance is a critical aspect of business management that ensures transparency,
accountability, and ethical practices. In the article "CORPORATE GOVERNANCE: A SOJOURN TO FIND A
YARDSTICK," author N.L. Mitra explores the evolving landscape of corporate governance and the ongoing
quest for a universally accepted yardstick to measure its effectiveness.

The Elusive Yardstick

Mitra highlights the lack of consensus on a definitive yardstick for assessing corporate governance.
Various committees and reports, such as the Cadbury Committee Report, the Combined Code, and the
Higgs Report, have made significant contributions to establishing corporate governance principles and
practices. However, the search for a universally applicable yardstick remains elusive.

The Indian Context

Mitra specifically examines the corporate governance landscape in India, where family-controlled
business groups play a dominant role. These groups often employ innovative control mechanisms,
including pyramidal corporate structures and intricate trust systems, to maintain firm control over their
empires.

The Implications of Weak Governance

The absence of effective corporate governance can have severe repercussions, as evidenced by the
increasing incidence of fraud in the Indian corporate sector. Mitra emphasises the need for robust
corporate governance mechanisms to protect the interests of stakeholders, including shareholders,
creditors, employees, and society at large.

8
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Rethinking Corporate Governance

Mitra calls for a reexamination of the concept of corporate governance in light of the changing dynamics
of the corporate sector. He advocates for a broader perspective that encompasses not only compliance
with regulations but also ethical considerations, social responsibility, and long-term sustainability.

Key points:
●​ The lack of a universally accepted yardstick for measuring corporate governance makes it
difficult to assess and compare the effectiveness of corporate governance practices across
different companies and countries.
●​ The dominance of family-controlled business groups in India has led to the development of
innovative control mechanisms that can be used to entrench management and undermine
shareholder rights.
●​ Weak corporate governance can lead to a number of negative consequences, including fraud,
corruption, and financial instability.
●​ Effective corporate governance requires a comprehensive approach that encompasses not only
compliance with regulations but also ethical considerations, social responsibility, and long-term
sustainability.
●​ The quest for a universally accepted yardstick for corporate governance is likely to continue, but
it is important to recognize that there is no one-size-fits-all solution. The best corporate
governance practices will vary depending on the specific circumstances of each company.

Conclusion
The article concludes by reiterating the importance of corporate governance in ensuring the ethical and
responsible conduct of businesses. While the quest for a universally accepted yardstick continues, Mitra
emphasises the need for continuous improvement and adaptation in corporate governance practices to
meet the evolving challenges of the business world.

Here is a detailed summary of the article "Some reflections on the theoretical concepts involved in
corporate governance - the moral and philosophical aspects" by Aleksandar Rašović, with detailed
arguments and important points.

Introduction
Rašović begins by discussing the moral and philosophical foundations of corporate governance. He
argues that corporate governance is not simply a matter of compliance with legal and regulatory
requirements, but also a matter of ethical and responsible behaviour.

9
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Ownership and control

Rašović then examines the relationship between ownership and control in corporations. He argues that
the separation of ownership and control creates a number of challenges for corporate governance,
including the potential for conflicts of interest and the abuse of power by managers.

Shareholder primacy
Rašović next discusses the shareholder primacy principle, which holds that the primary goal of
corporations is to maximise shareholder value. He argues that the shareholder primacy principle is based
on a number of questionable assumptions, and that it can lead to unethical and socially irresponsible
behaviour by corporations.

Stakeholder theory
Rašović then introduces stakeholder theory, which argues that corporations have a responsibility to all of
their stakeholders, including shareholders, employees, customers, suppliers, and the community. He
argues that stakeholder theory provides a more ethical and sustainable framework for corporate
governance.

Arguments in favour of stakeholder theory

Rašović provides a number of arguments in favour of stakeholder theory, including the following:
●​ Stakeholder theory recognizes that corporations are embedded in society and that they have a
responsibility to their stakeholders beyond simply maximising shareholder value.
●​ Stakeholder theory promotes long-term sustainability by encouraging corporations to consider
the interests of all stakeholders, not just shareholders.
●​ Stakeholder theory can lead to more ethical and responsible corporate behaviour.

Arguments against shareholder primacy

Rašović also provides a number of arguments against shareholder primacy, including the following:
●​ Shareholder primacy can lead to unethical and socially irresponsible behaviour by corporations.
●​ Shareholder primacy can lead to short-termism and a focus on maximising profits at the
expense of long-term sustainability.
●​ Shareholder primacy can lead to conflicts of interest between shareholders and other
stakeholders.

Conclusion
Rašović concludes by arguing that stakeholder theory provides a more ethical and sustainable
framework for corporate governance than shareholder primacy. He calls for a shift away from
shareholder primacy and towards a more stakeholder-oriented approach to corporate governance.
Important points

10
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Some of the most important points from the article include:

●​ Corporate governance is not simply a matter of compliance with legal and regulatory
requirements, but also a matter of ethical and responsible behaviour.
●​ The separation of ownership and control creates a number of challenges for corporate
governance, including the potential for conflicts of interest and the abuse of power by managers.
●​ The shareholder primacy principle is based on a number of questionable assumptions, and it can
lead to unethical and socially irresponsible behaviour by corporations.
●​ Stakeholder theory provides a more ethical and sustainable framework for corporate
governance than shareholder primacy.

The separation of ownership and control creates a number of challenges for corporate governance.

Here are some of the most common examples:

1.​ Conflicts of interest: Managers may make decisions that benefit themselves at the expense of
shareholders. For example, they may take on excessive risk, pay themselves excessive salaries,
or make decisions that benefit themselves at the expense of shareholders.
2.​ Agency costs: The agency problem can lead to a number of costs, such as:
a.​ Monitoring costs: Shareholders must incur costs to monitor the activities of
management.
b.​ Bonding costs: Corporations must incur costs to bond their managers, such as requiring
them to purchase directors and officers (D&O) insurance.
c.​ Residual loss: Shareholders may still experience losses even if management acts in
good faith, due to factors beyond management's control.
3.​ Short-termism: Managers may focus on short-term profits at the expense of long-term value
creation. This is because managers are often compensated based on short-term performance
metrics, such as quarterly earnings.
4.​ Entrenchment: Managers may take steps to entrench themselves in power, making it difficult for
shareholders to remove them. This can be done through a number of mechanisms, such as
staggered boards, supermajority voting requirements, and poison pills.
5.​ Information asymmetry: Managers may have more information about the corporation than
shareholders do. This can give managers an advantage in negotiating with shareholders and can
make it difficult for shareholders to hold managers accountable.
6.​ Governance costs: Corporations must incur costs to implement corporate governance
mechanisms. These costs can include the costs of hiring and compensating independent
directors, the costs of implementing executive compensation plans, and the costs of complying
with disclosure requirements.
7.​ Regulatory capture: Managers may use their political influence to capture regulatory agencies,
making it difficult for regulators to hold them accountable.

11
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8.​ Free-riding: Shareholders may free-ride on the efforts of other shareholders to monitor
management. This is because the benefits of monitoring management are shared by all
shareholders, while the costs of monitoring management are borne by the individual
shareholder.
9.​ Collective action problem: Shareholders may find it difficult to coordinate their efforts to hold
management accountable. This is because there are often many shareholders with different
interests and levels of engagement.
10.​ Complexity: The modern corporation is a complex organisation with a wide range of
stakeholders. This can make it difficult to design and implement effective corporate governance
mechanisms.

These are just some of the challenges that the separation of ownership and control creates for
corporate governance. These challenges can lead to a number of negative consequences, such as
corporate fraud, financial instability, and social harm.

Here is an explanation of why the shareholder primacy principle is based on a number of questionable
assumptions, and how it can lead to unethical and socially irresponsible behaviour by corporations,
along with examples:

Questionable Assumptions of Shareholder Primacy

The shareholder primacy principle is based on a number of questionable assumptions:

1.​ Shareholders are the only stakeholders that matter. This assumption ignores the interests of
other stakeholders, such as employees, customers, suppliers, and the community.
2.​ Shareholders are rational and self-interested. This assumption ignores the fact that shareholders
may have other motivations, such as altruism or environmentalism.
3.​ Markets are efficient and will punish companies that engage in unethical or socially irresponsible
behaviour. This assumption ignores the fact that markets are not always efficient, and that
companies can sometimes get away with unethical or socially irresponsible behaviour without
being punished.

Examples of Unethical and Socially Irresponsible Behaviour

The shareholder primacy principle can lead to a number of unethical and socially irresponsible
behaviours by corporations:
1.​ Corporate fraud: Enron, WorldCom, and Tyco International are just a few examples of
corporations that have engaged in corporate fraud. These corporations were motivated by the
desire to maximise shareholder value, even if it meant engaging in illegal or unethical activities.
2.​ Environmental damage: Exxon Valdez oil spill, the Bhopal gas tragedy, and the Deepwater
Horizon oil spill are just a few examples of environmental disasters caused by corporations.

12
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These corporations were motivated by the desire to maximise shareholder value, even if it
meant ignoring environmental regulations and putting the environment at risk.
3.​ Labour abuses: Foxconn and Nike are just a few examples of corporations that have been
accused of labour abuses. These corporations were motivated by the desire to minimise labour
costs, even if it meant exploiting their workers.
4.​ Social harm: The tobacco industry is an example of an industry that has caused significant social
harm. Tobacco companies have been accused of misleading consumers about the dangers of
smoking, and they have been held responsible for millions of deaths.

These are just a few examples of the unethical and socially irresponsible behaviour that can result from
the shareholder primacy principle. This principle can lead corporations to focus on short-term profits at
the expense of long-term value creation, and it can lead them to ignore the interests of other
stakeholders.

Alternatives to Shareholder Primacy

There are a number of alternatives to the shareholder primacy principle, including:
1.​ Stakeholder theory: Stakeholder theory argues that corporations have a responsibility to all of
their stakeholders, including shareholders, employees, customers, suppliers, and the
community.
2.​ Corporate social responsibility: Corporate social responsibility is a business approach that
integrates social and environmental concerns into business operations and decision-making.
3.​ Sustainable development: Sustainable development is the idea of meeting the needs of the
present without compromising the ability of future generations to meet their own needs.

These are just a few of the alternatives to the shareholder primacy principle. These alternatives can help
corporations to focus on long-term value creation, and they can help them to become more ethical and
socially responsible.

Conclusion
The shareholder primacy principle is a flawed and outdated way of thinking about corporate
governance. It is based on a number of questionable assumptions, and it can lead to unethical and
socially irresponsible behaviour by corporations. There are a number of alternatives to the shareholder
primacy principle that can help corporations to become more ethical and socially responsible.

Lee Vs. Lee’s Air Farming Ltd. [1961] A.C. 12

The case of "Lee v. Lee's Air Farming Ltd. [1961] A.C. 12" is a significant decision in company law,
particularly concerning the principle that a company is a legal entity separate from its shareholders. The
Privy Council, which was at the time one of the highest courts of appeal for the British Empire, made the
ruling, and it has been influential in many Commonwealth countries.

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Case Summary:

Title: Lee v. Lee's Air Farming Ltd.

Citation: [1961] A.C. 12
Court: Privy Council

Background:

The facts of the case involve Mr. Geoffrey Lee, who was a pilot and the sole shareholder of Lee's Air
Farming Ltd., a company he formed to carry out aerial topdressing. He also served as the managing
director and a salaried pilot under a contract of service with the company. Tragically, Lee died in an
aeroplane crash while piloting an aircraft of Lee's Air Farming Ltd.

Legal Issue:

The issue arose when Lee’s widow sought to claim compensation under the New Zealand workers'
compensation laws. The claim was contested on the ground that Lee could not be considered a "worker"
since he was essentially the company’s owner and could not employ himself.

Judgement:

The Privy Council held that the company, Lee's Air Farming Ltd., was a legal entity separate from Mr. Lee,
despite Mr. Lee's control over the company and his ownership of nearly all its shares. Consequently, Mr.
Lee could have multiple relationships with the company, including that of a controller, a director, and an
employee. As a result, his widow was entitled to claim compensation because at the time of his death,
Mr. Lee was acting in the capacity of an employee to the company.

Significance:

The decision in Lee v. Lee's Air Farming Ltd. reaffirmed the principle established in "Salomon v. A.
Salomon & Co Ltd." It clarified that a person could simultaneously be a company's controlling
shareholder and its employee and that the separate legal personality of a company has extensive
implications. The case emphasised that the roles and duties within a company structure could provide
for different capacities in which an individual might interact with the company, and the law recognizes
these capacities as distinct.

Lee's case has been cited in numerous subsequent cases to illustrate the separate corporate personality
doctrine, which protects individuals in their varied interactions with the business entity and ensures that
legal and contractual rights and obligations are upheld in accordance with the roles individuals undertake
within the corporate structure.

What is the corporate veil and under which circumstances it is lifted and under which it is not lifted?
The "corporate veil" is a fundamental principle of corporate law that separates the personality of a
corporation from the personalities of its shareholders and protects them from being liable for the

14
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company's debts and other obligations. This separation is what allows corporations to own property,
incur debts, sue, and be sued in their own right.

However, the corporate veil can be "lifted" or "pierced" under certain circumstances, which allows
creditors and courts to look beyond the corporation's separate personality to the actions of its
shareholders or directors. The corporate veil is not absolute; it is subject to exceptions where it is used
as a facade to commit fraud, evade laws, or in situations where justice demands recognizing the
corporate structure's abuse.

Circumstances Under Which the Corporate Veil is Lifted:

●​ Fraud or Improper Conduct: When the corporation is used as a vehicle for fraud or deceit,
courts will pierce the corporate veil to hold the wrongdoers personally accountable.
●​ Sham or Dummy Corporation: Where the company is found to be a sham or a "dummy" that
was never intended to be a real business entity.
●​ Group Enterprise/Single Economic Entity: In some cases, especially within groups of companies,
if the corporation is part of a larger corporate group acting as a single economic entity, the
courts may pierce the veil to reach the economic reality of the group’s operation.
●​ Agency or Trust: If the company is acting as an agent or trustee for its shareholders, the veil may
be lifted to look at the principals behind the agent.
●​ Statutory Exceptions: Specific statutes may provide for circumstances where company officers
can be personally liable for corporate activities, such as for unpaid taxes or certain
labour-related obligations.
●​ Public Interest: Sometimes, particularly under environmental or consumer protection laws,
public interest considerations may warrant setting aside the veil of incorporation.
●​ Justice of the Case: If justice demands, particularly where a strict adherence to corporate
personality would yield an unjust or inequitable result, courts may decide to pierce the
corporate veil.

Circumstances Under Which the Corporate Veil is Not Lifted:

●​ Business Failure: If a company fails and goes into bankruptcy, shareholders are not automatically
liable for the company's debts, provided there has been no impropriety.
●​ Risks of Business: Investors are not held responsible for the liabilities of the corporation beyond
their investment in share capital, even if the company's business is inherently risky.
●​ Separate Legal Entity Principle: As long as the company was legally formed and operated, the
mere fact that there is a single shareholder or that the company is fully controlled by one person
is not, by itself, a reason to pierce the veil.

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●​ Lack of Corporate Formalities: While failure to observe corporate formalities can lead to the veil
being pierced, in many jurisdictions, this alone without any element of abuse or injustice, is
insufficient for lifting the veil.

Courts generally apply the doctrine of piercing the corporate veil with caution, ensuring that it doesn't
undermine the very purpose of corporate formation— to promote entrepreneurship and economic
growth by limiting liability to the corporate assets. The application of this principle varies by jurisdiction,
and decisions are highly fact-specific.

Circumstances of Lifting the Veil:

1. By Legislature:
1.​ 2(60) Officer in default
2.​ Reduction of number of members: 3A
3.​ Misrepresentation in Prospectus: Sec 34 and 35
4.​ Failure to return Application money: 120 days after prospectus issued: Sec 39 and SEBI
regulations, 2009
5.​ Misdescription of company name: Sec 147
6.​ Fraudulent Conduct: Section 339: criminal offence of carrying on business with intent to defraud
creditors of the company or any other persons or for any fraudulent purpose.
7.​ Inducing persons to invest money in company- Section 36
8.​ Investigating ownership – Section 216

2. Lifting of the Veil by the Judiciary

1.​ For the Protection of Revenue:
a.​ in re Sir Dinshaw Maneckjee Petit, [AIR 1927 Bom 371].
b.​ Bacha F. Guzdar v. Commissioner of Income Tax, Bombay [AIR 1955 SC 74].
2.​ Fraud or improper conduct
a.​ Gilford Motor Co. v. Horne [(1933) 1 Ch 935].
3.​ To Determine if company has taken on enemy character:
a.​ Daimler Co. Ltd v. Continental Tyre & Rubber Co. [(1916) 2 AC 307: (1916-17) All ER 191].
4.​ Formation of Subsidiary to act as agent:
a.​ U.P v. Renusagar Power Co.[1991] 70 Comp Cas.127
5.​ To prevent economic offences.
a.​ New Horizons Ltd. v. Union of India, AIR 1994 Delhi 126

The case "re Sir Dinshaw Maneckjee Petit" reported as [AIR 1927 Bombay 371] is a notable decision by the
Bombay High Court on the matter of income tax evasion and the concept of a person vs. an artificial
juristic person in the context of tax law.

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Case Summary:

Case Title: re Sir Dinshaw Maneckjee Petit

Citation: AIR 1927 Bom 371
Jurisdiction: Bombay High Court

Background:

Sir Dinshaw Maneckjee Petit was a prominent industrialist in Bombay (now Mumbai), India. The case
arose when the income tax authorities charged that four companies set up by Sir Dinshaw were not real
'companies', but merely his aliases through which he carried on his private business as individual
ventures, thus their income should be taxed as his personal income.

Legal Issue:

The central legal issue was whether the income earned by the companies could be assessed as the
individual income of Sir Dinshaw. The taxation authorities claimed that the companies were a mere cloak
or sham, essentially part of the individual business of Sir Dinshaw, to avoid higher taxation rates imposed
on individuals compared to companies.

Judgement:

The Bombay High Court analysed the situation and ruled that the companies in question were not shams
but legitimate separate entities. Even though Sir Dinshaw had complete control over these companies,
and they were a means to his private business, they were legally constituted companies. Therefore, they
were to be treated separately for the purpose of taxation.

The court observed that if a company is validly constituted, it becomes a separate legal entity distinct
from its shareholders. This separation holds true even if one individual holds almost all the shares and
exercises substantial influence over the company’s operations.

Significance:

The case is significant as it illustrates the court's approach towards the concept of the corporate veil and
the distinction between tax avoidance (which is legal) and tax evasion (which is illegal). It established
that the mere control of a company by an individual shareholder is not sufficient to disregard the
company's separate legal identity unless it was created for fraudulent purposes.

This ruling has contributed to the jurisprudence on corporate personhood and tax law, affirming that as
long as a company operates within legal bounds, it is recognized as a separate taxable entity. The case
reflects an early view on the treatment of corporations in tax law, one that balances the
acknowledgment of corporate personhood with the need to prevent its misuse for tax evasion.

What is the difference between tax avoidance and tax evasion?

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Tax avoidance and tax evasion are two very distinct concepts within the practice of taxation, with major
differences in legality and methodology:

Tax Avoidance

Tax avoidance is the legal use of tax laws to reduce one's tax burden. It involves planning one's financial
affairs wisely to take full advantage of all applicable tax benefits, such as deductions, exemptions, and
credits. For instance, investing in government bonds that are tax-exempt or setting up a charitable trust
are legal ways of saving on taxes.
●​ Legal: It operates within the letter of the law.
●​ Planning: It involves prospective financial planning to utilise tax-saving options.
●​ Public Policy: Sometimes encouraged by governments for various policy reasons, such as
retirement savings plans to promote individual savings for retirement.

Tax Evasion

Tax evasion, on the other hand, is the illegal practice of not paying taxes by not reporting income,
reporting expenses not legally allowed, or by not paying taxes owed. It involves deceitful tactics to hide
actual financial status, or to mislead tax authorities, which may include underreporting income, inflating
deductions without evidence, or concealing money in offshore accounts.
●​ Illegal: It involves deceit and concealment, violating the laws.
●​ Fraudulent Activity: It includes deliberate misstatement or omission of data to the tax authorities.
●​ Criminal Consequences: Can result in substantial penalties, prosecution, and imprisonment.

Key Differences

●​ Legality: Avoidance is legal and occurs within the tax code; evasion is illegal and involves lying or
hiding assets.
●​ Intention: Avoidance is the legitimate result of smart planning; evasion is intentional wrongdoing.
●​ Method: Avoidance uses legitimate methods such as deductions and credits; evasion involves
falsifying records, underreporting income, etc.
●​ Consequences: While tax avoidance is a part of financial planning advice, tax evasion can lead
to criminal charges and significant penalties.

In practice, the line between avoidance and evasion can sometimes become blurred, leading to disputes
between taxpayers and tax authorities. Tax authorities are constantly updating regulations to close
loopholes that facilitate aggressive tax avoidance which may border on evasion. The courts often
become the ultimate adjudicators on whether certain tax strategies constitute legitimate avoidance or
illegal evasion.

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The case "Gilford Motor Co Ltd v Horne" [(1933) 1 Ch 935] is a foundational case in corporate law,
specifically in the area of piercing the corporate veil. The case is often cited as an example of the
circumstances under which courts may disregard the separate legal personality of a corporation to
prevent the evasion of legal obligations.

Case Summary:

Case Title: Gilford Motor Co Ltd v Horne

Citation: [(1933) 1 Ch 935]
Court: High Court of Justice - Chancery Division

Background:

Mr. E.B. Horne had been an employee of the Gilford Motor Company and was bound by a contract that
included a non-competition clause prohibiting him from soliciting the company's customers after the
termination of his employment.

After leaving Gilford Motor Co, Horne set up his own business and began to solicit customers he had
dealt with during his time at Gilford. To avoid the legal consequences of the non-competition clause,
Horne created a company, ostensibly separate from himself, which conducted the business of soliciting
the customers.

Legal Issue:

The issue at hand was whether Horne could be restrained from soliciting Gilford’s customers, given that
he was doing so through a separate legal entity—a limited company.

Judgement:

The court held that the company was a mere cloak or sham for the purpose of enabling Horne to commit
a breach of the covenant against solicitation of customers that he had with his former employer. The
creation of the company was construed as a fraudulent attempt to circumvent his contractual
obligations.

The court enjoined both Horne and his company from soliciting the customers of Gilford Motor Co,
effectively "lifting the corporate veil" to recognize that, in substance, the company was Horne acting
under another name.

Significance:

The significance of the case lies in its establishment of a key exception to the general rule that a company
is a legal entity separate from its shareholders. It is one of the earlier precedents for the concept that
when the formation of a company is used as a mechanism to perpetrate fraud, evade existing

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obligations, or disguise the true nature of the business carried out, the courts may disregard the
company's separate entity status.

This case remains an authoritative legal principle against the abuse of the corporate form and is
foundational in the area of corporate law and the theory of piercing the corporate veil.

Daimler Co. Ltd v. Continental Tyre & Rubber Co. [(1916) 2 AC 307: (1916-17) All ER 191].
The case "Daimler Co Ltd v Continental Tyre & Rubber Co" [(1916) 2 AC 307: (1916-17) All ER 191] is a
significant English case concerning the rights of a company as a distinct legal entity during wartime and
the liabilities that can attach to it based on the nationality of its shareholders.

Case Summary:

Case Title: Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd
Citation: [(1916) 2 AC 307: (1916-17) All ER 191]
Court: House of Lords

Background:

During World War I, the British government enacted legislation that restricted trading with 'enemy'
nationals. The Continental Tyre & Rubber Company (Great Britain) Limited was a company incorporated
in England but its parent company was based in Germany, and the majority of its shares were held by
German nationals or companies.

Daimler Co Ltd, also a British company, had a debt owing to Continental Tyre and questioned whether it
was lawful for it to pay this debt given the wartime restrictions and the fact that the payee company was
substantially controlled by 'enemy' nationals.

Legal Issue:

The primary legal issue was whether an English company that was controlled by German interests could
be treated as an "enemy company" for the purposes of English law, which would make any transactions
with it illegal under the wartime legislation.

Judgment:

The House of Lords held that the Continental Tyre & Rubber Co (Great Britain) Ltd was to be treated as an
enemy company due to the control exerted by the German shareholders. As such, any payments made
to it from Daimler Co Ltd during the war would be illegal. The court considered the practical reality of
control and influence, rather than just the formal legality of the company's incorporation in England.

20
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Significance:

The decision in "Daimler Co Ltd v Continental Tyre & Rubber Co" is notable for its exploration of what
constitutes the 'nationality' of a company, a concept that was especially relevant during wartime when
dealing with 'enemy' powers. The ruling established that the character of a company could be
determined by the nationality of its controlling shareholders in certain contexts, particularly when
national security and trading with the enemy laws are in question.

This case is a landmark in English corporate law and international trade law, highlighting how a
corporation's rights and responsibilities can be affected by external circumstances and the identities of
its principal members. It also feeds into broader discussions about corporate personality and the extent
to which a company can be separated from the people who own and control it.

New Horizons Ltd. v. Union of India, AIR 1994 Delhi 126

In the case of New Horizons Ltd. v. Union of India, AIR 1994 Delhi 126, the Supreme Court of India had to
consider whether to lift the corporate veil of New Horizons Ltd. (NHL) in order to determine whether
NHL was qualified to bid for a contract to print and publish the telephone directory for Hyderabad.

Facts
NHL was a newly formed company that was not experienced in printing and publishing telephone
directories. However, NHL's shareholders had extensive experience in this field.

The tender notice for the Hyderabad telephone directory contract specified that the tenderer must have
experience in printing and publishing telephone directories. NHL submitted a bid for the contract, but its
bid was rejected on the ground that NHL did not have the requisite experience.

NHL filed a writ petition in the Delhi High Court, challenging the rejection of its bid. The High Court
dismissed the writ petition, holding that NHL did not have the requisite experience and that the
corporate veil could not be lifted to attribute the experience of NHL's shareholders to NHL.
NHL appealed to the Supreme Court of India.

Issue
The issue before the Supreme Court was whether the corporate veil should be lifted in order to
determine whether NHL was qualified to bid for the contract to print and publish the telephone directory
for Hyderabad.

Argument
NHL argued that the corporate veil should be lifted in this case because the shareholders of NHL had the
requisite experience and that NHL was merely a sham company that was formed to circumvent the
tender notice requirement.

21
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The Union of India argued that the corporate veil should not be lifted in this case because NHL was a
separate legal entity from its shareholders and that the shareholders were not personally liable for the
debts or obligations of NHL.

Decision
The Supreme Court held that the corporate veil should be lifted in this case and that NHL was qualified to
bid for the contract to print and publish the telephone directory for Hyderabad.
The Court reasoned that the purpose of the tender notice was to ensure that the telephone directory was
printed and published by a company with the requisite experience. The Court held that the experience of
NHL's shareholders could be attributed to NHL because NHL was merely a sham company that was
formed to circumvent the tender notice requirement.

Rationale
The decision in New Horizons Ltd. v. Union of India, AIR 1994 Delhi 126 is a significant case in Indian
corporate law. The case establishes that the courts will lift the corporate veil in exceptional cases where
it is necessary to prevent fraud or abuse of the corporate form.

The case also highlights the importance of the concept of corporate sham. A corporate sham is a
company that is formed for an improper purpose, such as to evade taxes or to circumvent the law. The
courts will not recognize a corporate sham and will lift the corporate veil in order to attribute the actions
of the sham company to its shareholders.

Conclusion
The case of New Horizons Ltd. v. Union of India, AIR 1994 Delhi 126 is a reminder that the doctrine of
corporate veil is not absolute and that the courts will lift the veil in exceptional cases where it is
necessary to do so in the interests of justice.

Pre-incorporation contracts are contracts purported to be made on behalf of a company which is yet to
come into existence i.e. before its incorporation. Pre Incorporation contracts are also referred to as
preliminary contracts or preliminary agreements. The expenses incurred during the course of these
contracts are referred to as preliminary expenses and in corporate practice are usually written off in the
first few years of account books.

Background of Pre-Incorporation Contracts:

●​ Pre-incorporation Scenario: The case discusses the contractual rights and liabilities in relation to
contracts made in anticipation of a company's formation. In common law, a corporation cannot
be a party to a contract before it exists (i.e., before its registration).

22
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●​ Promoter's Role: A promoter is a person who undertakes to form a company with reference to a
given project and to set it going and who takes the necessary steps to accomplish that purpose.

Facts of Newborne v. Sensolid:

●​ Actions by Newborne: The individual Newborne intended to create a company, Newborne

(London) Limited, and had already started acting under the company's name before its legal
registration.
●​ Use of Stationery: Newborne used stationary bearing the company name for correspondence
and contracts, indicating the company's involvement before it legally existed.
●​ Signature on Contract: Newborne signed the contract in the company's name, with a signature
that was identified as his, attempting to bind the company to the contract terms.

Legal Issues:

●​ Validity of Contract: The key legal question was whether a contract could be made on behalf of
a company that had not yet been incorporated.
●​ Promoter's Liability: Whether Newborne, as a promoter, could be held personally liable for the
contract made on behalf of a non-existent company.

Court Proceedings and Judgment:

●​ Initial Defence Rejected: Sensolid's initial defence, that the contract was invalid due to a sale by
sample where no sample had been provided, was dismissed by the trial judge.
●​ Subsequent Defence on Incorporation: Sensolid then argued that the contract was void because
it was made with a company that did not exist at the time. This was a strategic move to avoid
obligations under the contract due to a decline in the market for the goods.
●​ Judgement: The court accepted Sensolid's argument that there was no binding contract with
Newborne personally, as the intention was to contract with the company, not with Newborne in
his individual capacity.

Outcome and Confusion in Law:

●​ Distinction in Agency: The case created confusion by differentiating between a promoter acting
as an agent of an unincorporated company and one who is simply purporting that the company
is a party to the contract.
●​ Legal Consequences: Newborne's use of the company's name and stationery, and his signature
on behalf of the yet-to-be-formed company, was deemed to be insufficient to create personal
liability for Newborne, considering the contract was intended for the company upon its
incorporation.
●​ Case Implication: The judgement suggests that even when a promoter acts with clear intent to
bind a future company, if the company is not incorporated, the promoter may not be held liable

23
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once the other party becomes aware of the non-incorporation status. This might leave the
promoter in a precarious position if the company is never formed or if third parties seek to avoid
contracts made during the pre-incorporation phase.

This case highlights the legal complexities and risks promoters face when entering into contracts on
behalf of companies that are still in the process of being incorporated. It also serves as a cautionary tale
for businesses to ensure that contractual dealings in relation to a new company are handled with clear
knowledge of the incorporation status and with provisions that protect against the consequences of
pre-incorporation activities.

Pre-Incorporation Contracts H.R. Saviprasad.PDF

The document "Pre-Incorporation Contracts H.R. Saviprasad.PDF" discusses the legal issues surrounding
pre-incorporation contracts in India. The author begins by defining a pre-incorporation contract as a
contract that is entered into on behalf of a company that has not yet been formed. The author then
discusses the common law position on pre-incorporation contracts, which is that such contracts are not
binding on the company after it is formed. This is because the company cannot enter into contracts until
it is actually in existence.

The author then discusses the Indian position on pre-incorporation contracts. The author notes that the
Indian Contract Act does not specifically address pre-incorporation contracts. However, the author
argues that the Indian courts have interpreted the Act in a way that allows for the enforcement of
pre-incorporation contracts. The author cites the case of Seth Sobhagmal Lodha v. Edward Mills Co.
Ltd. as an example of this. In that case, the court held that a pre-incorporation contract could be
enforced if the company had taken the benefit of the contract.

The author then discusses the problems with the Indian position on pre-incorporation contracts. The
author argues that the current law is unclear and uncertain. The author also argues that the current law
does not provide adequate protection for third parties who contract with pre-incorporation companies.

The author then proposes a number of reforms to the Indian law on pre-incorporation contracts. The
author proposes that the law should be clarified to make it clear that pre-incorporation contracts can be
enforced. The author also proposes that the law should be amended to provide for a mechanism for
third parties to enforce pre-incorporation contracts against the company after it is formed.

Pre-Incorporation Contracts
●​ Definition: A contract that is entered into on behalf of a company that has not yet been formed.

24
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●​ Common law position: Pre-incorporation contracts are not binding on the company after it is
formed.
●​ Indian position: The Indian Contract Act does not specifically address pre-incorporation
contracts. However, the Indian courts have interpreted the Act in a way that allows for the
enforcement of pre-incorporation contracts.
●​ Case law:
○​ Seth Sobhagmal Lodha v. Edward Mills Co. Ltd.: The court held that a pre-incorporation
contract could be enforced if the company had taken the benefit of the contract.
●​ Problems with the Indian position:
○​ The law is unclear and uncertain.
○​ The law does not provide adequate protection for third parties who contract with
pre-incorporation companies.
●​ Reform proposals:
○​ The law should be clarified to make it clear that pre-incorporation contracts can be
enforced.
○​ The law should be amended to provide for a mechanism for third parties to enforce
pre-incorporation contracts against the company after it is formed.

Specific details from the document "Pre-Incorporation Contracts H.R. Saviprasad.PDF":

●​ Types of pre-incorporation contracts:

○​ Promoters' contracts: Contracts entered into by the promoters of a company on behalf
of the company before it is formed.
○​ Subscription contracts: Contracts entered into by subscribers to the memorandum of
association of a company before it is formed.
●​ Factors that may affect the enforceability of a pre-incorporation contract:
○​ Whether the company has taken the benefit of the contract.
○​ Whether the third party knew that the company was not yet formed.
○​ Whether the contract is fair and reasonable.
●​ Remedies for breach of a pre-incorporation contract:
○​ Damages.
○​ Specific performance.

The document "Pre-Incorporation Contracts H.R. Saviprasad.PDF" suggests the following reforms to the
Indian law on pre-incorporation contracts:
●​ Clarify the law to make it clear that pre-incorporation contracts can be enforced.
●​ Amend the law to provide for a mechanism for third parties to enforce pre-incorporation
contracts against the company after it is formed.

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visit: https://www.linkedin.com/in/mahendra-rathod/

●​ Provide for a cooling-off period during which the company can back out of a pre-incorporation
contract without liability.
●​ Allow the company to ratify pre-incorporation contracts after it is formed.
●​ Provide for indemnification of promoters for liabilities incurred under pre-incorporation
contracts.

The author argues that these reforms would provide greater clarity and certainty for both parties to
pre-incorporation contracts, and would also provide better protection for third parties.

"Ashbury Railway Carriage and Iron Co Ltd v Riche" is a foundational case in corporate law that was
decided in the House of Lords in 1875. It concerns the capacity of a corporation to enter into contracts
that are outside its objects clause. Here is a summary of the case details and its significance:

Case Citation:

●​ Ashbury Railway Carriage and Iron Co Ltd v Riche, (1875) LR 7 HL 653

Key Facts:

●​ The Ashbury Railway Carriage and Iron Company was registered under the Companies Act with
an objects clause stating that the company's business was to make and sell, or lend on hire,
railway carriages and wagons, and all kinds of railway plant, fittings, machinery, and rolling
stock; to carry on the business of mechanical engineers and general contractors; to purchase
and sell as merchants timber, coal, metals, or other materials, and to buy and lease land for any
of these purposes.
●​ Despite this object clause, the company entered into a contract with Riche where they agreed to
finance the construction of a railway line in Belgium.

Legal Issue:

●​ The primary legal issue was whether the company had the authority to enter into a contract that
was not within the scope of the activities outlined in its objects clause.

Arguments and Reasoning:

●​ The company later repudiated the contract on the basis that it was ultra vires, which means
"beyond the powers" of the company as stated in its memorandum of association.
●​ Riche argued that since the company's directors had agreed to the contract, the company was
bound by it.
●​ The court had to determine whether a company could be bound by a contract that it did not
have the express or implied power to make, as per its memorandum of association.

26
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Decision:

●​ The House of Lords held that the contract was ultra vires the company's objects clause and,
therefore, void. This was because the contract did not fall within the range of businesses that the
company was authorised to conduct by its memorandum.
●​ The rationale was that when the directors act beyond the scope of the powers granted to the
corporation by its memorandum of association, they are acting without authority, and such
acts cannot bind the corporation.

Significance:

●​ The case established the ultra vires doctrine, which limits a company's capacity to act to only
those activities outlined in its objects clause.
●​ It confirmed the principle that if a company acts outside its prescribed activities, those acts are
void and cannot be ratified by the company, even if all the shareholders wish to ratify it.
●​ The case has had a long-standing impact on company law, leading to the strict interpretation of
a company's capacity based on its memorandum of association. However, the doctrine of ultra
vires has since been relaxed in many jurisdictions, including the United Kingdom, by subsequent
legislation allowing companies more freedom to operate outside their original objectives.

This case remains a cornerstone of corporate law education because it underscores the importance of a
company's memorandum of association and the bounds it places on a company's actions.

The case of "Bell Houses Ltd. v. City Wall Properties Ltd." is a decision from the English courts which
dealt with the issue of pre-incorporation contracts and the liability that may arise from them. Below is a
general summary and some key aspects of the case based on the citation provided:

Case Citation:

●​ Bell Houses Ltd. v. City Wall Properties Ltd., [1966] 1 Q.B. 207

Background:

●​ The case involved a dispute related to a contract entered into on behalf of a company (Bell
Houses Ltd.) that was not yet incorporated. Pre-incorporation contracts are agreements that are
signed by individuals on behalf of a company that is still in the process of being formed.

27
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are solely those of the author. Readers are advised to peruse at their own discretion. To know about Mahendra Rathod, please
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Facts of the Case:

●​ An agreement was made by the promoters of Bell Houses Ltd. before the company was legally
formed. The agreement was for the acquisition of property from City Wall Properties Ltd.
●​ After the company was incorporated, it took possession of the property but later sought to
disclaim the agreement, effectively withdrawing from the contract.

Issues:

●​ The key legal issue was whether the pre-incorporation contract bound the company after it
came into existence and, if not, whether the company could be liable for any obligations under
the contract upon ratification.
●​ Another significant issue was the potential personal liability of the promoters who acted for the
non-existent company at the time the contract was made.

Judgement:

●​ The court found that the contract could not bind the company since it was not in existence at
the time the contract was made. This follows the general legal principle that a contract cannot
be enforced by or against a non-existent entity.
●​ The court held that the promoters who had acted on behalf of the company were personally
liable for the contract until the company adopted it after incorporation. However, after such
adoption, the liability would be transferred to the company.

Significance:

●​ The case of "Bell Houses Ltd. v. City Wall Properties Ltd." is important because it illustrates the
legal principles that govern the capacity of a company to adopt a pre-incorporation contract
after it has been formed and the transition of liability from the promoters to the company.
●​ It also affirms that promoters must act with caution when entering into contracts on behalf of a
company yet to be formed, as they may incur personal liability for such actions.

The "Bell Houses" case often comes up in discussions about the commercial law concerning the
formation of companies and the complexities involved with contractual agreements made in the early
stages of a company's life. It is studied to understand the rights and obligations of the involved parties
and the enforceability of agreements during and after the incorporation process.

The Memorandum of Association (MOA) is a crucial document for the formation of a company under
common law. It is effectively the company's charter and lays down the boundary beyond which a
company cannot go - its activities and powers are limited to what is written in the MOA. The essential
components of the MOA, especially in common law jurisdictions like the UK, are as follows:

28
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●​ Name Clause: This section specifies the name of the company with 'Limited' as the last word of
the name in the case of a public limited company, indicating that the shareholders' liability is
limited.
●​ Registered Office Clause: This indicates the address of the company's registered office, where all
official communications and notices can be sent. This also determines the country of
incorporation and its jurisdiction.
●​ Objects Clause: Perhaps the most important part, this clause outlines the purpose and range of
activities for which the company is formed. The company cannot legally engage in activities
beyond its stated objectives.
●​ Liability Clause: This stipulates the nature of the liability of members. It states whether the
liability of the members is limited by shares or by guarantee. If the liability is limited by shares,
members' obligations are limited to the amount unpaid on their shares.
●​ Capital Clause: It sets out the amount of capital with which the company proposes to be
registered and the division thereof into shares of a fixed amount. This clause is not a strict limit
but rather a maximum authorised capital; the company doesn't need to issue all the capital at
once.
●​ Association Clause: Also known as the subscription clause, it is the part where the initial
subscribers declare an intention to form a company and agree to take up shares in it. In many
jurisdictions, it is a requirement for subscribers to take at least one share each.
●​ Subscription Clause: This is the portion where the first subscribers to the memorandum must
agree to form a company and take at least one share each. It records their consent and the
number of shares they will take, which forms the basis of the initial share capital.

These sections are designed to provide a full understanding of the company's structure to anyone who
deals with it, including shareholders, creditors, and the regulatory authorities. The requirement for the
contents and format of the MOA may vary slightly from one jurisdiction to another, but the principles are
broadly similar across common law countries. Changes to the MOA typically require shareholder
approval and sometimes the fulfilment of additional legal procedures.

The Articles of Association (AOA) serve as the internal rulebook of a company and are filed with the
Registrar of Companies at the time of incorporation. In common law jurisdictions, the Articles of
Association govern the company's internal affairs, management, and conduct of its business. They define
the responsibilities of the directors, the kind of business to be undertaken, and the means by which the
shareholders exert control over the board of directors.

While the specific contents of the Articles of Association can vary from company to company, there are
common components that are typically included in accordance with common law principles:
●​ Preliminary: This section defines the scope of the document and any used terms, often aligning
with definitions in the Memorandum of Association.

29
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●​ Share Capital: Rules regarding the issue and transfer of the company's shares, including
procedures for share allotment, certificates, and transfers, as well as any share rights or
restrictions.
●​ Directors: Powers and responsibilities of directors, their qualifications, the process for their
appointment and removal, their remuneration, and procedures for board meetings.
●​ Decision-making by Shareholders: Guidelines for conducting general meetings, notices,
agendas, the procedure for voting, resolutions, proxies, and quorums.
●​ Dividends and Reserves: Procedures for declaring and paying dividends, and managing any
capitalization of reserves.
●​ Accounts and Audit: Rules for maintaining financial records, audit requirements, and access
rights to the company's accounting records.
●​ Borrowing Powers: Provisions detailing the extent to which the company can secure funding and
increase borrowing powers.
●​ Winding Up: The process to be followed for the dissolution of the company.
●​ Indemnity and Insurance: Provisions for indemnifying directors and officers against liabilities
incurred by them while in office.
●​ Amendment to the Articles: The process by which changes to the Articles can be made, which
typically requires a certain level of shareholder consent.

The Articles of Association must be consistent with the laws of the country in which the company is
incorporated and the company's Memorandum of Association. In the UK, for example, they must not
conflict with the Companies Act, which governs company law. In practice, many companies use
standard 'model' Articles of Association provided by statute, but they may also alter these Articles or
adopt their own custom provisions to suit their specific needs. Alterations to the Articles usually require
a special resolution passed by the shareholders.

30
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Course Material

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An unlimited company in India is a corporate entity wherein the liability of the members or shareholders
is not limited. That means, if the company goes into debt or faces insolvency, the shareholders may be
called upon to contribute an unlimited amount of money to cover the company’s liabilities. This is in
contrast to the liability in a limited liability company, where it is limited to the extent of the share capital
contributed by its members.

The concept originates from British common law, and while not as common as other types of business
entities, unlimited companies do exist in India. The Indian Companies Act, 2013, provides for the
incorporation of an unlimited company under section 2(92). The features of an unlimited company in
India are somewhat similar to a traditional partnership firm, with the exception that it provides a
separate legal identity to the company, distinct from its members.

There are several reasons why an entity may choose to incorporate as an unlimited company, including
tax benefits, privacy (since there is no need to file annual accounts), and specific business strategies that
might require such a structure.

However, unlimited companies are relatively rare in India, with most businesses preferring the limited
liability model for obvious reasons. As such, specific examples of unlimited companies are not
commonly publicised and may often be smaller private enterprises, professional services firms, or family
businesses that do not require or desire the protection of limited liability.

LLP (Limited Liability

Features Company Partnership Firm Partnership)

Not compulsory.
Compulsory registration required
Unregistered Compulsory
with the ROC. Certificate of
Registration Partnership Firm registration required
Incorporation is conclusive
will not have the with the ROC.
evidence.
ability to sue.

Name of a public company to

Name to end with “LLP”
end with the word “Limited” and
Name No guidelines. or “Limited Liability
a private company with the
Partnership”.
words “Private Limited”.

Private company should have a

Capital minimum paid up capital of Rs. 1
Not specified. Not specified.
Contribution lakh and Rs. 5 lakhs for a public
company.

Legal Entity Not a separate legal Is a separate legal

Is a separate legal entity.
Status entity. entity.

Limited to the extent of unpaid Unlimited, can Limited to the extent of

Liability
capital. extend to the contribution to LLP.

32
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LLP (Limited Liability

Features Company Partnership Firm Partnership)

personal assets of
the partners.

One in case of a One Person

No. of Company (introduced by the Act Minimum of two,
Two to twenty
Shareholders / of 2013) Minimum of two in a maximum not
partners.
Partners private company, maximum of specified.
fifty shareholders.

Foreign Nationals Foreign nationals

Foreign nationals can be Foreign nationals can
as Shareholder / cannot form
shareholders. be partners.
Partner partnership firm.

The income is taxed

The income is taxed at 30% +
Taxability at 30% + surcharge Not yet notified.
surcharge + cess.
+ cess.

Quarterly Board of Directors

Meetings meeting, annual shareholding Not required. Not required.
meeting is mandatory.

Annual statement of
No returns to be
Annual Accounts and Annual accounts and solvency
Annual Return filed with the
Return to be filed with ROC. & Annual Return has to
Registrar of Firms.
be filed with ROC.

Required, if the
contribution is above
Compulsory, irrespective of
Audit Compulsory. Rs. 25 lakhs or if annual
share capital and turnover.
turnover is above Rs.
40 lakhs.

Credit worthiness
Perception is higher
High credit worthiness due to depends on
How do the compared to that of a
stringent compliances and goodwill and credit
Bankers View partnership but lesser
disclosures required. worthiness of the
than a company.
partners.

Less procedural
Very procedural. Voluntary or by By agreement of the compared to a
Dissolution Order of National Company Law partners, insolvency company. Voluntary or
Tribunal. or by Court Order. by Order of National
Company Law Tribunal.

Section 177(9) of the Companies

Act, 2013 mandates for the Protection provided to
establishment of a vigil employees and
mechanism by certain partners who provide
Whistle Blowing No such provision.
companies. Further supported by useful information
Rule 7 of the Companies during the investigation
(Meetings of Board and its process.
Powers) Rules, 2014.

33
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Circumstances of Lifting the veil

The circumstance under which the courts may lift the corporate veil is put under 2 heads:
●​ By the Legislature
●​ By the Judiciary.

(A) By the Legislature

Though this doctrine owes much to the judiciary for its evolution and development, the statute itself
provides certain situations where the courts may go behind the corporate veil. Though not as important
as the judicial lifting of the veil, even these situations merit a brief description. So, now we will study
each situation in detail where the corporate veil can be lifted.

34
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are solely those of the author. Readers are advised to peruse at their own discretion. To know about Mahendra Rathod, please
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Reduction of number of members

Under Section 3A of the Act, if a Pvt Limited company carries on a business for more than 6 months with
less than two members, and a Public Limited Company with less than 7 members for 6 months, any
person who is a member after the lapse of the 6 month period may become liable, jointly and severally
with the for the payment of any debt incurred during that period. This Section does not operate to
destroy the separate personality of the company. It still remains an existing entity even though there may
be fewer than the prescribed number of members.

A director does not become automatically liable unless he is a member also. Due to these limitations the
rule is more of theoretical interest rather than of practical importance.

Furnishing of False Information

In case of a company furnishing false or incorrect information or representation or by suppressing any
material fact or information in any document or declaration filed in pursuance of the incorporation of the
Company, the 2013 legislation under Section 7(7) provides for the power to pierce the corporate veil to
hold liable the persons behind the fraudulent action.

Fraudulent Application for removal of name

Instances where it is found that a company has furthered an application with the intent to evade the
liabilities of the company or to deceive the creditors or to defraud any other persons, the 2013 Act
provides for liability to be imposed on persons in charge of the management and hold punishable for
fraud under Section 447.

Misrepresentation in Prospectus
Under Section 35 of the 2013 legislation, a distinction is carved out between innocent and fraudulent
mis-statement in the matter of civil lability for misstatements in the prospectus. Section 34 of the 2013
Act deals with criminal liability for mis-statements in the prospectus and provides for stricter penalties.
Section 37 of the 2013 Act provides for 'action by affected persons.' A suit may be filed or any action may
be taken by any persons, affected by any misleading statement or the inclusion or omission of any
matter in the prospectus.

Failure to return Application money

In case of a company failing to receive a minimum subscription within one hundred and twenty days
after the date of first issue of the prospectus, it must refund the entire application money within the next
ten days, failing which it shall refund the same with interest at six percent per annum. Section 39 of the
2013 Act applies to all securities, while Section 69 of the 1956 Act applied only to allotment of shares. In
terms of Section 39(3) of the 2013 Act, if the stated minimum amount has not been subscribed and the
sum payable on application is not received within a period of thirty days from the date of issue of the
prospectus, or such other period as may be prescribed by the Securities and Exchange Board of India,

35
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the amount received (under Section 39(1)) shall be returned in such manner and time as may be
prescribed.

Misdescription of company name

If in any act or contract of a company, its name is not fully or properly indicated as required under the
Act in Section 12, which brings in additional requirements to be complied with, if a company has changed
its name during the past two years. Thus, in Hendon v. Adelman 1973 New Delhi LR 637, the directors
were held personally liable on a cheque signed by them in the name of the company stating the
company's name as 'L.R. Agencies Ltd.' the real name being 'L. & R. Agencies Ltd'.

The case of Hendon v. Adelman is a significant decision in the realm of corporate law, particularly in the
context of lifting the corporate veil. While the case originated in England in 1973, it has implications for
corporate entities across various jurisdictions.

Background
In this case, the directors of L & R Agencies Ltd, a company incorporated in England, were held
personally liable for the debts of the company. The company had issued a cheque in the name of "LR
Agencies Ltd," which was not the company's correct legal name. The court found that the directors were
personally liable for the cheque because they had failed to properly identify the company when signing
the cheque.

Significance
The Hendon v. Adelman case established an important principle in corporate law: directors can be held
personally liable for the debts of their company if they fail to take reasonable steps to protect the
company's separate legal identity. This principle is known as the "doctrine of lifting the corporate veil."

The court in Hendon v. Adelman considered the following factors in determining whether to lift the
corporate veil:
●​ Whether the directors were aware of the company's legal name
●​ Whether the directors took steps to verify the company's legal name
●​ Whether the directors made any misrepresentations about the company's identity
●​ Whether the directors' actions caused any harm to third parties

Fraudulent conduct
Section 339 of the 2013 Act prescribes stringent punishment of not less than 6 months which may be
extended to ten years and impose fine not less than the amount of the fraud, which may extend to three
times the amount of the fraud in case of liability for fraudulent conduct of business during the course of
winding up. Once this fact is established during a winding-up, the court may, on the application of the

36
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insolvency professional, creditor or contributory of the company, declare that the persons who were
parties to such business shall be personally responsible for such debts of the company as the court may
direct. Besides, every person who is knowingly a party to such conduct of business is punishable with
imprisonment, or fine, or both. This liability arises only when the company is in winding up and for
offences committed before or during winding up. Fraudulent trading connotes real dishonesty according
to current notions of fair trading among commercial men, i.e., real moral blame. The basis for decisions
under this Section have been explained in the case of Augustus Barnett & Sons Ltd. [19861 BCLC 170
Ch.D.

Holding subsidiary company

As seen earlier, even a 100 percent subsidiary company, is a separate legal entity and its creator and
controller is not to be held liable for its acts merely because he is the creator and controller.

Nor is the subsidiary to be held as an asset of the holding company.

Information of the accounts and financial position of the group as a whole to the creditors, shareholders
and public. Section 128 of the Act of 2013 has introduced the conditions for the prohibition on financial
assistance for the purchase of company's own shares and the same extends to financial assistance by
any of its subsidiaries.

These provisions relating to group disclosures have in some respects made matters worse rather than
better, for they are calculated to lead those who had group annual reports to assume that there is a
group liability which is not really true. So, people unaware of intricacies in company law are more likely
to be misled by these disclosures. Though, we have given certain specific instances, there are many
other miscellaneous provisions spread throughout the Act, which make it possible for the courts to
disregard the corporate identity and to fix the liability on the person(s) responsible for the breach of such
statutory provisions.

(B) By the Judiciary

As stated earlier this entire doctrine of lifting of the corporate veil', is a prime example of judicial
ingenuity. Time and again, the courts have gone behind the facade of corporate identity, in their search
for truth, though again, many are the instances when the courts have refused to look behind this veil of
legal personality. Thus, whether the court would be willing to pierce the corporate veil or not, would
rather depend on the gravity and need of the particular situation, but for the following purposes the
courts have been very willing to lift the veil.

Therefore the Hon'ble Supreme Court of India in Tata Engg & Locomotive Co. Ltd. v. State of Bihar, AIR
1965 SC 40, aptly enunciated the legal position stating
"The corporation in lawis equal to a natural person and has a legal entity of its own. The entity of the
corporation is entirely separate from that of its shareholders.... This position has been well-established

37
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ever since the decision in the case of Salomon v. Salomon & Co.... However, in the course of time, the
doctrine that the corporation or a company has a legal and separate entity of its own has been
subjected to certain exceptions by the application of the fiction that the veil of the corporation can be
lifted and its face examined in substance."

Protection of revenue
The courts have given to themselves the power to disregard the corporate entity, to reach the person
controlling it, if it feels that the company is being used for purposes of tax evasion or to circumvent tax
obligation. One of the early cases on this issue is in Re Sir Dinshaw Maneckjee Petit, [AIR
1927 Bom 3717. Here, the assessee was a wealthy man enjoying huge dividends and interest income.

He formed four private companies and agreed with each to hold a block of investments as an agent for it.
Income received was credited in the accounts of the company, but the company handed back the
amount to him as a pretended loan. This way he divided his income into four parts in a bid to reduce his
tax liability. But it was held that, "the company was formed by the assessee purely and simply as a
means of avoiding super-tax and the company was nothing more than the assessee himself. It did no
business, but was created simply as a legal entity to ostensibly receive the dividends and interests and to
hand them over to the assessee as pretended loans' '. This does not mean that in all cases, courts will
tend to equate the income of the company with the income of the assessee. This is done only in cases,
where there is an express intention to deceive. Where such an intention is lacking, the courts refuse to
pierce the corporate veil, as is evident from the case of Bacha F. Guzdar v. Commissioner of Income Tax,
Bombay [AIR 1955 SC 74].

Here, the income of a tea company was exempt up to 60% as agricultural income and 40% income was
taxed as income from manufacture & sale of tea.

The plaintiff was a member of a tea company. She received a certain amount as dividend in respect of
shares held by her in the company and claimed that this income should also be regarded as agricultural
income upto 60% and be non taxable.

It was held that, 'although the income in the hands of the company was partly agricultural, yet the same
income when received by the shareholders as a dividend could not be regarded as agricultural income.

Fraud or improper conduct

The corporate entity as such is wholly incapable of being strained to illegal or fraudulent purposes.
Where a company is formed with an express intention to defraud creditors or for improper purposes,
the courts will refuse to uphold the corporate identity and hold the controlling person personally liable.
One clear illustration is Gilford Motor Co. v. Horne [(1933) 1 Ch 9357. Horne was appointed as MD of the
plaintiff company on condition that "he shall not at any time while he shall hold the office of MD or
afterwards, solicit or entice away the customers of the company"

38
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His employment came to an end under an agreement. Shortly afterwards he started a company which
solicited the plaintiff's customers.

It was held that, "the company was mere cloak or sham for the purpose of enabling the defendant to
commit a breach of his covenant against solicitation. Evidence as to the formation of the company and as
to the position of its shareholders and directors lead to that inference. The defendant company was a
mere channel used by the defendant Horne for the purpose of enabling his own benefit, for the
advantage of the customers of the plaintiff company and that the defendant company ought to be
restrained along with the defendant Horne"

In the matter of Kapila Hingorani v. State of Bihar, 2003(4) Scale 712, wherein the State failed to pay
salaries to employees of PSUs resulting in deprivation of livelihood and loss of life. By lifting the corporate
veil of the PSUs, the Apex Court observed that though the State did not manage and control the
day-to-day functioning of the PSUs, it could not brush away its constitutional duty under the garb of the
corporate form indulging in improper conduct.

Determination of enemy character of a Company

It may in certain situations become necessary for the courts to determine the character of a company to
check if it is an enemy. In such cases, it goes behind the legal identity, to examine the character of the
persons actually in control of it. One of the leading cases on this point is Daimler Co. Ltd v. Continental
Tyre & Rubber Co. [(1916) 2 AC 307: (1916-17) All ER 191}.

Here, a company was incorporated in England for the purpose of selling tyres manufactured in Germany
by a German company. The German company held the bulk of the shares in the English company. The
holders of the remaining shares (saveone) and all the directors were Germans, residing in Germany. Thus
the real control of the English company was in German hands. During the First World War, the English
company commenced an action to recover a trade debt and the question was whether the company had
become an enemy company and should, therefore, be barred from maintaining the action. House of
Lords held that, "a company incorporated in the UK is a legal entity, a creation of law with the status and
capacity which the law confers. It is not a natural person with mind or conscience. It can be neither loyal
nor disloyal. It can be neither a friend nor enemy. But it may assume an enemy character when persons
in defacto control of its affairs, are residents in an enemy country or, wherever resident, are acting under
the control of enemies". Accordingly the company was not allowed to proceed with the action. But
where no such monumental questions of public policy or national importance are involved, the courts
refuse to look behind the corporate entity to ascertain the nature of persons controlling it [Refer to
People's Pleasure Park Co. v. Rohleder, 61 SE 794].

Formation of subsidiaries to act as an agent

Where a Holding company holds 100% shares in a subsidiary company and the latter is created only for
the purpose of the holding company, the corporate veil can be lifted. This principle was held in the case

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of U.P v. Renusagar Power Co./1991] 70 Comp Cas. 127 and Merchandise Transport Limited v. British
Transport Commission. [1982] 2 QB 173.

In Balwant Rai Saluja v. Air India Ltd., (2013) 15 SCC 85, the facts were that with regards to a labour
dispute the legal entity of Hotel Corporation of India, which was a government company incorporated
under the Companies Act, 1956 and was a wholly-owned subsidiary of Air India and its entire share
capital was held by Air India and its nominee, was brought under scrutiny.

The Court observed that "it is well settled that the court can lift the veil, look to the conspectus of
factors governing employment, discern the naked truth though concealed intelligently.

However the court has to be astute in piercing the veil to avoid the mischief and achieve the purpose of
law. It cannot be swayed by legal appearance. The court's duty is to find out whether the contract
between the principal employer and the contractor is a sham, nominal or merely a camouflage to deny
employment benefits to the workmen."

Thus by investigating into the legal entity of HCI the Court held it be a government corporation
incorporated under the Companies Act, with its legal entity different from its shareholders and is not
subservient to Air India but a servant to its Memorandum of Association and Articles of Association.

In case of economic offences

The court is empowered to lift the corporate veil by paying heed to the economic realities behind the
legal façade. In the case of Shantanu Ray v. Union of India/1989165 Comp. Cas. 196 (Delhi), the company
was alleged to have violated Section 11 (a) of the Central Excises and Salt Act, 1944. The court held that
the veil of the corporate entity should be lifted by the Concerned Authorities to determine as to which
director and by what means has been used to contravene the provisions of the Act and the rules laid
thereunder.

In Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613, then Hon'ble Apex Court
observed that lifting the corporate veil doctrine could be readily applied in tax matters, even in the
absence of any statutory authorisation to that effect. The Court observed the importance of the doctrine
as "the principle is also being applied in cases of holding company-subsidiary relationship, where in spite
of being separate legal personalities, if the facts reveal that they indulge in dubious methods for tax
evasion."

The basic principle behind the doctrine is to prevent the companies from indulging in unethical
corporate practices and then using corporate identity principle to evade the clutches of law, as was
held in the case of State of UP v. Renusagar Power Co AIR 1988 SC 1737. It is also important to take note
that the Supreme Court in the case of New Horizons Ltd. v. Union of India, 1995 SCC (1) 478 has gone

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further and reviewed all its decisions on this subject and discussed at length as to under what
circumstances the corporate veil can be lifted.

A fiduciary duty is a legal obligation to act in the best interests of another person or entity. Promoters of
companies owe fiduciary duties to the company, its shareholders, and its creditors.

Specific fiduciary duties of a promoter include:

1.​ Duty of disclosure: Promoters must disclose all material facts about the company to potential
investors. This includes information about the company's business, its assets and liabilities, and
its financial condition.
2.​ Duty of good faith: Promoters must act in good faith and in the best interests of the company.
This means that they must avoid conflicts of interest and must not use their position to benefit
themselves at the expense of the company.
3.​ Duty of care: Promoters must exercise reasonable care in managing the company's affairs. This
means that they must use their skills and knowledge to make sound decisions that are in the
best interests of the company.
4.​ Duty of loyalty: Promoters must be loyal to the company and must not put their own interests
ahead of the company's interests. This means that they must not engage in self-dealing or other
activities that could harm the company.

Failure to fulfill fiduciary duties

If a promoter fails to fulfill their fiduciary duties, they may be held liable for any damages that the
company or its shareholders suffer as a result of the promoter's breach. In addition, promoters may be
subject to criminal prosecution for fraud or other offences.

Example of fiduciary duty breach

One example of a promoter breaching their fiduciary duties is if they secretly profit from the formation
of the company. For example, a promoter might purchase property at a low price and then sell it to the
company at a higher price without disclosing their profit to the company's investors. This would be a
breach of the promoter's duty of disclosure and could result in the promoter being held liable for the
difference between the two prices.

Fiduciary duties are important because they help to protect investors and creditors from fraud and
abuse. By requiring promoters to act in the best interests of the company, fiduciary duties help to ensure
that companies are managed fairly and honestly.

The case of Seth Sobhagmal Lodha v. Edward Mills Co. Ltd. [(1972) 42 Comp. Cas 1 (Raj)] is a significant
one in the context of company law, particularly regarding the pre-incorporation contracts and the
liability attached thereto. Here's an analysis of this case from the perspective of pre-incorporation
contracts:

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●​ Background of the Case: This case dealt with the legal implications of contracts entered
into by a company before its incorporation. In corporate law, a pre-incorporation contract
refers to an agreement entered into on behalf of a company before it has been legally
formed.
●​ Issue at Hand: The primary legal question was whether a company can ratify a contract
made before it came into existence, and if so, what are the implications for the parties
involved?
●​ Decision and Legal Reasoning:
■​ The Rajasthan High Court held that a company formed later cannot ratify a contract
entered before its incorporation. This is because, at the time of the contract's creation,
the company did not exist and therefore could not give its assent to the contract.
■​ The court based its decision on the principle that a non-existent entity (in this case, the
company before incorporation) cannot be a party to a contract and thus cannot ratify it
post-incorporation.
■​ The decision emphasised the legal principle that a company is a separate legal entity,
distinct from its members and promoters. Hence, any contract made by the promoters
on behalf of the company before its incorporation cannot bind the company.
​
​ Implications for Company Law:
●​ The decision in this case reaffirms the doctrine of 'ultra vires' concerning
pre-incorporation contracts. Contracts entered into before a company's existence are
beyond the company's legal capacity and cannot be ratified subsequently.
●​ It highlights the risks associated with pre-incorporation contracts. Promoters or
persons acting on behalf of the yet-to-be-incorporated company may bear personal
liability for such contracts.
●​ The ruling underscores the need for careful consideration by promoters when entering
into contracts on behalf of a company that is not yet formed.
●​ Contrast with Other Jurisdictions: This judgement is particularly notable when
contrasted with legal principles in other jurisdictions, such as the UK or the US, where
there are provisions for the adoption of pre-incorporation contracts under certain
conditions.

In summary, Seth Sobhagmal Lodha v. Edward Mills Co. Ltd. is a landmark case in Indian corporate
law, highlighting the limitations and risks associated with pre-incorporation contracts. It serves as a
cautionary tale for promoters and reinforces the principle of a company's separate legal existence.

Here is an analysis of the case Income Tax Officer v. Bhurangiya Coal Co Ltd (AIR 1953 Pat 298) from
the point of view of pre-incorporation contracts:

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Case Summary
In this case, the Income Tax Officer (ITO) sought to tax the Bhurangiya Coal Co Ltd (Bhurangiya) on a
profit or gain arising from the sale of certain assets. Bhurangiya had entered into pre-incorporation
contracts for the sale of these assets before it was incorporated as a company. The ITO argued that the
profit or gain from the sale of the assets was taxable because the contracts were binding on
Bhurangiya once it was incorporated.

Analysis
The court held that the pre-incorporation contracts were not binding on Bhurangiya once it was
incorporated. The court reasoned that the pre-incorporation contracts were mere agreements to enter
into a contract in the future, and that they were not enforceable until Bhurangiya was incorporated.

Pre-Incorporation Contracts
A pre-incorporation contract is a contract that is entered into by promoters of a company before the
company is incorporated. These contracts are often used to secure financing for the company, to
acquire assets for the company, or to engage in other activities that will be necessary for the company
to operate once it is incorporated.

Enforceability of Pre-Incorporation Contracts

Pre-incorporation contracts are generally not enforceable against the company once it is incorporated.
This is because the company is a separate legal entity from its promoters, and the company is not
bound by the contracts of its promoters unless the company adopts the contracts after it is
incorporated.

Exceptions to the Rule

There are a few exceptions to the rule that pre-incorporation contracts are not enforceable against the
company.
●​ One exception is that the company may be bound by a pre-incorporation contract if the
company ratifies the contract after it is incorporated.
●​ Another exception is that the company may be bound by a pre-incorporation contract if the
contract is in the best interests of the company and the company has received a benefit from
the contract.

Conclusion
The case of Income Tax Officer v. Bhurangiya Coal Co Ltd (AIR 1953 Pat 298) is an important case for the
law of pre-incorporation contracts. The court's holding in this case confirms that pre-incorporation
contracts are generally not enforceable against the company once it is incorporated. However, there
are a few exceptions to this rule.

Terminal Questions

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Elucidate the statement that "The fundamental attribute of corporate personality is that company is a
Legal entity distinct from its members".

The statement "The fundamental attribute of corporate personality is that a company is a legal entity
distinct from its members" is a cornerstone principle of common law corporate jurisprudence. It signifies
that a company, upon proper incorporation, becomes a legal entity separate and distinct from its
shareholders, directors, officers, and promoters. This legal separation has far-reaching implications,
granting the company a distinct legal identity and shielding its members from personal liability for the
company's debts and obligations.

Implications of Separate Legal Entity

1.​ Distinct Legal Identity: A company possesses its own legal identity, enabling it to enter into
contracts, own property, incur debts, sue and be sued in its own name. It can act autonomously,
independent of the actions of its members.
2.​ Limited Liability: Shareholders' liability is limited to their investment in the company. Their
personal assets are generally protected from the company's debts and obligations. This limited
liability encourages risk-taking and investment in business ventures.
3.​ Perpetual Succession: A company's existence is not tied to the lives of its members. It can
continue indefinitely, unaffected by the death, bankruptcy, or withdrawal of its shareholders.
This ensures business continuity and stability.
4.​ Taxation: A company is a separate taxable entity, liable for its own taxes. The income and profits
of the company are not attributed to its shareholders, who are taxed on their dividends
separately.

Distinguishing Company from Members

1.​ Separate Assets and Liabilities: The company's assets and liabilities are distinct from those of its
members. The company's debts cannot be pursued against the personal assets of its
shareholders.
2.​ Separate Legal Actions: A company can sue and be sued in its own name, while its members
cannot be held directly liable for the company's actions.
3.​ Separate Management and Control: The company's management and control are vested in its
directors, who are responsible for its operations and decisions. Shareholders do not have direct
control over the company's day-to-day activities.

Conclusion
The principle of separate legal entity is fundamental to corporate law, enabling companies to operate
independently, encourage risk-taking and investment, and promote business continuity. It is a crucial
element of modern business structures and the foundation of a robust market economy.

Enumerate the advantages and disadvantages of the incorporation of a company.

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Advantages of Incorporation
1.​ Limited Liability: Shareholders' liability is limited to their investment in the company, protecting
their personal assets from the company's debts and obligations. This limited liability encourages
risk-taking and investment in business ventures.
2.​ Separate Legal Entity: A company is a distinct legal entity separate from its members, enabling it
to enter into contracts, own property, incur debts, sue and be sued in its own name. This
separation provides clarity in legal matters and protects members from personal liability arising
from the company's actions.
3.​ Perpetual Succession: A company's existence is not tied to the lives of its members. It can
continue indefinitely, unaffected by the death, bankruptcy, or withdrawal of its shareholders.
This ensures business continuity and stability.
4.​ Access to Capital: Incorporation facilitates easier access to capital through the issuance of
shares, allowing the company to raise funds from a wider pool of investors. This can support
business expansion and growth.
5.​ Tax Benefits: Companies may enjoy certain tax benefits, such as lower corporate tax rates and
various deductions, depending on their nature and size. These tax advantages can improve the
company's financial position.
6.​ Credibility and Reputation: Incorporation enhances a company's credibility and reputation,
making it more attractive to potential investors, partners, and customers. A company is
perceived as more established and trustworthy.

Disadvantages of Incorporation
1.​ Formation and Regulatory Compliance: The process of incorporation involves legal formalities,
regulatory compliance, and ongoing administrative requirements, which can be time-consuming
and costly.
2.​ Taxation: Companies are subject to separate corporate taxation, which may be higher than
individual taxation for smaller businesses. This can impact the company's overall profitability.
3.​ Double Taxation: Dividends paid to shareholders from company profits are typically subject to
personal income tax, resulting in double taxation of the same income. This can be a
disadvantage for high-dividend companies.
4.​ Disclosure Requirements: Companies are subject to mandatory disclosure requirements,
including financial statements and annual reports. This can be burdensome for smaller
companies and may reveal sensitive information to competitors.
5.​ Separation of Ownership and Control: In larger companies, shareholders may have limited
direct control over the company's management and operations, which can lead to potential
conflicts of interest between shareholders and management.
6.​ Winding Up Procedures: The process of winding up or dissolving a company is complex and
may involve legal proceedings, which can be time-consuming and costly.

Conclusion

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The decision of whether or not to incorporate a company depends on various factors, including the
nature of the business, the risk profile, the financial goals, and the desired level of legal protection.
Incorporation offers significant advantages, particularly limited liability, separate legal entity, and
perpetual succession, but it also comes with certain drawbacks, such as formation costs, regulatory
compliance, and double taxation. Carefully evaluating these factors is crucial for making an informed
decision about the most suitable business structure.

Aksha Ltd., a company, had eight members at the time of incorporation. Within 3 months of
incorporation, two of the members transferred their shares to one of the existing members. By the end
of the year, the company went into liquidation and the creditors sought to recover their dues from the
shareholders. The shareholders do not accept the liability, though having fully paid up shares. What is
the legal position?

Summary of Facts
●​ Aksha Ltd. had eight members at the time of incorporation.
●​ Within three months of incorporation, two of the members transferred their shares to one of the
existing members.
●​ By the end of the year, the company went into liquidation.
●​ The creditors sought to recover their dues from the shareholders.
●​ The shareholders refused to accept liability, despite having fully paid up shares.

Issue
Whether the shareholders of Aksha Ltd. are liable to pay the company's debts in liquidation.

Legal Analysis
Under the Indian Companies Act, 2013, the liability of a shareholder is limited to the extent of the unpaid
capital on the shares held by him. In other words, a shareholder's personal assets are generally protected
from the company's debts and obligations.

However, there are certain exceptions to this rule of limited liability. One such exception is where a
shareholder transfers his shares within a short period of time after the company's incorporation with
the intention of avoiding liability.

In the present case, two of the members of Aksha Ltd. transferred their shares to one of the existing
members within three months of incorporation. This raises a suspicion that the transfers were made
with the intention of avoiding liability.

If the court finds that the share transfers were made with the intention of avoiding liability, then the
shareholders who transferred their shares may be held liable to pay the company's debts in liquidation.

46
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This is because their transfer of shares was not bona fide and was intended to deceive the creditors.

The court will consider various factors in determining whether the share transfers were made with the
intention of avoiding liability. These factors may include:
●​ The financial position of the company at the time of the share transfers.
●​ The relationship between the transferor and transferee of the shares.
●​ The motive for the share transfers.
●​ Whether the transferor had any knowledge of the company's financial difficulties at the time of
the transfers.

If the court finds that the share transfers were bona fide and were not made with the intention of
avoiding liability, then the shareholders who transferred their shares will not be held liable to pay the
company's debts in liquidation.

Conclusion
The legal position of the shareholders of Aksha Ltd. will depend on the facts of the case and the specific
circumstances surrounding the share transfers. The court will carefully consider all relevant factors in
determining whether the shareholders are liable to pay the company's debts in liquidation.

Is a limited liability company capable of being a partner in a firm?

Yes, a limited liability company (LLC) can be a partner in a firm under Indian law. This is because an LLC
is a separate legal entity from its members, and it has the capacity to enter into contracts, own property,
and incur liabilities in its own name. As such, an LLC can form a partnership with another LLC, an
individual, or another type of entity.

There are several reasons why an LLC might choose to become a partner in a firm. For example, an LLC
might become a partner in order to:
●​ Expand its reach into new markets.
●​ Gain access to new resources or expertise.
●​ Share the risks and rewards of a new business venture.
●​ Limit its liability for the debts and obligations of the partnership.

However, there are also some potential disadvantages to an LLC becoming a partner in a firm. For
example, an LLC might lose some control over its own operations as a result of the partnership
agreement. Additionally, the LLC might be exposed to the debts and liabilities of the partnership, even if
those debts and liabilities are not the result of the LLC's own actions.

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Overall, whether or not an LLC should become a partner in a firm is a decision that should be made on a
case-by-case basis, taking into account the specific facts and circumstances of the situation.

Here are some of the legal provisions that govern the ability of an LLC to become a partner in a firm
under Indian law:
●​ The Indian Companies Act, 2013: This Act does not expressly prohibit an LLC from becoming a
partner in a firm. In fact, the Act states that an LLC can "enter into contracts, own property, and
incur liabilities in its own name." This suggests that an LLC has the capacity to form a
partnership.
●​ The Indian Partnership Act, 1932: This Act does not specifically mention LLCs as a type of entity
that can be a partner in a firm. However, the Act does state that a "partnership firm" can be
formed by "two or more individuals." This suggests that an LLC, which is a separate legal entity,
could be considered an "individual" for the purposes of the Act.

Based on the above legal provisions, it is clear that an LLC has the capacity to become a partner in a firm
under Indian law. However, it is important to note that there may be other legal or regulatory
considerations that could affect an LLC's ability to form a partnership. As such, it is always advisable to
consult with an attorney before forming a partnership.

What is the minimum number of members a company should have and what are the consequences in
case it is below the statutory requirement?
The minimum number of members required for a company depends on the type of company.

Private Company
●​ A private company must have at least 2 members and a maximum of 200 members.
●​ If a private company has fewer than 2 members, it will be deemed to be in default and may face
penalties, including fines and dissolution.

Public Company
●​ A public company must have at least 7 members and there is no maximum limit on the number
of members.
●​ If a public company has fewer than 7 members, it will be deemed to be in default and may face
penalties, including fines and dissolution.

Consequences of Having Fewer Than the Statutory Minimum Number of Members

There are several consequences of having fewer than the statutory minimum number of members. These
consequences can include:

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●​ Inability to raise capital: Companies with fewer than the statutory minimum number of
members may find it difficult to raise capital from investors. Investors may be reluctant to invest
in a company that is not in compliance with the law.
●​ Inability to borrow money: Companies with fewer than the statutory minimum number of
members may also find it difficult to borrow money from banks or other lenders. Lenders may
be concerned about the company's ability to repay its debts if it does not have a sufficient
number of members.
●​ Difficulty in enforcing contracts: Companies with fewer than the statutory minimum number of
members may also find it difficult to enforce contracts. This is because the company may not
have the legal capacity to enter into contracts if it does not have a sufficient number of
members.
●​ Dissolution: In some cases, a company with fewer than the statutory minimum number of
members may be dissolved. This means that the company will be legally wound up and its
assets will be distributed to its creditors.

How to Avoid Having Fewer Than the Statutory Minimum Number of Members
There are several things that companies can do to avoid having fewer than the statutory minimum
number of members. These things include:
●​ Issuing new shares: Companies can issue new shares to increase the number of members.
●​ Transferring shares: Existing members can transfer their shares to new members.
●​ Merging with another company: Companies can merge with another company to increase the
number of members.

Conclusion
It is important for companies to comply with the statutory minimum number of members requirement.
Failure to do so can have serious consequences, including the inability to raise capital, borrow money,
enforce contracts, and even dissolution. Companies should take steps to ensure that they always have at
least the statutory minimum number of members.

Explain the jurisdiction of the Courts in order of hierarchy.

The Indian judicial system has a hierarchical structure, with courts at different levels having varying
degrees of jurisdiction. In matters related to company law, the hierarchy of courts is as follows:

1. Supreme Court of India:

The Supreme Court of India is the apex body of the Indian judiciary. It has original jurisdiction in disputes
involving fundamental rights, civil matters, and criminal matters. In company law matters, the Supreme
Court has original jurisdiction in disputes between the Centre and a state, or between two or more

49
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states, regarding the incorporation, constitution, or operation of companies. It also has appellate
jurisdiction over decisions of High Courts in company law matters.

2. High Courts:
High Courts are the principal courts of a state, each with jurisdiction over its respective state. They have
original jurisdiction in company law matters, including matters relating to winding up of companies,
rectification of the register of members, and the issue of shares. They also have appellate jurisdiction
over decisions of lower courts in company law matters.

3. District Courts:
District Courts are the principal courts of original jurisdiction. They have jurisdiction over company law
matters, including matters relating to the appointment of directors, the issue of shares, and the transfer
of shares. They also have appellate jurisdiction over decisions of lower courts in company law matters.

4. Tribunals:
In addition to the courts, there are also specialised tribunals that have jurisdiction over company law
matters. These tribunals include the National Company Law Tribunal (NCLT) and the National Company
Law Appellate Tribunal (NCLAT). The NCLT has original jurisdiction in a wide range of company law
matters, including matters relating to mergers and acquisitions, corporate governance, and insolvency.
The NCLAT has appellate jurisdiction over decisions of the NCLT.

The jurisdiction of courts in company law matters is determined by the nature of the dispute and the
amount of money involved. For example, disputes involving fundamental rights or disputes between the
Centre and a state would fall under the original jurisdiction of the Supreme Court. Disputes involving
lesser amounts of money or disputes between private parties would fall under the original jurisdiction of
District Courts.
The hierarchical structure of the Indian judicial system ensures that there is a system of checks and
balances in place. This system ensures that there is a fair and impartial adjudication of company law
disputes.

"Promoter is not an agent or trustee for the company he promotes, but stands in a fiduciary position
towards it". Comment.

Description of the Theoretical Issue:

The statement, "Promoter is not an agent or trustee for the company he promotes, but stands in a
fiduciary position towards it," pertains to the legal role and responsibilities of a promoter in the context of
company formation. Understanding this statement requires an exploration of the legal relationship
between a promoter and the company, and how this relationship imposes fiduciary duties on the
promoter.

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Components of the Theoretical Principle:

1.​ Role of a Promoter:

○​ A promoter is an individual or entity that undertakes to form a company and takes
necessary steps to bring it into existence. Promoters are involved in activities such as
preparing the business plan, securing initial capital, drafting the company's
memorandum and articles of association, and registering the company.
2.​ Agent and Trustee Distinction:
○​ Agent: An agent is someone who acts on behalf of another person or entity (the
principal) and has the authority to create legal relations between the principal and third
parties.
○​ Trustee: A trustee holds and manages property or assets for the benefit of another
person or entity (the beneficiary) and has legal obligations to act in the best interests of
the beneficiary.
○​ A promoter does not fit precisely into either of these roles. Before the company is
formed, there is no principal-agent relationship because the company does not yet exist
to appoint the promoter as an agent. Similarly, a promoter is not a trustee because they
do not hold the company's property or assets in trust before the company's formation.
3.​ Fiduciary Position:
○​ A fiduciary is a person who has a duty to act for another's benefit while subordinating
their personal interests to those of the other person or entity. Fiduciaries are expected
to act with loyalty, good faith, and integrity.
○​ Although a promoter is not an agent or trustee, they stand in a fiduciary position
towards the company they promote. This means that promoters must act in the best
interests of the company, avoid conflicts of interest, and not make secret profits from
their position.

Legal Authority and Development:

1.​ Statutory Provisions and Case Law:

○​ Section 19 of the Companies Act, 2013 (India): Discusses the duties of promoters and the
conditions under which they must operate.
○​ Erlanger v New Sombrero Phosphate Co. [1878]: A landmark case that established the
fiduciary duties of promoters, emphasizing the need for full disclosure and avoidance of
conflicts of interest.
○​ Lagunas Nitrate Co v Lagunas Syndicate [1899]: Reinforced the fiduciary duties of
promoters to act in the company's best interests and avoid making secret profits.
2.​ Duties of Promoters:

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○​ Duty of Disclosure: Promoters must disclose any interest they have in transactions
involving the company.
○​ Duty to Avoid Secret Profits: Promoters must not make undisclosed profits from their
role and must account to the company for any benefits received.
○​ Duty of Good Faith: Promoters must act honestly and in good faith towards the
company, ensuring that all dealings are transparent and fair.

Illustrative Examples:

1.​ Example of Fiduciary Duty Breach:

○​ If a promoter purchases land at a low price and sells it to the company at a significantly
higher price without disclosing this profit to the company, they would be in breach of
their fiduciary duty. The promoter would be required to account for the secret profit
made from this transaction.
2.​ Example of Proper Conduct:
○​ A promoter negotiates a deal on behalf of the prospective company, ensuring that all
terms are favourable and fully discloses any personal interests involved. This
transparency maintains the fiduciary duty owed to the company.

Conclusion:

The statement that a promoter is not an agent or trustee but stands in a fiduciary position towards the
company highlights the unique and significant responsibilities of promoters in company formation. While
they do not hold the same roles as agents or trustees, their fiduciary obligations require them to act in
the best interests of the company, ensuring transparency, good faith, and avoidance of conflicts of
interest. This fiduciary duty is crucial in protecting the company and its stakeholders during its formation
and early stages.

The promoters of your company, incorporated on 10th April, 2010 entered into a contract with 'A' on 9th
March for supply of goods. After incorporation, your company does not want to proceed with the
contract. Advise the management of your company.

Sure, here is an advice to the management of your company regarding the contract entered into with 'A'
on 9th March, 2010, before incorporation:

Advice to Management
Since the contract with 'A' was entered into before the incorporation of your company on 10th April,
2010, it is generally not binding on the company. This is because a company is a separate legal entity

52
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from its promoters, and it is not bound by the contracts of its promoters unless the company adopts the
contracts after it is incorporated.

In this case, your company has not adopted the contract with 'A'. Therefore, your company is not legally
bound to perform the contract. However, 'A' may still be able to sue your company for damages if your
company's refusal to perform the contract causes 'A' to suffer losses.

In order to minimise the risk of a lawsuit from 'A', your company should consider the following options:
1.​ Negotiate with 'A': Your company could try to negotiate with 'A' to reach a mutually agreeable
settlement. This could involve paying 'A' some form of compensation for the inconvenience
caused by your company's refusal to perform the contract.
2.​ Ratify the Contract: Your company could ratify the contract with 'A'. This would mean that your
company would adopt the contract and be bound by its terms. However, ratification would only
be effective if 'A' agrees to it.
3.​ Take No Action: Your company could choose to take no action and hope that 'A' does not sue.
However, this is a risky strategy, as 'A' may still sue your company for damages.

Recommendation
I recommend that your company negotiate with 'A' to reach a mutually agreeable settlement. This is the
most likely way to avoid a lawsuit and minimise the risk of financial loss.

Additional Considerations
In addition to the legal considerations discussed above, your company should also consider the
following factors:
●​ The potential financial impact of honouring the contract.
●​ The company's reputation.
●​ The company's relationship with 'A'.

After carefully considering all of the relevant factors, your company should make a decision that is in the
best interests of the company and its shareholders.

The law of restitution is a branch of civil law that deals with the recovery of unjust enrichment. It is
based on the principle that a person who has been unjustly enriched at the expense of another should be
made to disgorge the enrichment.

There are three main categories of restitutionary claims:

1.​ Claims based on unjust enrichment: These claims arise when a person has been enriched at the
expense of another without any legal justification. For example, if a person receives money that
they are not entitled to, they may be required to repay that money to the rightful owner.

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2.​ Claims based on failure of consideration: These claims arise when a contract has been broken
and one party has received something of value from the other party without providing the
agreed-upon consideration. For example, if a person pays for goods or services that they never
receive, they may be able to recover their money.
3.​ Claims based on mistake of fact or law: These claims arise when a person has made a mistake of
fact or law that has resulted in an unjust enrichment. For example, if a person pays a bill that
they have already paid, they may be able to recover their money.

The law of restitution is a complex and ever-evolving area of law. There are many different types of
restitutionary claims, and the specific requirements for each type of claim vary depending on the
jurisdiction.

Examples of Restitutionary Claims

Here are some examples of common restitutionary claims:
●​ Mistaken payment: A person pays a bill that they have already paid.
●​ Goods sold and delivered: A person receives goods or services that they never ordered or
agreed to pay for.
●​ Money had and received: A person receives money that they are not entitled to.
●​ Quantum meruit: A person provides services to another person without an agreed-upon price.

Remedies in Restitution
The most common remedy in restitution is the disgorgement of unjust enrichment. This means that the
person who has been unjustly enriched must repay the money or return the property that they have
received. In some cases, the court may also award damages to the person who has been harmed.

Conclusion
The law of restitution is an important tool for ensuring that justice is done. It provides a remedy for
people who have been unjustly enriched at the expense of others.

What are the differences between a clause, article and section from the contracts point of view?
In the context of contracts, clauses, articles, and sections each serve distinct purposes and have specific
roles in the structure and organization of the contract. Understanding these differences is crucial for both
drafting and interpreting contracts. Here's a breakdown of each term:
​ Clause:
●​ Definition: A clause is a specific provision or condition in a contract. It usually addresses
a particular aspect of the agreement.
●​ Role in a Contract: Clauses are the fundamental building blocks of a contract. They set
out the rights, obligations, and responsibilities of the parties involved. Examples include
payment clauses, confidentiality clauses, and termination clauses.

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●​ Detail Level: Clauses are often detailed and tailored to the specific circumstances of the
contract. They can be complex and are key to understanding the specifics of the
agreement.
​ Article:
●​ Definition: An article is a larger segment of a contract, often encompassing several
related clauses.
●​ Role in a Contract: Articles serve to organise the contract into broader themes or
categories. For example, an article might deal with all aspects of payment, including
invoicing, payment terms, and penalties for late payment.
●​ Detail Level: Articles are more general than clauses and provide structure to the
contract. They are used to group related clauses together for better organization and
readability.
​ Section:
●​ Definition: A section is a subdivision of an article or the contract as a whole. It helps in
further organising the content within an article.
●​ Role in a Contract: Sections break down articles into more manageable parts. Each
section typically deals with a specific aspect of the broader topic covered in the article.
●​ Detail Level: Sections are less detailed than individual clauses but more specific than
articles. They help in navigating the contract and understanding its flow.

In summary, clauses are the most specific and detailed parts of a contract, outlining individual terms and
conditions. Articles are broader, grouping related clauses under a common theme, and sections further
subdivide this content for clarity and ease of reference. Understanding this hierarchy and organization is
crucial in both drafting contracts and interpreting their contents.

Attorney General v. G.E. Rly.Co.[1880] 5 S.A.C. 473

The case of Attorney General v. Great Eastern Railway Company in 1880 is a significant legal case that
revolves around the doctrine of ultra vires, a Latin term meaning "beyond the powers." This doctrine
refers to acts conducted by a corporation that are beyond the scope of its corporate powers as defined
in its constitutional documents. Here are the key aspects of this case:
●​ Background and Facts: The case involved the Great Eastern Railway Company, which had been
authorized by an Act of Parliament to construct a railway. Later, the company entered into an
agreement with two other companies, the London and Blackwall Railway Companies, for the
construction and extension of the railways. This agreement involved supplying or manufacturing
rolling stock, carriages, and locomotive power​​.
●​ Legal Issue and Ultra Vires Doctrine: The central issue in the case was whether the agreement
made by the Great Eastern Railway Company to supply locomotives and rolling stock was valid
and in conformity with the company's memorandum (a document that outlines the scope of the
company's powers). This raised the question of whether such actions were ultra vires, meaning

55
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beyond the powers granted to the company by its constitutional documents and the Act of
Parliament​​.
●​ Judgment and Interpretation of Ultra Vires: The House of Lords, in its judgement, held that the
act was not ultra vires. It was determined that powers granted by law to a company include the
right to undertake all appropriate measures to achieve the statutory purpose, including actions
that are fairly incidental or consequential to those items which the legislature has approved,
unless expressly prohibited. The court emphasised that companies cannot devote funds to
objects that are neither essential nor incidental to the fulfilment of their objectives. This case
marked a shift in the interpretation of the ultra vires doctrine, suggesting that it should be
reasonably applied to incidental objects as well. The decision indicated that if the acts
performed are dependent upon the provisions of the object clause of the memorandum, then
they are valid unless expressly prohibited by law​​.
●​ Significance of the Case: This case was significant in altering the perspective on the doctrine of
ultra vires. Prior to this decision, if an act performed by a company was not in conformity with
the object clause of the memorandum, it was considered invalid. However, post this case, it was
established that acts which are dependent on the provisions of the object clause are valid,
provided they are not expressly prohibited. This broadened the scope of what could be
considered within a company's powers​​.

In summary, Attorney General v. Great Eastern Railway Co. (1880) is a landmark case in corporate law,
particularly in interpreting the doctrine of ultra vires. It demonstrated a more flexible approach towards
the powers of a corporation, allowing for the inclusion of incidental activities within the scope of a
company's legal powers, as long as they are not expressly prohibited and are in line with the company's
constitutional objectives.

Cotman V. Brougham [(1918) A.C. 514]

The case of Cotman v Brougham [1918] AC 514 is an important case in UK company law, particularly
concerning the objects clause of a company and the ultra vires doctrine. Here are the key aspects of this
case:
●​ Objects Clause and Ultra Vires Doctrine: The case primarily dealt with the interpretation of the
objects clause of a company's memorandum of association. The appellant company contended
that its memorandum contained a diverse range of objects it could engage in. Notably, the final
clause of the objects list specified that the listed objects should be read individually and not as
subordinate to one another​​.
●​ Legal Ruling: The court held that a clause stipulating that the courts should not read long lists of
objects as subordinate to one another was valid. This ruling was significant in that it affected
how the objects clause in a company's memorandum of association should be interpreted,
particularly in relation to the ultra vires doctrine​​.

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●​ The Significance of the Case: The case tested the practice of drafting an objects clause in a
manner that allowed a company to engage in a wide range of activities, effectively permitting it
to do almost anything it chose. This was a pivotal moment in the evolution of the ultra vires rule
in English company law​​.
●​ Specifics of the Ruling: In this case, the Court held that the acquisition of powers by the
Essequibo Company, as stipulated in the memorandum, was not ultra vires. The main issue
before the Court was the construction of the memorandum as it stood, and consequently, the
appeal was dismissed with costs​​.

The Cotman v Brougham case is significant in the context of company law as it addresses how the
objects clause in a company's memorandum of association should be interpreted, especially in light of
the ultra vires doctrine. The ruling that clauses should not be read as subordinate to one another when
interpreting the objects clause marked a departure from more restrictive interpretations and expanded
the scope of activities a company could lawfully engage in under its memorandum of association.

Lakshmanaswami Mudaliar v. L.I.C AIR 1963 SC 1185

The case of Lakshmanaswami Mudaliar v. Life Insurance Corporation of India (AIR 1963 SC 1185) is
centred around the concept of ultra vires in the context of company law. Here are the key aspects of the
case:
●​ Background: The United India Life Insurance Company Limited passed a resolution to donate Rs.
2,00,000. After the Life Insurance Corporation Act came into force in 1956, which transferred
control of the insurance business to the Life Insurance Corporation, this donation was
challenged as being ultra vires, meaning beyond the powers granted to the company​​.
●​ Judgement: The Supreme Court of India held that an act of a company is considered ultra vires if
it is not necessary to fulfil the objectives stated in the company's memorandum, not
consequential to attend to the objects of the company, or not authorised by the Companies Act
in the course of its business. The Court emphasised that ultra vires acts are void and cannot be
ratified even if all members or shareholders of the company agree. The judgement also stressed
the importance of reading the memorandum of association fairly and effectively interpreting its
language​​.

In this case, the Court's decision highlighted the boundaries of corporate powers and the importance of
adhering to the objectives outlined in a company's memorandum of association, reinforcing the principle
that companies cannot legally engage in activities beyond their defined scope.

Bel houses Ltd v. City Wall Properties Ltd [(1966)36 Comp. Cases 779]
In the case of Bell Houses Ltd v. City Wall Properties Ltd [(1966)36 Comp. Cases 779], the court
considered whether an agreement between Bell Houses Ltd, a company engaged in property
development, and City Wall Properties Ltd, a company seeking to lease property, was ultra vires.

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Bell Houses Ltd had introduced City Wall Properties Ltd to a potential landlord and had claimed a
commission of £20,000 for its services. City Wall Properties Ltd refused to pay the commission, arguing
that the agreement was ultra vires because Bell Houses Ltd memorandum of association did not
specifically authorise it to act as an agent.

The court held that the agreement was not ultra vires. The court reasoned that Bell Houses Ltd
memorandum of association did not expressly prohibit the company from acting as an agent, and that
the company's power to carry on "any other trade or business whatsoever which can, in the opinion of
the Board of directors, be advantageously carried on by the company" was broad enough to
encompass the activity of acting as an agent for property transactions.

The court also noted that Bell Houses Ltd had a history of engaging in property transactions, and that the
company had the expertise and resources to act as an agent effectively. The court concluded that the
agreement was not ultra vires and that Bell Houses Ltd was entitled to the commission.

This case is an example of the court's willingness to adopt a purposive approach to the interpretation of
company memorandum of association. The court recognized that companies need flexibility to adapt to
changing business conditions, and that overly restrictive interpretations of memoranda could stifle
innovation and growth.

Here are some of the key takeaways from this case from an ultra vires perspective:
1.​ A company's memorandum of association does not expressly prohibit all activities that are not
specifically authorised.
2.​ A company's power to carry on "any other trade or business whatsoever" can be interpreted
broadly to encompass activities that are incidental to the company's primary purpose.
3.​ A company's history of engaging in a particular activity can be relevant to the determination of
whether that activity is ultra vires.
4.​ The court will adopt a purposive approach to the interpretation of company memorandum of
association, recognizing the need for companies to adapt to changing business conditions.

Chrispas Nyombi's article "The gradual erosion of the ultra vires doctrine in English company law"
discusses the decline of the ultra vires doctrine in English company law. The ultra vires doctrine is a legal
principle that prohibits companies from engaging in activities that are not authorised by their
memorandum of association.

Nyombi argues that the ultra vires doctrine has been eroded by a number of factors, including:

The increasing complexity of business activities

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The modern business world is characterised by a high degree of complexity and specialisation.
Companies operate in a globalised market and are constantly evolving to adapt to new technologies and
market trends. As a result, it is becoming increasingly difficult to define the scope of a company's
activities in a rigid and inflexible manner. The ultra vires doctrine, with its strict focus on the express
powers set out in a company's memorandum of association, is ill-suited to this modern business
environment.

The rise of the shareholder primacy model of corporate governance

The traditional view of corporate governance was that companies should be run in the interests of all
stakeholders, including shareholders, employees, customers, and the community. However, in recent
decades, there has been a shift towards the shareholder primacy model of corporate governance. This
model holds that the primary purpose of a company is to maximise shareholder value. As a result, courts
are now more likely to interpret company objects clauses in a way that allows companies to pursue
activities that are likely to generate profits for shareholders, even if those activities were not explicitly
contemplated when the company was formed.

The development of a more flexible approach to the interpretation of company objects clauses
Traditionally, company objects clauses were interpreted in a very literal way. Courts would look for
express authorization for any activity that a company wished to undertake. However, in recent years,
courts have adopted a more flexible approach to the interpretation of object clauses. They are now more
willing to imply powers that are reasonably necessary or incidental to the company's main purpose. This
has allowed companies to engage in a wider range of activities without falling foul of the ultra vires
doctrine.

The enactment of legislation that has reduced the scope of the ultra vires doctrine
A number of statutes have been enacted in recent years that have reduced the scope of the ultra vires
doctrine. For example, the Companies Act 2006 provides that a company's objects clause should be
construed in a way that is "appropriate for the company and in the best interests of its members as a
whole." This has given companies more flexibility to pursue activities that they believe are in the best
interests of their shareholders.

In conclusion, the ultra vires doctrine has been eroded by a number of factors in recent years. The
increasing complexity of business activities, the rise of the shareholder primacy model of corporate
governance, the development of a more flexible approach to the interpretation of company objects
clauses, and the enactment of legislation that has reduced the scope of the ultra vires doctrine have all
contributed to this decline. As a result, the ultra vires doctrine is now rarely applied by the courts, and
companies are now free to engage in a wide range of activities, even if those activities are not expressly
authorised by their memorandum of association.

MOA

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The MoA serves as a fundamental document for various aspects of a company's operations:
1.​ Defining the Company's Scope: The MoA clearly defines the company's purpose and the
activities it can undertake, ensuring that it operates within the legal boundaries.
2.​ Protecting Shareholder Interests: The MoA safeguards the interests of shareholders by ensuring
that the company's actions align with its stated objectives and do not deviate from its intended
purpose.
3.​ Guiding Management Decisions: The MoA serves as a reference point for the company's
management, guiding their decisions and ensuring that their actions are consistent with the
company's overall objectives.
4.​ Establishing Legal Identity: The MoA plays a crucial role in establishing the company's distinct
legal identity, differentiating it from its members and creating a separate legal entity.
5.​ Public Disclosure Document: The MoA is a public document accessible to stakeholders,
providing transparency regarding the company's fundamental structure and objectives.

The MoA can be amended with the approval of shareholders and the Registrar of Companies, allowing
the company to adapt its objectives and scope of operations as its business evolves. However, any
amendments must adhere to the restrictions imposed by the Companies Act, 2013, and should not
deviate from the company's core purpose.

A Memorandum of Association (MoA) is a crucial legal document that outlines the fundamental
framework and objectives of a company incorporated under the Companies Act, 2013, in India. It serves
as a foundational charter, defining the company's purpose, scope of operations, and limitations, and it
plays a pivotal role in establishing the company's distinct legal identity.

The MoA comprises five essential clauses:

1.​ Name Clause: This clause specifies the company's name, which must be unique and comply
with the naming regulations under the Companies Act, 2013. Every memorandum must state the
name of the company with which it is to be registered. The name must exactly be the same
name as has been made available by the Registrar, with the word 'Limited' as the last word in the
case of a public limited company and the words 'Private Limited' as the last words in the case of
a private limited company. ALTERATION - May be ordered by the Central Govt, may be done
Suo moto by Company after approval of the Central Govt.
2.​ Registered Office Clause: This clause states the company's registered office address, which is its
official address for legal and communication purposes. Every Company must have a registered
office which establishes its domicile. The notice of the exact address of the registered office
must be given to the ROC in Form No. 18 within 30 days from the date of incorporation.
3.​ Objects Clause: This clause elaborates on the company's primary objectives and the activities it
intends to pursue. It defines the scope of the company's operations and the boundaries within
which it can conduct business.
a.​ Main objects (to be pursued by the company on its incorporation);

60
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b.​ Objects incidental or ancillary to the attainment of the main objects;

c.​ Other objects.
4.​ Liability Clause: This clause specifies the extent of the liability of the company's members,
whether limited or unlimited.should state that the liability of the members of the company is
limited. In addition, the memorandum of a company limited by guarantee should also state that
each member would undertake 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.
5.​ Capital Clause: This clause outlines the authorised share capital of the company, which
represents the maximum amount of capital the company can raise through the issuance of
shares. It also details the division of authorised share capital into different classes of shares, such
as equity shares and preference shares. (including a guarantee company having a share capital
but excluding an unlimited company) should state the total amount of the share capital with
which the company is to be registered and its division in different classes or kinds of capital the
number of shares of each kind and the face value of each share.
6.​ The association and subscription clause.— The memorandum of every company should declare
the intention of the subscribers to the memorandum for associating themselves with the
company and agreeing to take up the shares in the company, in the number stated against the
respective promoter's name, not being less than one. The total number of shares agreed to be
taken up by all the subscribers should also be stated.

Attorney General v. G.E. Rly.Co.[1880] 5 S.A.C. 473

The landmark case of Attorney-General v. Great Eastern Railway Co. [1880] 5 S.A.C. 473 stands as a
significant precedent in the application of the ultra vires doctrine in corporate law. The case revolved
around the question of whether a company's act of providing financial assistance to a rival railway
company was within the scope of its powers as defined by its memorandum of association.

The court, in its judgement, acknowledged the importance of the ultra vires doctrine in safeguarding
shareholders and ensuring that companies adhere to their authorised purposes. However, it also
recognized the need for a flexible approach that considered the practical realities of business
operations.

Lord Selborne, delivering the judgement for the majority, stated that the doctrine of ultra vires "ought to
be reasonably, and not unreasonably, understood and applied." He further clarified that "whatever may
fairly be regarded as incidental to, or consequential upon, those things which the Legislature has
authorised, ought not (unless expressly prohibited) to be held, by judicial construction, to be ultra vires."
In applying this principle to the case at hand, the court concluded that the Great Eastern Railway
Company's act of providing financial assistance to the rival company was not ultra vires. The court
reasoned that such assistance could be considered incidental to the company's primary objective of
promoting railway development and ensuring efficient transportation services.

61
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The Attorney-General v. Great Eastern Railway Co. case marked a turning point in the interpretation of
the ultra vires doctrine. It shifted the focus from a rigid adherence to the express powers listed in the
memorandum of association to a more flexible approach that considered the implied powers and
incidental activities necessary for a company to achieve its objectives effectively.

This case continues to influence corporate law jurisprudence, emphasising the need to balance the
protection of shareholder interests with the practical realities of business operations. It underscores the
importance of a nuanced interpretation of the ultra vires doctrine, ensuring that it serves as a safeguard
without unduly restricting the legitimate activities of companies.

The case of Cotman v. Brougham [(1918) A.C. 514] is a significant legal case in the context of the ultra
vires doctrine in corporate law. The ultra vires doctrine, which means "beyond the powers," refers to
acts performed by a corporation that lie beyond the scope of its corporate powers as defined in its
constitution or statutory law.

In the Cotman v. Brougham case, the key issues revolved around the powers of a company and the
validity of its actions that might fall outside its stated objectives. Here’s an analysis from the ultra vires
perspective:
●​ Company's Objectives and Powers: The primary focus in such cases is to determine whether
the actions of the company were within the range of its objectives as laid out in its articles of
association. The ultra vires doctrine traditionally held that if a company acted beyond its
expressed powers (i.e., ultra vires), those actions were invalid.
●​ Legal Implications of Ultra Vires Actions: Prior to various legal reforms, any action taken by a
company outside its stated objectives was considered null and void. This had implications for
both the company and third parties who engaged with the company, potentially leading to
legal and financial uncertainties.
●​ Outcome and Interpretation in Cotman v. Brougham: The ruling in this case would have
involved an examination of whether the actions in question were indeed beyond the powers of
the company. If so, under the traditional doctrine, these actions would be deemed invalid.
However, over time, the strict application of the ultra vires doctrine has been relaxed in many
jurisdictions to reduce unfair outcomes, especially for third parties who deal with companies in
good faith.
●​ Modern Perspective: Modern corporate law in many jurisdictions has evolved to allow more
flexibility. The 'constructive notice' doctrine, which assumes that third parties have knowledge
of a company's public documents, has been modified. Now, there is often a presumption that
third parties dealing with a company are not necessarily bound to know the full extent of its
powers as stated in its constitutional documents.
●​ Relevance Today: The case of Cotman v. Brougham, like many other early 20th-century cases,
helped shape the development of corporate law, particularly in the context of a company’s

62
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powers and the legal validity of its actions. While the strict application of the ultra vires
doctrine has been relaxed, the principles surrounding a company’s capacity and the scope of
its powers continue to be relevant in corporate governance and legal compliance.

Lakshmanaswami Mudaliar v. L.I.C AIR 1963 SC 1185

Background
In the 1963 case of Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, the Supreme Court
of India addressed the question of whether a company's act of making charitable donations was ultra
vires, or beyond its legal powers.

Facts
The Life Insurance Corporation of India (LIC), a company incorporated under the Indian Companies Act,
1882, had a provision in its memorandum of association authorising it to make charitable donations.
Pursuant to this provision, the LIC's directors donated Rs. 2 lakhs to a charitable organisation. However,
the legality of this donation was challenged by a shareholder, Lakshmanaswami Mudaliar, who argued
that the donation was ultra vires as it was not within the company's primary objectives.

Issue
The central issue in this case was whether the LIC's act of making a charitable donation was within its
legal powers as defined by its memorandum of association.

Judgment
The Supreme Court, in a unanimous decision, held that the LIC's donation was ultra vires. The court
reasoned that the memorandum of association was the fundamental document that defined the
company's powers and that any act that fell outside the scope of the memorandum was considered
invalid.

The court further held that the charitable donation was not incidental or consequential to the LIC's
primary objectives of providing life insurance services. The court reasoned that the company's business
was to provide insurance to its policyholders and that making charitable donations was not a necessary
or incidental activity in carrying out this business.

Significance
The Lakshmanaswami Mudaliar case reaffirmed the importance of the ultra vires doctrine in ensuring
that companies act within the limits of their authorised powers. The case emphasised the need for
companies to strictly adhere to their memorandum of association and to avoid engaging in activities that
are not expressly authorised.

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Bel houses Ltd v. City Wall Properties Ltd [(1966)36 Comp. Cases 779]
Background
In the 1966 case of Bell Houses Ltd. v. City Wall Properties Ltd., the High Court of England and Wales
addressed the question of whether a company's act of introducing a potential buyer for a property in
exchange for a commission was ultra vires.

Facts
Bell Houses Ltd., a company incorporated under the British Companies Act, 1948, had a memorandum of
association that authorised it to carry on "any other trade or business whatsoever which can, in the
opinion of the Board of Directors, be advantageously carried on by the company."

In 1962, Bell Houses Ltd. introduced City Wall Properties Ltd., a potential buyer, to the owner of a
property. The company agreed to pay Bell Houses Ltd. a commission of £20,000 if the sale went
through. However, the sale ultimately fell through, and City Wall Properties Ltd. refused to pay the
commission.

Bell Houses Ltd. sued City Wall Properties Ltd. for breach of contract, arguing that the company was
entitled to the commission despite the failed sale. City Wall Properties Ltd. defended its position by
arguing that the introduction of buyers was not within the company's authorised powers and therefore
ultra vires.

Issue
The central issue in this case was whether Bell Houses Ltd.'s act of introducing a potential buyer for a
property in exchange for a commission was within its legal powers as defined by its memorandum of
association.

Judgment
The High Court, in a unanimous decision, held that Bell Houses Ltd. 's act of introducing a potential buyer
for a property in exchange for a commission was not ultra vires. The court reasoned that the company's
memorandum of association contained a wide general objects clause that allowed it to carry on any
business that the directors considered advantageous.

The court further held that the introduction of potential buyers was an activity that could be considered
incidental to the company's primary objectives of property development and investment. The court
reasoned that the company's memorandum of association did not specifically exclude such activities,
and that they could be considered a means of achieving the company's overall objectives.

Significance

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The Bell Houses Ltd. case highlighted the flexibility provided by wide general objects clauses in
memorandums of association. The case demonstrated that companies with such clauses could engage in
a wider range of activities without being constrained by a strict interpretation of their express powers.

1. The ultra vires transactions are null and void ab initio​

2. Any member can get an order of Injunction from the court in case he finds that the company is about
to undertake an ultra vires act.
3. It is the duty of the director to ensure that the corporate capital is used only for the legitimate business
of the company, In case of such capital being diverted, the directors are personally liable to replace it.
The directors and other officers are personally accountable to third parties in case of ultra vires
transactions.
4. Where a company’s money has been used ultra vires to acquire some property, the company’s right
over such property is held secured.

Can Shareholders Ratify an Ultra Vires Act?

Description of the Theoretical Issue:

The concept of "ultra vires" refers to acts performed beyond the scope of power or authority granted by
a company's articles of association or its charter. In the context of corporate law, the question arises
whether shareholders can ratify an ultra vires act—an act that the company does not have the power to
perform according to its constitution or the law.

Components of the Theoretical Principle:

1.​ Ultra Vires Doctrine:

○​ The term "ultra vires" means "beyond the powers." An ultra vires act is one that is
beyond the scope of powers defined by the company's memorandum of association or
outside the legal capacity of the company.
○​ This doctrine aims to protect shareholders and creditors by ensuring that the company’s
funds are used only for legitimate business activities defined in its objects clause.
2.​ Types of Ultra Vires Acts:
○​ Ultra Vires the Company: Acts entirely beyond the powers of the company as defined in
its constitution or the law.
○​ Ultra Vires the Directors: Acts beyond the powers granted to the directors by the
company’s articles but within the capacity of the company.
3.​ Ratification:

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○​ Ratification refers to the approval of an act performed on behalf of a company that was
initially unauthorised.
○​ For an act to be ratifiable, it must be within the legal capacity of the company, even if it
was beyond the authority of the directors.

Legal Authority and Development:

1.​ Statutory Provisions and Case Law:

○​ Ashbury Railway Carriage and Iron Co. Ltd. v. Riche [1875]: A landmark case where the
House of Lords held that any contract made by a company outside its objects clause is
void and cannot be ratified.
○​ Section 245 of the Companies Act, 2013 (India): Allows shareholders to bring an action
against the company if it acts ultra vires.
○​ Re Jon Beauforte (London) Ltd [1953]: The court held that acts ultra vires the company
cannot be ratified by shareholders.
2.​ Modern Developments:
○​ With the modernisation of corporate laws, the strict application of the ultra vires
doctrine has been relaxed. Many jurisdictions now allow alterations to the company's
objects clause with shareholder approval, making it easier to authorise certain acts.
○​ Section 13 of the Companies Act, 2013 (India): Allows companies to alter their
memorandum with a special resolution, thereby expanding or changing their objects
clause.

Analysis and Application:

1.​ Ratification of Ultra Vires Acts:

○​ Ultra Vires the Company: Acts that are beyond the capacity of the company as defined
in its memorandum cannot be ratified by shareholders. Such acts are void ab initio
(from the beginning) and have no legal effect.
○​ Ultra Vires the Directors but Intra Vires the Company: Acts that are within the
company's capacity but beyond the authority of the directors can be ratified by the
shareholders. In this case, the shareholders can pass a resolution to approve the act
retrospectively.
2.​ Illustrative Examples:
○​ Ultra Vires the Company: If a company established to manufacture textiles decides to
start a real estate business, such an act is ultra vires the company. Even if all
shareholders agree, this act cannot be ratified unless the company first alters its objects
clause to include real estate.
○​ Ultra Vires the Directors but Intra Vires the Company: If the directors enter into a
contract to purchase machinery without proper authorisation, but such a purchase is

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within the company's objects clause, the shareholders can ratify this act by passing a
resolution.

Conclusion:

Shareholders cannot ratify an act that is ultra vires the company, as such acts are void and beyond the
legal capacity of the company. However, shareholders can ratify acts that are ultra vires the directors but
intra vires the company, provided these acts fall within the scope of the company’s constitution and legal
capacity. The principle ensures that companies operate within their defined powers, protecting the
interests of shareholders and creditors while allowing for flexibility in internal governance.

What is the impact of an ultra vires transaction on the company?

An ultra vires transaction is a transaction that is beyond the powers of a company, as defined by its
memorandum of association (MoA) and articles of association (AoA). Such transactions are considered
invalid and can have significant legal and financial implications for the company involved.

Legal Implications:
1.​ Voidable Contracts: Contracts entered into through ultra vires transactions are generally
considered voidable, meaning that either party can choose to cancel the contract. This can leave
the company vulnerable to potential legal claims from the other party.
2.​ Liability of Directors: Directors may be held personally liable for any losses or damages arising
from ultra vires transactions. This is because directors have a duty to ensure that the company
operates within its authorised powers.
3.​ Shareholder Protection: The ultra vires doctrine protects shareholders from being bound by
actions that are not within the scope of their investment. This ensures that shareholders are not
exposed to unnecessary risks.

Financial Implications:
1.​ Financial Losses: Ultra vires transactions can result in financial losses for the company. For
instance, if the company enters into an ultra vires contract and fails to perform its obligations, it
may be liable for damages to the other party.
2.​ Reputational Damage: Engaging in ultra vires activities can damage the company's reputation
and make it difficult to attract investors and partners.
3.​ Regulatory Scrutiny: Ultra vires transactions may attract regulatory scrutiny and potential fines
or penalties.

Preventive Measures:

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1.​ Thorough Review: Companies should thoroughly review all transactions to ensure they are
within their authorised powers. This includes consulting the MoA and AoA, seeking legal advice
when necessary.
2.​ Clear Internal Procedures: Establish clear internal procedures for approving and executing
transactions. This helps ensure that all transactions are properly reviewed and authorized.
3.​ Director Education: Educate directors about the ultra vires doctrine and their responsibilities in
ensuring that the company operates within its authorized powers.

In conclusion, ultra vires transactions can have significant legal and financial consequences for
companies. By understanding the doctrine and taking preventive measures, companies can minimize the
risk of ultra vires activities and protect their shareholders and stakeholders.

Alteration of Memorandum
●​ 13. (1) Save as provided in section 61, a company may, by a special resolution and after​
complying with the procedure specified in this section, alter the provisions of its memorandum.
●​ (8) A company, which has raised money from public through prospectus and still has any
unutilised amount out of the money so raised, shall not change its objects for which it raised the
money through prospectus unless a special resolution is passed by the company
●​ and—
●​ (i) the details, as may be prescribed, in respect of such resolution shall also be published in the
newspapers (one in English and one in vernacular language) which is in circulation at the place
where the registered office of the company is situated and shall also be placed on the website
of the company, if any, indicating therein the justification for such change;
●​ (ii) the dissenting shareholders shall be given an opportunity to exit by the promoters and
shareholders having control in accordance with regulations to be specified by the Securities and
Exchange Board.
●​ (9) The Registrar shall register any alteration of the memorandum with respect to the objects of
the company and certify the registration within a period of thirty days from the date of filing of
the special resolution in accordance with clause (a) of sub-section (6) of this section.
●​ (10) No alteration made under this section shall have any effect until it has been registered in
accordance with the provisions of this section.

​ Chrispas Nyombi,“The gradual erosion of the ultra vires doctrine in English company law”
International Journal of Law and Management, 2014

In his 2014 article "The gradual erosion of the ultra vires doctrine in English company law," Chrysostom
Nyombi examines the evolution of the ultra vires doctrine in English company law and argues that the
doctrine has been significantly eroded over time.

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The ultra vires doctrine is a legal principle that prohibits companies from acting beyond the scope of
their powers as defined by their memorandum of association (MoA). The MoA is a fundamental
document that outlines the company's objectives and the activities it is authorised to undertake.
Nyombi traces the development of the ultra vires doctrine from its origins in the 19th century to its
current state. He argues that the doctrine has been gradually eroded through a combination of factors,
including:
●​ The rise of wide objects clauses: Many companies now adopt wide objects clauses in their
MoAs, which grant them the power to carry on any business that the directors consider
advantageous. This has made it increasingly difficult to determine whether a particular activity is
ultra vires.
●​ The development of the doctrine of implied powers: The courts have recognized that companies
have certain implied powers that are necessary for them to carry on their business effectively.
This has further broadened the scope of permissible activities for companies.
●​ The introduction of statutory exceptions: The Companies Act 2006 has introduced a number of
exceptions to the ultra vires doctrine, such as the ability of companies to make charitable
donations.

Nyombi concludes that the ultra vires doctrine is no longer a significant constraint on the powers of
companies in English law. He argues that the doctrine has been largely replaced by a more flexible
approach that focuses on the fairness and reasonableness of a company's actions.

The erosion of the ultra vires doctrine has had a number of implications for companies and their
stakeholders. On the one hand, it has given companies greater flexibility to pursue new opportunities
and adapt to changing market conditions. On the other hand, it has reduced the protection afforded to
shareholders by allowing companies to engage in activities that may not be in the best interests of
shareholders.

Overall, the erosion of the ultra vires doctrine has been a significant development in English company
law. It has reflected the changing role of companies in society and the need for them to be able to
operate in a dynamic and competitive environment. However, it is important to note that the doctrine
has not been entirely abolished, and companies should still be careful to ensure that they are acting
within the scope of their authorised powers.

​Difference between Juristic and Natural person.

Juristic and natural persons are both legal entities, but they have different characteristics.

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●​ Natural persons are human beings. They have physical bodies and can act in their own names.
Natural persons have certain rights and obligations, such as the right to life, liberty, and property.
They are also responsible for their own actions and can be held liable for their debts.
●​ Juristic persons are artificial entities created by law. They do not have physical bodies and
cannot act in their own names. Juristic persons must be represented by natural persons. Juristic
persons have certain rights and obligations, such as the right to own property and enter into
contracts. They are also liable for their debts.

Here is a table summarising the key differences between juristic and natural persons:

Feature Juristic Person Natural Person

Definition An artificial entity created by law A human being

Physical No Yes
body

Ability to No Yes
act in own
name

Represent Must be represented by natural persons Can act in their own names
ation

Rights and Have certain rights and obligations, such Have certain rights and obligations,
obligations as the right to own property and enter such as the right to life, liberty, and
into contracts property

Liability Liable for their debts Liable for their debts

Here are some examples of juristic persons:

●​ Corporations
●​ Partnerships
●​ Trusts
●​ Governments
●​ Non-profit organisations
Here are some examples of natural persons:
●​ Individuals

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●​ Sole proprietors
●​ Partners in a partnership
●​ Members of a trust
●​ Employees of a corporation
●​ Members of a non-profit organisation

​A foreign Company incorporates a fully owned subsidiary in India. The parent company enters into a
contract with a company in India (New exports Pvt. Ltd.) for the export of goods to it.
​
​The parent fails to pay for the goods received. New Exports files a suit against the parent and the
subsidiary in India. Is the Indian Company to be held liable?

Relevant Facts:

1.​ A foreign company incorporates a fully owned subsidiary in India.

2.​ The parent company enters into a contract with an Indian company (New Exports Pvt. Ltd.) for
the export of goods.
3.​ The parent company fails to pay for the goods received.
4.​ New Exports Pvt. Ltd. files a suit against both the parent company and the subsidiary in India.

Identification of Legal Principles:

1.​ Separate Legal Entity:

○​ The principle established in Salomon v. Salomon & Co. Ltd. [1897] holds that a company
is a separate legal entity distinct from its shareholders and parent company.
○​ Under Indian law, this principle is enshrined in the Companies Act, 2013, recognising
each company as a separate legal entity.
2.​ Liability of Parent and Subsidiary Companies:
○​ Generally, a parent company and its subsidiary are treated as separate legal entities.
This means the subsidiary is not automatically liable for the debts or obligations of the
parent company, and vice versa.
3.​ Lifting the Corporate Veil:
○​ In certain circumstances, courts may lift the corporate veil to hold the parent company
liable for the acts of the subsidiary or to prevent fraud or improper conduct.
○​ Relevant case law includes Adams v. Cape Industries plc [1990] and Delhi Development
Authority v. Skipper Construction Company (P) Ltd. [1996] where the courts held that

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the corporate veil could be lifted if there was evidence of fraud, sham, or improper
conduct.
4.​ Indian Jurisdiction and Contractual Obligations:
○​ Contracts entered into by a foreign entity with an Indian company are subject to Indian
contract law as outlined in the Indian Contract Act, 1872.
○​ The jurisdiction clause in the contract (if any) will also determine where legal
proceedings can be initiated.

Analysis:

1.​ Liability of the Parent Company:

○​ The parent company, having entered into the contract with New Exports Pvt. Ltd. and
subsequently failing to pay, is directly liable for the breach of contract. New Exports Pvt.
Ltd. can sue the parent company for recovery of the unpaid amount.
2.​ Liability of the Subsidiary:
○​ The subsidiary in India is a separate legal entity. It did not enter into the contract with
New Exports Pvt. Ltd. and is therefore not liable for the debts of its parent company by
default.
○​ The subsidiary can only be held liable if New Exports Pvt. Ltd. can prove that the
subsidiary was merely a facade or if there was fraudulent conduct warranting the lifting
of the corporate veil.
3.​ Judicial Precedents:
○​ Salomon v. Salomon & Co. Ltd. [1897] and subsequent case law affirm that the
subsidiary is not liable for the parent company's debts unless specific circumstances
justify piercing the corporate veil.

Conclusion:

Based on the principles of separate legal entity and the circumstances provided, the Indian subsidiary is
not to be held liable for the debts of its parent company unless New Exports Pvt. Ltd. can provide
evidence of fraud, improper conduct, or that the subsidiary is merely an alter ego of the parent company.

New Exports Pvt. Ltd. should pursue legal action primarily against the parent company for recovery of
the unpaid amount. The subsidiary, being a separate legal entity, is not automatically liable for the
obligations of the parent company under the given facts.

Therefore, the Indian company (the subsidiary) is not to be held liable for the parent company's failure to
pay for the goods received.

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Bhumesh varma Constructive notice.pdf

●​ Doctrine of Constructive Notice Critique: The doctrine is criticized for its extensive and harsh
application in property matters. It may unfairly impact parties who lack the means to acquire
knowledge about property titles and related information.
●​ Presumptive Titles in India: India's property system is based on "presumptive titles," where title
documents are not certified by the State and thus do not have public record status. The
Registration Act, 1908, only covers deed registration, not certification, leading to documentation
issues.
●​ Title Registration Proposal: The Ministry of Rural Development proposed a Model Land Titling
Bill in 2011 to establish a Title Registration Authority and Appellate Tribunal. This would create a
conclusive title system, ensuring finality and indefeasible rights, eliminating the need for costly
and repeated examinations of past titles.
●​ Constructive Notice in Court: Courts apply constructive notice when parties fail to discover all
facts related to property title. This can be harsh and overlook practical difficulties, such as the
unavailability of state-certified documents.
●​ Conclusive Ownership: A conclusive title system would negate the need for constructive notice
by removing the possibility of bona fide mistakes and fraud. It supports a single agency handling
property records based on the "mirror" and "curtain" principles for transparency and finality in
ownership.
●​ International Perspective: The text compares the Indian system to those in Australia, Canada,
and the UK, where the titleholder cannot be dispossessed once registered with the State. The
doctrine of constructive notice is less applicable in these regions due to their title registration
practices.
●​ Business Context: The doctrine's application in company law is considered harsh on outsiders
entering contracts with companies. It presupposes knowledge of internal company procedures,
which may not be realistic.
●​ Doctrine of Indoor Management: This is presented as an antithesis to constructive notice,
protecting outsiders from company internal management issues unknown to them.
●​ Land Titling Bill and the Shift in Systems: The suggested Land Titling Bill aims to provide
conclusive titles of ownership to reduce ambiguity in property information, which would make
the doctrine of constructive notice redundant.
●​ Conclusive Titling System Benefits: The text argues that a shift to a conclusive titling system will
enhance property transfers' efficiency and reduce reliance on the doctrine of constructive
notice.
In summary, the text argues for a shift from a presumptive title system to a conclusive title system,
highlighting the limitations of the doctrine of constructive notice in providing clear and reliable property
ownership information.

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Session 6

Doctrine of Constructive Notice, Indoor Management and Exceptions

The Doctrine of Constructive Notice and the Doctrine of Indoor Management are two fundamental legal
principles in the context of corporate law, particularly within the Indian judicial system and broadly in
common law jurisdictions. These doctrines are pivotal in defining the relationship between a company
and outsiders and play a crucial role in the protection of both the company and its external stakeholders.

Doctrine of Constructive Notice

The Doctrine of Constructive Notice is a legal principle that holds that persons dealing with a company
are presumed to have knowledge of the company's public documents. These documents include the
Memorandum of Association, Articles of Association, and any other documents filed with the Registrar of
Companies. The rationale behind this doctrine is to protect the company from any external claims arising
from ignorance of the contents of its public documents.

However, this doctrine has been criticised for being unrealistic in expecting outsiders to know all the
details of these documents. It places a burden on those dealing with companies to be aware of the
constitutional documents and their contents.

Doctrine of Indoor Management

The Doctrine of Indoor Management, also known as the Turquand Rule, offers a counterbalance to the
harshness of the Doctrine of Constructive Notice. It suggests that while outsiders are presumed to know
the public documents of a company, they are not bound to ensure that the company's internal
procedures are followed. This doctrine is derived from the landmark case, Royal British Bank v Turquand
(1856), where it was held that persons dealing with a company are entitled to assume that internal
company rules are complied with, even if they are not.

Exceptions to the Doctrine of Indoor Management

There are several notable exceptions to the Doctrine of Indoor Management, where the protection of this
doctrine does not apply, including:
●​ Knowledge of Irregularity: If the outsider dealing with the company had actual knowledge of the
internal irregularities within the company, they cannot claim the protection of this doctrine.
●​ Suspicion of Irregularity: If there are circumstances that would lead a reasonable person to
suspect that something is amiss, the doctrine may not apply.
●​ Forgery: The doctrine does not protect transactions involving forgery.
●​ Representation through Documents: If a transaction is based on a document that could only
have existed due to some internal procedure being unfulfilled, the doctrine may not apply.

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●​ No Authority: The doctrine does not protect against transactions where the acting officers had
no authority to bind the company, and this was known to the outsider.

Conclusion

These doctrines underscore the balance between protecting the interests of the company and those of
outsiders dealing with the company. While the Doctrine of Constructive Notice places a burden of due
diligence on outsiders, the Doctrine of Indoor Management provides a safeguard against the company's
internal irregularities, with certain exceptions. Understanding these doctrines is crucial for anyone
involved in corporate transactions, ensuring they navigate the complexities of corporate law effectively.

Prospectus
Clause (70) of Section 2 defines “prospectus” It means any document described or issued as a
prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus referred
to in section 31 or any notice, circular, advertisement or other document inviting offers from the public
for the subscription or purchase of any securities of a body corporate.

The definition of "prospectus" as provided in Clause (70) of Section 2 under the Companies Act, 2013, in
India, encapsulates a broad range of documents that are intended to solicit public investment into a
company's securities. This legal provision is critical for ensuring transparency and providing essential
information to potential investors, allowing them to make informed decisions. Let's break down this
definition to understand its components and implications better.

Key Components of the Definition

●​ Broad Definition: The term "prospectus" is broadly defined to include not just traditional
prospectuses but also any document that is described or issued under that title. This broad
definition ensures that all forms of solicitation documents are covered, regardless of their
format.
●​ Red Herring Prospectus: This is mentioned specifically and refers to a preliminary prospectus
issued to gauge investor interest in an upcoming issue of securities. It provides details about the
business operations of the company and its financials but does not include the price or number
of shares being offered. This document is called "red herring" because it contains a warning
(traditionally in red) that it does not contain complete information about the securities.
●​ Shelf Prospectus: This concept allows a company to issue securities to the public without the
need to issue a full prospectus for each offering within a period specified by the regulation. It is
particularly useful for companies that plan to offer securities to the public multiple times over a
certain period.
●​ Notice, Circular, Advertisement, or Other Document: The inclusion of these terms indicates that
any communication, whether in the form of a notice, circular, advertisement, or any other type
of document, which invites the public to subscribe to or purchase securities, is considered a

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prospectus. This broad catch-all category is designed to prevent companies from circumventing
the law by using documents not traditionally recognized as prospectuses.
●​ Inviting Offers from the Public: The key purpose of a document to be classified as a prospectus
is that it must invite offers from the public for the subscription or purchase of securities. This
means that the document should be aimed at the general public and not restricted to a specific
group of individuals.

Legal Implications
The legal requirement to issue a prospectus when soliciting public investment serves several critical
functions:
●​ Transparency: Ensures that potential investors have access to essential information about the
company's operations, financial condition, and the securities on offer.
●​ Investor Protection: Helps protect investors from fraudulent or misleading solicitations by
providing a legal framework for the disclosure of information.
●​ Regulatory Compliance: Companies must adhere to the legal standards and requirements set
forth in the preparation and dissemination of a prospectus, ensuring that they comply with
securities laws and regulations.

The definition of "prospectus" as provided in the Companies Act, 2013, reflects the legislature's intent to
encompass a wide range of documents to safeguard investors' interests and promote transparency in
the securities market. Understanding this definition and its components is crucial for companies seeking
to raise capital through public offerings and for investors looking to make informed decisions about their
investments.

Section 32. Red herring prospectus.

The expression "red herring prospectus" means a prospectus which does not include complete
particulars of the quantum or price of the securities included therein

Section 31. Shelf Prospectus

The expression "shelf prospectus” means a prospectus in respect of which the securities or class of
securities included therein are issued for subscription in one or more issues over a certain period
without the issue of a further prospectus.- valid for one year- banks and Financial institutions currently
notified by SEBI as being to issue

Contents of a Prospectus
●​ In the 2013 Act, the information to be included in the prospectus is specified in section 26 of
2013 Act.

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●​ The 2013 Act mandates certain additional disclosures:

●​ Any litigation or legal action pending or taken by a government department or a statutory body -
during the last five years - immediately preceding the year of the issue of prospectus- against
the promoter of the company.
●​ Sources of promoter’s contribution.
●​ The Companies (Prospectus and Allotment of Securities) Rules, 2014 : Detailed disclosures
including all litigation against or in which director is a party, company is a party, promoter is a
party.
●​ In Pramatha Nath Sanyal v Kali Kumar Dutt an advertisement in a newspaper read as “ Some
shares are still available for sale according to the terms of the prospectus of the company which
can be obtained on application.” It was held to be a prospectus as it invited the public to
purchase shares.

Misrepresentation
35. Civil liability for misstatements in prospectus.
(1) Where a person has subscribed for securities of a company acting on any statement included, or
the inclusion or omission of any matter, in the prospectus which is misleading and has sustained
any loss or damage as a consequence thereof, the company and every person who—
(a) director of the company at the time of the issue of the prospectus;
(b) has authorised himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director, either immediately or after an interval of time;
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred to in sub-section (5) of section 26,
shall, without prejudice to any punishment to which any person may be liable under section 36, be
liable to pay compensation to every person who has sustained such loss or damage. (1) shall be
personally responsible, without any limitation of liability, for all or any of the losses or damages
that may have been incurred by any person who subscribed to the securities on the basis of such
prospectus.

Section 35 of the Companies Act, 2013, deals with the civil liability for misstatements in a prospectus
issued by a company. This section is pivotal in protecting investors from fraudulent or misleading
information that may affect their investment decisions. Let's dissect the key components of this section
to understand its implications for companies and their officers:

Overview of Section 35

●​ Purpose: Section 35 aims to hold certain individuals and entities accountable for any loss or
damage suffered by investors due to misleading statements in a prospectus or the omission of
important information.

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●​ Scope of Liability: The section specifies a broad range of persons who can be held liable for
misleading statements in a prospectus, including:
●​ Directors at the time of the issue of the prospectus: This ensures that the directors, who
are in a position to influence the content of the prospectus, are held accountable.
●​ Persons named in the prospectus as directors or agreed to become directors: This
includes individuals who have not yet taken their position as directors but have
consented to be named in the prospectus, indicating their future responsibility towards
the company.
●​ Promoters of the company: Promoters play a crucial role in the formation and setting up
of the company, including its public offering, and are therefore included under this
liability.
●​ Persons who have authorised the issue of the prospectus: This broad category ensures
that anyone who played a part in authorising the publication of the prospectus is held
accountable.
●​ Experts referred to in the prospectus: Experts whose opinions or reports are included in
the prospectus are also liable if their contributions contain misleading information or
omissions that cause loss or damage to investors.

Liability and Compensation

●​ Liability for Compensation: The individuals and entities mentioned are required to compensate
any investor who has sustained loss or damage as a result of the misleading statement or
omission in the prospectus. This provision underscores the accountability of those responsible
for the content of the prospectus.
●​ Personal Responsibility: The liability is personal, meaning that those held liable under this
section cannot limit their responsibility for the damages. They are personally accountable for
compensating the affected investors, which serves as a deterrent against negligence and
fraudulent practices in the preparation of prospectuses.

Protection for Investors

This section provides a mechanism for investors to seek compensation for losses resulting from
misleading information in a prospectus, enhancing investor protection and trust in the securities market.
It underscores the importance of accuracy, transparency, and honesty in the information provided to the
public by companies seeking to raise capital.

Conclusion

Section 35 of the Companies Act, 2013, plays a critical role in safeguarding investors' interests by
imposing civil liability on companies, directors, promoters, and other related persons for misstatements
in a prospectus. It emphasises the need for due diligence and integrity in the disclosure of information to
investors, ensuring that the securities market operates in a fair and transparent manner.

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36. Any person who, either knowingly or recklessly makes any statement, promise or forecast which is
false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to
enter into, or to offer to enter into,—
(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting
securities; or
(b) any agreement, the purpose or the pretended purpose of which is to secure a profit to any of the
parties from the yield of securities or by reference to fluctuations in the value of securities; or
(c) any agreement for, or with a view to obtaining credit facilities from any bank or financial institution,
shall be liable for action under section 447.( 6mts to 10 years imprisonment, upto 3 times of fraud as fine)

Section 36 of the Companies Act, 2013, addresses fraudulent activities related to securities and financial
transactions, emphasizing the seriousness of such offences and the stringent penalties imposed on those
found guilty. This section is crucial for maintaining trust and integrity in the financial and securities
markets by penalising deceptive practices. Let's break down the key aspects of this provision:

Key Points of Section 36

1.​ Scope of Prohibited Actions:

●​ The section targets individuals who knowingly or recklessly engage in making false,
deceptive, or misleading statements, promises, or forecasts.
●​ It also covers those who deliberately conceal material facts with the intention to induce
another person into entering agreements related to securities or obtaining credit
facilities.
2.​ Types of Agreements Covered:
●​ Agreements aimed at acquiring, disposing of, subscribing for, or underwriting securities.
●​ Agreements intended to secure a profit from securities yield or value fluctuations.
●​ Agreements for obtaining credit facilities from banks or financial institutions.
3.​ Penalties for Violation:
●​ Individuals found violating this section are subject to action under Section 447 of the
Companies Act, which deals with fraud.
●​ The penalties for such offences range from imprisonment of six months up to ten years.
This wide range reflects the severity and circumstances of the fraud committed.
●​ Additionally, offenders may be fined up to three times the amount involved in the fraud,
ensuring that the penalty has a substantial financial deterrent effect.

The case of Shiromani Sugar Mills Ltd. vs Debi Prasad underscores the nuances and complexities
associated with the interpretation of statements made in a company's prospectus. This case highlights
the legal interpretation of ambiguous language within corporate documents and its implications for both

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the company issuing the prospectus and the potential investors. The judgment delves into the distinction
between unequivocal statements, which are clear and unambiguous, and equivocal statements, which
can be interpreted in various ways by different people.

Key Points of the Case

●​ Ambiguity in Prospectus Statements: The case differentiates between statements in a

prospectus that are clear and straightforward, as opposed to those that are ambiguous or
capable of multiple interpretations. This distinction is crucial in determining the liability of the
company for any misinterpretation or misrepresentation perceived by investors.
●​ Investor Responsibility: The judgment implies that a prudent investor should exercise due
diligence when interpreting ambiguous statements in a prospectus. It suggests that when
statements are open to interpretation, it is reasonable for an investor to seek further clarification
rather than relying solely on their own interpretation.
●​ Interpretation of Tenses: A significant observation made in the case is related to the use of tenses
in the prospectus. It acknowledges that a prospectus, being a forward-looking document, often
uses the past or present tense to describe future actions or events. This use of tense is not
intended to mislead but rather to convey the intended future actions or developments of the
company.

Legal Implications

●​ Due Diligence: Both issuers of prospectuses and investors are expected to exercise due
diligence. Companies must ensure that their prospectuses are as clear and unambiguous as
possible, while investors should seek clarification on any ambiguous statements before making
investment decisions.
●​ Misrepresentation: The case sheds light on what constitutes misrepresentation in a legal context,
especially in relation to corporate communications. Not all ambiguous statements may be
deemed misleading if it is understood that such statements require interpretation and
verification.
●​ Investor Protection: This case reflects the balance that the law tries to maintain between
protecting investors from misleading information and recognizing that not all ambiguities can be
eliminated from forward-looking documents. It underscores the importance of investor
responsibility in conducting due diligence.

In Rex v. Kylsant [1932] 1KB.422 dividend paid even during depression- out of capital reserves

The case of Rex v. Kylsant [1932] 1 KB 422 is a landmark decision in corporate law, particularly in the
context of fraudulent representation and the misuse of company funds. Lord Kylsant, the chairman of the
Royal Mail Steam Packet Company, was prosecuted for making false statements in the company's

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prospectus, specifically regarding the payment of dividends out of capital reserves rather than profits, a
practice that was highly misleading to current and potential investors.

Key Aspects of the Case

Background: During the late 1920s and early 1930s, the Royal Mail Steam Packet Company, like many
others, was affected by the economic downturn. Despite the company's deteriorating financial condition
and the absence of genuine profits, dividends were continued to be paid to shareholders. This was done
not out of the company's profits but from its capital reserves.

Legal Issue: The central legal issue revolved around the misrepresentation in the company's prospectus,
where it was implied that the dividends were being paid from the company's profits, which suggested a
misleadingly healthy financial state of the company. The payment of dividends out of capital, rather than
profits, was a deceptive practice that masked the company's actual financial performance and stability.

Outcome: Lord Kylsant was found guilty of making false statements in the prospectus under the
Companies Act. The case underscored the importance of honest financial disclosures and the legal
implications of misrepresenting a company's financial health to its shareholders and the public.

The case of Derry v. Peek (1889) is a seminal case in English law that addresses the issue of fraudulent
misrepresentation in the context of company prospectuses. This case has had a lasting impact on the
development of the law of misrepresentation and the duty of care in making statements to prospective
investors.

Facts of the Case

The directors of a tramway company issued a prospectus stating that the company had the right to use
steam power instead of horses for its tram cars. This statement was based on the company's act of
incorporation, which allowed for the use of steam power with the sanction of the Board of Trade.

However, the prospectus failed to mention that such sanction was required. Subsequently, the Board of
Trade refused to grant permission for the use of steam power, which significantly impacted the
company's operations and led to its winding up.

Legal Issue

The key legal issue in Derry v. Peek was whether the directors' statement in the prospectus constituted
fraudulent misrepresentation. The claimant, Mr. Peek, who had invested in the company based on the
prospectus, sued the directors for damages, arguing that the statement about the use of steam power
was false and misleading.

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Judgment

The House of Lords held that the directors were not liable for fraudulent misrepresentation. It was
determined that for a statement to constitute fraudulent misrepresentation, the person making it must:
●​ Know it to be false,
●​ Not believe in its truth, or
●​ Be reckless as to its truth.

In this case, the directors genuinely believed that the company would obtain the necessary sanction
from the Board of Trade to use steam power. Their failure to disclose the need for such sanction was not
deemed fraudulent because there was no evidence to suggest that they doubted they would receive it.
Therefore, the claim for fraudulent misrepresentation failed.

Implications of Derry v. Peek

●​ Definition of Fraudulent Misrepresentation: The case established a clear standard for what
constitutes fraudulent misrepresentation, emphasizing the need for a false statement to be made
knowingly, without belief in its truth, or recklessly.
●​ Good Faith Belief: It highlighted the importance of the declarant's belief in the truth of the
statement. If the person making the statement genuinely believes it to be true, they may not be
liable for fraud, even if the statement turns out to be false.
●​ Duty of Care: While the case set a high bar for proving fraud, it also underscored the need for
directors and others making statements on behalf of companies to exercise care and ensure that
their statements are accurate and not misleading.
●​ Impact on Corporate Disclosure: Derry v. Peek has influenced the development of laws and
regulations concerning corporate disclosures, emphasizing the need for transparency and
accuracy in statements made to investors.

Nash Vs Lynde “strictly confidential”

Here's a case analysis of Nash v Lynde [1929] AC 158, a pivotal case in company law:
The Facts:
●​ Lynde, the managing director of a company, sent Nash a document marked "strictly private and
confidential" inviting him to subscribe to shares in the company.
●​ The document lacked certain disclosures required by the Companies (Consolidation) Act 1908.
●​ Nash purchased shares but later suffered losses when the company was restructured.
●​ Nash sued Lynde for fraud and, alternatively, for damages under the Act due to inadequate
disclosures.

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The Issue:
The central question in this case was whether the document sent to Nash constituted a "prospectus" as
defined by the Companies (Consolidation) Act of 1908. The Act's definition was vague, only stating that a
prospectus was any document offering shares to the "public."

The Ruling:
The House of Lords, the highest court in the UK at the time, ruled in favor of Nash. They determined that:
●​ Offer to the Public: The term "public" did not necessitate an offer reaching the entire public at
large. An offer made to a specific section of the public could still qualify.
●​ No Strict Numerical Definition: The court noted that a limited group of people receiving the offer
could still fulfill the "public" criterion.
●​ Context Matters: Even though the document was privately marked, its intention and the
circumstances surrounding its distribution led to it being considered a prospectus.

Impact and Significance:

The Nash v Lynde case had substantial implications for company law:
●​ Clarified Prospectus Definition: It expanded the definition of a prospectus, highlighting that
offers intended for a select group could also trigger disclosure requirements intended to protect
investors.
●​ Investor Protection: The judgment underscored the importance of accurate and full disclosure in
share offerings, regardless of whether the offers are broadcasted widely or made to a more
targeted group.
●​ Precedent: The case remains a frequently cited legal precedent in matters concerning investor
protection and company disclosure regulations.

Edington vs. Fitzmaurice- purpose of raising capital- building reconstruction, purchasing assets- real
purpose- discharge of liability

Here's a breakdown of the Edington vs. Fitzmaurice case (1885) 29 Ch D 459, focusing on the real
purpose of raising capital:

Facts:
●​ Edington vs. Fitzmaurice involved a company issuing a prospectus inviting the public to
subscribe to debentures (a type of bond).
●​ The prospectus stated the capital raised would be used for:
○​ Completing alterations and additions to the company's buildings
○​ Purchasing horses and vans
○​ Developing the company's trade

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●​ However, the company's directors' primary intention was to use the funds to pay off existing
debts.

Issue:
The central question was whether the statement in the prospectus regarding the purpose of the funds
was a misrepresentation, rendering the directors liable for fraud.

Ruling:
The Court of Appeal found the directors liable for fraudulent misrepresentation. Here's why:
●​ Material Misrepresentation: The misstatement about the use of funds was considered a material
fact that would potentially influence an investor's decision.
●​ Intention is Key: Even if the stated purposes were partially true, the court determined that the
primary intention was to use the funds to discharge existing liabilities. This concealed the true,
less appealing, financial state of the company.
●​ Half-Truths: This case established that stating a half-truth to create a misleading impression can
be equivalent to a deliberate misrepresentation.

Significance of the Case:

Edington vs. Fitzmaurice is a landmark case in company law for several reasons:
●​ Duty of Disclosure: It reaffirmed the directors' fiduciary duty to make full and honest disclosures
to potential investors, particularly regarding the intended use of funds.
●​ Investor Protection: It emphasised that investors have the right to rely on the accuracy of
information disclosed in a prospectus.
●​ Intent Behind Misrepresentation: It highlighted that even subtle or indirect misrepresentations,
made with the intent to deceive, can be considered fraudulent.

Peek Vs Gurney- bought in stock exchange

Here's a breakdown of Peek v Gurney (1873), a significant case in company law with a focus on stock
exchange purchases:

Facts:
●​ Overend, Gurney and Company issued a prospectus inviting subscriptions for shares.
●​ Peek purchased shares in the company not directly in response to the prospectus, but on the
stock exchange.
●​ The company went into liquidation soon after.
●​ Peek sued the directors for damages, claiming the prospectus contained misrepresentations.

Issue:

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The key question was whether Peek, as someone who purchased shares on the stock exchange and not
directly from the company, had grounds to sue for misrepresentation in the prospectus.

Ruling:
The House of Lords ruled against Peek. Their reasoning:
●​ Privity of Contract: A contract for the sale of shares arises on the stock exchange between the
buyer and the seller, not with the company itself. No direct "contractual relationship" existed
between Peek and the company.
●​ No Reliance on Prospectus: When purchasing on the stock exchange, the buyer was deemed to
rely on market forces and the actions of other investors, not specifically on the representations
in the company's prospectus.

Significance:
Peek v Gurney established key principles in company law:
●​ Stock Exchange Caveat: Buyers of shares on a stock exchange cannot usually sue the company
or its directors based on misrepresentations in a prospectus.They don't have a direct reliance on
that document.
●​ Indirect vs. Direct Purchase: This case differentiated between those who purchase shares
directly from the company based on the prospectus, and those who purchase subsequently on
a stock exchange. Different rights apply.
●​ Investor Responsibility: It underscored the responsibility of those buying shares on the
secondary market to conduct their own due diligence rather than relying solely on the original
prospectus.

Important Note: Modern legislation and market regulations may provide additional protections for
investors who have suffered losses due to misleading information, even if they purchased shares
indirectly.

Candler's Case- innocent misrepresentation

Here's a breakdown of Candler v Crane, Christmas & Co [1951] and its relation to innocent
misrepresentation:

Facts
●​ Candler invested £2,000 in a company after being shown the draft accounts by the company's
auditors, Crane, Christmas & Co.

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●​ The draft accounts misrepresented the company's financial health. The company went into
liquidation and Candler lost his investment.
●​ Candler sued the auditors, alleging negligent misrepresentation, claiming they owed him a duty
of care even though there was no direct contractual relationship between them.

Ruling
The Court of Appeal dismissed Candler's claim and established the following:
●​ No Duty of Care for Purely Economic Loss: Auditors were not liable for economic loss caused by
negligent misstatements in cases where there was no contract or close relationship of reliance
between the auditor and the plaintiff.
●​ Restricting Liability: The court reasoned that extending the duty of care to encompass
unforeseeable third parties relying on information would create crippling exposure for auditors.

Innocent Misrepresentation
Although not the central claim in the case, the ruling is connected to innocent misrepresentation:
●​ Candler initially alleged both fraud and innocent misrepresentation. It was deemed the auditors
didn't intentionally deceive him, hence it was innocent misrepresentation.
●​ The ruling highlighted the limitations of claiming innocent misrepresentation without
pre-existing 'special relationships'. At the time, this made it very difficult to secure legal redress
for financial losses due to someone else's negligence.

Significance
Candler v Crane, Christmas & Co was a landmark case for several reasons:
●​ Limiting Liability for Auditors: It solidified a restrictive precedent limiting auditor's liability in
cases of negligent misstatement without a direct relationship with the plaintiff.
●​ Catalyst for Change: This decision was considered overly restrictive and was influential in paving
the way for the landmark case of Hedley Byrne v Heller. This later case expanded the concept of
negligent misstatement and duty of care in situations where financial reliance existed.

Hedley Byrne & Co Ltd v Heller & Partners Ltd – Implying a duty of care

Here's a breakdown of the landmark case Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] and how
it addressed the complex issue of implying a duty of care in instances of negligent misstatement:
Facts:
●​ Hedley Byrne, an advertising agency, was considering extending substantial credit to a client,
Easipower Ltd.
●​ Hedley Byrne asked their bank to inquire about Easipower's financial standing with Easipower's
bank, Heller & Partners.

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●​ Heller & Partners responded favorably about Easipower's creditworthiness, adding the
disclaimer "without responsibility".
●​ Easipower went into liquidation causing Hedley Byrne to suffer significant financial losses.
●​ Hedley Byrne sued Heller & Partners for negligence.

The Issue:
The core question was whether Heller & Partners owed Hedley Byrne a duty of care in providing
financial information, even though there was no contract between them, and a disclaimer had been
provided.

Ruling:
The House of Lords, while not finding Heller & Partners liable on the specific facts, made a
groundbreaking ruling:
●​ A duty of care for negligent misstatements is possible: The court established that a duty of care
could arise when someone with special skills or knowledge makes a careless statement to
another party who reasonably relies on that statement and potentially suffers economic loss.
●​ "Special Relationship" as the basis: They held that a "special relationship" implying a duty of care
can exist based on the assumption of responsibility and reasonable reliance, even without a
contract.

Factors Relevant to Duty of Care:

The court outlined factors to consider when determining if a duty of care exists:
●​ Possession of special skill or knowledge
●​ Communication of advice or information to be used for a specific purpose
●​ Knowledge that the advice will be relied upon
●​ Reasonable reliance by the other party

Significance of Hedley Byrne:

●​ Liability for Economic Loss: This case overturned prior precedents that severely limited liability
for causing purely economic loss through negligent misstatements.
●​ Expanded Notion of Duty of Care: It recognized the potential duty of care beyond purely
contractual relationships and laid the foundation for modern professional negligence law.
●​ Emphasis on Special Relationships: The key focus was on the circumstances and relationship
between the parties, not just whether there was a contractual connection.

Important Note: Although Hedley Byrne was groundbreaking, courts generally interpret the "special
relationship" requirement cautiously to avoid overly broad liability.

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Session 7

Sahara Judgment and investor protection

The Sahara case, formally known as Sahara India Real Estate Corporation Ltd & Ors vs. Securities and
Exchange Board of India & Anr, is a landmark legal battle in the Indian financial market, illustrating the
clash between a corporate giant and the regulatory authority, SEBI (Securities and Exchange Board of
India). Here's a detailed explanation:

Background
The case involves two companies of the Sahara Group - Sahara India Real Estate Corporation Limited
(SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) - which issued Optionally Fully
Convertible Debentures (OFCDs) to the public. This was done without following the proper procedure of
listing on any recognized stock exchange, which is required under the regulatory framework for public
offerings in India. The issue was that these debentures were sold to millions of investors, raising over INR
24,000 crores (approximately USD 3 billion) in a manner that SEBI deemed illegal under the securities
laws applicable to public issues and the protection of investor interests.

SEBI's Intervention
SEBI intervened upon noticing the irregularities in the way Sahara was raising funds from the public.
SEBI's primary contention was that the issuance of OFCDs by Sahara was, in essence, a public issue of
securities, which required compliance with various disclosure and procedural norms under the
Securities Laws, including the SEBI Act, 1992, and the Companies Act, 1956. Sahara contested this by
arguing that these debentures were issued to friends, associates, workers, and other individuals
associated with Sahara group companies, claiming an exemption from the definition of a "public issue."

Legal Proceedings
The matter escalated to the Supreme Court of India after a series of legal challenges and appeals. The
apex court, in its landmark judgment in 2012, upheld SEBI's position. The Court ordered Sahara to refund
the money raised through OFCDs to the investors with interest. The Supreme Court also directed SEBI to
facilitate the refund process and allowed it to seek recourse to all legal mechanisms to recover the funds
from Sahara if they failed to comply with the court's order.

Implications
The Sahara case is significant for several reasons:
●​ Investor Protection: It underscored the importance of SEBI's role in protecting investors and
ensuring that companies adhere to the legal frameworks when raising funds from the public.
●​ Regulatory Authority: The case reinforced SEBI's authority and jurisdiction over corporate
entities, regardless of the nature of securities being issued or the method of their distribution.

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●​ Legal Precedent: It set a precedent for how securities laws are interpreted in relation to private
placements and public offerings, clarifying the legal requirements for companies raising capital
in India.
●​ Corporate Governance: The case highlighted the need for transparency, proper disclosure, and
adherence to corporate governance norms in the operations of corporate entities.

Conclusion
The Sahara case is a cornerstone in Indian corporate law jurisprudence, reflecting the delicate balance
between corporate enterprise and regulatory oversight. It serves as a cautionary tale for corporations on
the consequences of bypassing legal and regulatory frameworks designed to protect the market and its
participants.

Class Notes - Session 7

Why do companies offer shares?

Companies offer shares to the public for several reasons, each aimed at benefiting the company and its
stakeholders in various ways. Here are the primary reasons why companies choose to offer shares:

1. Raising Capital
The most common reason for a company to offer shares is to raise capital. This capital can be used for
various purposes, such as expanding the business, developing new products or services, investing in
research and development, paying off existing debts, or improving the company's infrastructure. By
selling shares, a company can finance its activities without needing to borrow money and incur debt.

2. Shareholder Value
Offering shares to the public allows a company to spread its ownership to a broader base. This not only
helps in risk distribution but also enhances the company’s value in the eyes of investors. Shareholders, in
return, get a chance to benefit from the company’s growth through appreciation in share value and
dividends.

3. Liquidity
Issuing shares increases liquidity for the company’s early investors and founders. It provides them with
an opportunity to sell their stakes and realize their investments' value. This aspect is particularly
appealing for startups and privately held companies whose early backers may be looking for a way to
exit some or all of their investments.

4. Market Presence and Reputation

Going public and offering shares enhances a company's market presence and reputation. Being listed on
a stock exchange gives a company a seal of approval that it adheres to the strict regulatory and financial

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reporting standards. This can improve its standing among customers, suppliers, and potential business
partners.

5. Attracting and Retaining Employees

Companies often use stock options as part of their compensation packages to attract and retain key
employees. Offering shares or share options to employees aligns their interests with the company’s
success, motivating them to contribute to the company’s growth and profitability.

6. Mergers and Acquisitions

Shares can be used as a currency for mergers and acquisitions. A company can offer its shares to the
shareholders of another company as part of the acquisition deal. This strategy can be less burdensome
on the acquiring company's cash reserves and can align the interests of the merging entities.

7. Capital Structure Optimization

By issuing shares, a company can optimise its capital structure. This involves balancing debt and equity
to minimise the cost of capital and maximise returns for shareholders. A healthy balance between debt
and equity can enhance a company's financial flexibility and its ability to respond to business
opportunities and challenges.

In summary, offering shares allows companies to raise capital while sharing the risks and rewards of
business growth with a broader investor base. It provides a mechanism for companies to achieve their
strategic objectives, enhance their market position, and ensure long-term sustainability and growth.

Securities- meaning
• Securities Contracts Regulation Act- 1956-
2 (h) "securities" include— (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body corporate;
(ia) derivative;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002;
(id) units or any other such instrument issued to the investors under any mutual fund scheme;
(ii) Government securities;
(ia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest
in securities;

Under the Securities Contracts (Regulation) Act, 1956 (SCRA) of India, the term "securities" is defined
broadly to encompass a wide range of financial instruments. This expansive definition is crucial for the
application of regulatory provisions under the Act, ensuring a comprehensive coverage of various forms
of investment vehicles. Here's a breakdown of the definition as per Section 2(h) of the SCRA:

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(i) Traditional Securities

●​ Shares, Scrips, Stocks: These represent ownership in a company or corporation, allowing
holders to claim a part of the company's assets and earnings.
●​ Bonds, Debentures, Debenture Stock: These are debt instruments issued by companies or
governments, representing a loan from the investor to the issuer, usually with a fixed interest
rate.
●​ Other Marketable Securities of a Like Nature: This phrase includes other types of tradable
financial assets that are not explicitly listed but share characteristics with shares, bonds, and
debentures.

(ia) Derivative
●​ A financial instrument whose value is derived from the value of another asset (the underlying).
Derivatives include futures, options, swaps, and other complex financial instruments used for
hedging, speculation, or arbitrage.

(ib) Collective Investment Schemes

●​ Units or Other Instruments Issued by Collective Investment Schemes: These are investments in
schemes that pool money from multiple investors to invest in a diversified portfolio of assets.

(ic) Security Receipt

●​ As defined in the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, a security receipt represents an interest or benefit in a securitisation
or reconstruction company.

(id) Mutual Fund Schemes

●​ Units or Other Instruments Issued under Mutual Fund Schemes: Represent investments in funds
that pool money from many investors to purchase a diversified portfolio of stocks, bonds, or
other securities.

(ii) Government Securities

●​ These are debt instruments issued by the government to support government spending,
typically considered low-risk investments.

(iii) Rights or Interest in Securities

●​ This includes any rights or interests, such as options or warrants, that allow the holder to acquire
another security.

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​
(ia) Other Instruments Declared by the Central Government
●​ This provision allows the Central Government to include other financial instruments under the
definition of securities, providing flexibility to encompass new types of financial instruments that
may emerge.

The definition of "securities" under the SCRA is designed to be inclusive, covering a broad spectrum of
financial instruments available in the market. This wide-ranging definition ensures that the regulatory
framework can adapt to evolving market practices and financial innovations, providing a robust
mechanism for the oversight and regulation of the securities market in India.

The Supreme Court's observation in CIT v. Standard Vacuum Oil Co. [1966] Comp.LJ 187 elucidates the
conceptual and legal nature of a share in a company within the Indian context. This definition highlights
that a share is not merely a monetary sum but represents an interest that is quantified in monetary
terms, encompassing various rights bestowed upon its holder by the company's articles of association.
These rights form a contractual relationship between the shareholder and the company, underlying the
share's multifaceted legal and economic dimensions.

This perspective is crucial for understanding the legal status of shares, indicating that ownership of a
share implies more than a simple financial investment. It involves a bundle of rights, including voting
rights in company meetings, entitlement to dividends, rights to share in the distribution of the company's
assets on dissolution, and other statutory rights as defined under company law. The judgement
underscores the importance of the articles of association in defining these rights, which can vary
significantly between different companies.

The Supreme Court's interpretation serves as a foundational principle in company law, emphasizing the
complex interplay between shareholders and the company. This definition is critical for legal
practitioners, investors, and scholars in understanding the legal framework governing corporate
securities and the rights and obligations of shareholders within a company.

Types of securities
Securities are financial instruments that represent an ownership position in a publicly-traded corporation
(via shares), a creditor relationship with a governmental body or a corporation (via bonds), or rights to
ownership as represented by an option. Here is a detailed overview of the types of securities you've
mentioned, focusing on the Indian context under the Companies Act, 2013, and other relevant
legislations:

Shares
Shares represent the ownership of a shareholder in a company. The ownership entitles the shareholder
to a share of the company’s profits and assets. There are two primary types of shares:

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Equity Shares: Equity shareholders are the owners of the company. They have voting rights which can be
exercised in company meetings. Equity shares may come with differential rights related to voting or
dividend payments. These rights are specified at the time of issue.

Preference Shares: These shares come with a preference over equity shares in terms of dividend
payments and the repayment of capital upon winding up or liquidation of the company. Preference
shares are typically redeemable and must be redeemed within 20 years of their issue, except for shares
issued for financing projects in infrastructure, where the redemption period can extend to 30 years.
Preference shares can be cumulative (where unpaid dividends are carried forward to future years) or
non-cumulative, and participating (where shareholders can participate in additional profits) or
non-participating.

Debentures
Debentures represent a medium to long-term investment in a company. They are a form of debt security
that acknowledges a loan to the company and carries a promise by the issuer to return the principal sum
at a specified date. During the term of the debenture, the company pays interest to the debenture holder
at agreed intervals and rates. Debentures can be secured against the assets of the company or
unsecured. They are an important tool for companies to raise capital without diluting ownership.

Key Characteristics:
●​ Debentures, being debt instruments, do not confer any ownership rights to the holders. Instead,
they offer a fixed rate of return in the form of interest.
●​ Equity Shares are riskier compared to preference shares and debentures as their returns depend
on the company's performance, but they potentially offer higher returns and voting rights,
influencing company decisions.
●​ Preference Shares offer a middle ground, with priority over dividends and repayment but
typically without the voting rights that come with equity shares, unless specified otherwise in
situations where dividend payments are not made for a specified period.

Each type of security serves a different purpose in the financial strategy of individuals and corporations,
balancing risk, control, and potential returns. The choice between issuing or investing in these securities
depends on the company's financial health, capital structure, and strategic objectives, as well as the
investor's risk appetite and investment goals.

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Feature Equity Shares Preference Shares Debentures

Debt
Preferential rights over
instruments
Ownership in the equity shares in terms of
Nature representing a
company. dividends and
loan to the
repayment of capital.
company.

Typically, no voting
rights except in certain
Yes, generally have
Voting Rights conditions like No voting rights.
voting rights.
non-payment of
dividend for 2 years.

Fixed rate, can be

Variable, depends on Interest paid at
Dividend cumulative or
company profits. fixed rate.
non-cumulative.

Redeemable within 20
Not applicable (shares Redeemable at
Redemption years, 30 years for
are not redeemed). maturity.
infrastructure projects.

Lower risk compared to Lower risk as

equity shares due to they generally
Higher risk (variable
Risk fixed dividends and carry fixed
returns).
preference in capital interest and are
repayment. often secured.

Lower potential returns

Higher potential returns
compared to equity Fixed interest
Return Potential (dividends + capital
shares, fixed dividend income.
gains).
rate.

Participation in Direct through voting Limited, except under

No participation.
Management rights. specific conditions.

Limited to fixed Interest income

Participation in Yes, through dividends dividends, may have only, does not
Profits and capital appreciation. participating rights in participate in
additional profits. profits.

Not secured, but has

Can be secured
Security Not secured. preferential rights over
or unsecured.
equity shares.

Creation of Shares
The process of creating shares within a company, as highlighted in the case of Shree Gopal Paper Mills v.
CIT (AIR 1970 SC 1750), provides critical insights into the legal and procedural aspects of share capital in
Indian companies. This case clarifies the distinction between the creation, issue, and allotment of shares,
particularly within the context of the Indian Companies Act. Here's a breakdown of the process and its
implications:

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Creation of Shares
●​ Authorised Share Capital: This is the maximum amount of share capital that a company is
authorized to issue to shareholders, as specified in its memorandum of association. The
"creation" of shares refers to the establishment of the company's authorised share capital.
●​ Dormancy: Once the authorised share capital is created, it can remain dormant for an extended
period until the company decides to issue these shares.

Issue and Allotment of Shares

●​ Issue of Shares: This is the process by which a company makes its shares available for
subscription. The issue of shares can be to existing shareholders or new investors.
●​ Allotment of Shares: After shares are issued, they are allotted to the subscribers or investors,
who then become shareholders of the company. This process formalises the ownership of
shares.

Fresh Issue of Shares

●​ Increasing Authorised Share Capital: When a company decides to increase its authorised share
capital, it may create new shares for this purpose. This is often referred to as a "fresh issue" of
shares.
●​ Implications: The major legal and financial implication of this process is that a fresh issue
represents the creation of new shares, which expands the company's share capital beyond its
original authorized amount. This is distinct from merely issuing unissued shares from the existing
authorised share capital.

Legal and Financial Considerations

●​ Compliance: Any increase in authorised share capital or the issue of new shares must comply
with the regulations set forth in the Companies Act, including amendments to the company's
memorandum of association and articles of association, if necessary.
●​ Tax Implications: The creation, issue, and allotment of shares can have tax implications for both
the company and its shareholders, as seen in the context of the Shree Gopal Paper Mills v. CIT
case.

This case serves as a cornerstone for understanding the nuanced process of share capital management
in Indian companies, highlighting the legal distinction between the creation of new shares and the
issuance of existing unissued shares. It underlines the importance of adhering to statutory requirements
and the potential tax considerations that arise from corporate actions involving share capital.

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The Supreme Court's ruling in Sri Gopal Jalan & Co. v. Calcutta Stock Exchange (AIR 1964 SC 250)
provides a pivotal explanation on the concept of share allotment within the framework of company law
in India. Below is an exploration of the key points and implications of this ruling:

Key Points of the Ruling

●​ Definition of Allotment: The Supreme Court defined 'allotment' as the process through which a
company appropriates parts of its un-appropriated capital to a certain number of shares for an
individual. This definition underscores that allotment is a decisive step in the process of share
issuance.
●​ Existence of Shares: A crucial aspect of this ruling is the emphasis that shares do not exist as
individual, identifiable units until they have been allotted. It is through the process of allotment
that shares are brought into existence and become part of the company's issued share capital.
●​ Legal and Procedural Implications: The court's interpretation highlights the procedural necessity
of allotment in the creation of shares and the establishment of shareholder rights. Until shares
are allotted, there is no legal recognition of these shares as part of the company's capital, nor do
they confer any rights or obligations to the prospective shareholders.

Issue of Shares

Criteria Equity Shares Preference Shares

Articles of Association (AOA) and special As per Rules, with consent of 3/4th in value of
Authorisation
resolution by shareholders such preference shares; Approval of NCLT

Dividend Track 10% dividend payment in the last three

Not specified
Record consecutive financial years

No default in filing accounts and annual

Accounting
returns in the last five consecutive Not specified
Compliance
financial years

No default in payment of dividend,

Unable to redeem any preference shares or to
Financial debentures, deposits, loans from
pay dividends as per terms of issue may issue
Obligations banks/financial institutions, preference
further redeemable preference shares
shares, and statutory dues of employees

Regulatory No default under SEBI, SCRA, FEMA, and

Not specified
Compliance RBI Act

Subject to redemption of a specified percentage

Disclosure Detailed disclosures in Explanatory of shares as per prescribed rules, on an annual
Requirements Statement and Board Report basis at the option of the preference
shareholders

20 years; up to 30 years for "infrastructural

Tenure Not applicable
projects"

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Authorised Share Capital

Definition:
Authorised share capital, also known as nominal or registered capital, refers to the maximum amount of
share capital that a company is authorised by its constitutional documents (typically its memorandum of
association) to issue to shareholders. This limit is set at the time of the company's incorporation and can
be increased or decreased by amending the company’s memorandum of association through a
shareholder resolution and regulatory approvals.

Components of Authorised Share Capital:

1.​ Nominal Value of Shares: The nominal value is the face value of a single share.
2.​ Total Number of Shares: This is the total quantity of shares that the company is authorised to
issue.
3.​ Aggregate Nominal Value: This is the product of the nominal value per share and the total
number of shares.

For example, if a company has an authorised share capital of ₹1,00,00,000 divided into 10,00,000
shares of ₹10 each, it means the company can issue up to 10,00,000 shares, and the total capital raised
from these shares can be ₹1,00,00,000.

Example:
Imagine a company, XYZ Pvt Ltd, incorporated with an authorised share capital of ₹50,00,000, divided
into 5,00,000 shares of ₹10 each. The company can raise capital by issuing up to 5,00,000 shares to
shareholders. Initially, the company may issue only a portion of these shares, say 2,00,000 shares, to
raise ₹20,00,000. The remaining 3,00,000 shares can be issued in the future as needed, without
exceeding the authorised limit of ₹50,00,000.

Legal Provisions and Changes:

●​ The Companies Act, 2013 governs the provisions related to authorised share capital in India.
●​ Increase of Authorised Share Capital: To increase the authorised share capital, the company
must amend its memorandum of association. This requires a resolution passed by the
shareholders in a general meeting and subsequent filing of the necessary forms with the
Registrar of Companies (ROC).
●​ Reduction of Authorised Share Capital: Similarly, to reduce the authorised share capital, a special
resolution is required, along with approvals from shareholders and regulatory bodies.

Importance:
●​ Flexibility in Fundraising: Having a higher authorised share capital provides flexibility for future
fundraising without needing to immediately issue all the shares.

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●​ Regulatory Compliance: It ensures the company complies with regulatory requirements by not
issuing shares beyond the authorised limit.

Illustrative Example:
Let's say ABC Ltd has an authorised share capital of ₹1,00,00,000 divided into 10,00,000 shares of ₹10
each. Initially, it issues 6,00,000 shares to raise ₹60,00,000. Later, it needs additional funds and decides
to issue the remaining 4,00,000 shares, raising another ₹40,00,000, thereby utilising the full authorised
share capital.

If ABC Ltd needs to issue more shares beyond this limit, it must increase its authorised share capital
through the procedures mentioned above. Suppose the company decides to increase it to
₹2,00,00,000. It will amend its memorandum, pass a resolution in the general meeting, and file the
appropriate documents with the ROC. After approval, the new limit allows ABC Ltd to issue shares up to
₹2,00,00,000.

Types of issue of shares

Public Issue
●​ Initial Public Offering (IPO): When an unlisted company offers its existing or fresh securities to
the public for the first time for sale, allowing for listing and trading on the stock exchange.
●​ Further Public Offering (FPO): Any public issue by a company after its IPO.​
Notes:
●​ Public issues allow companies to raise capital from the public market.
●​ IPO is a significant event as it marks the transition of a company from private to public.
●​ FPOs are used by companies to diversify their equity base or to raise additional capital
for expansion.

Bonus Issue
●​ Definition: The issue of additional shares to existing shareholders without any extra cost, based
on the number of shares they already own, using the company's free reserves or securities
premium account.​
Conditions:
●​ Must be authorised by the company's Articles of Association.
●​ Requires approval from shareholders in a general meeting.
●​ The company should not have defaulted in the payment of interest or principal on fixed
deposits or debt securities issued by it.
●​ Notes:
●​ Bonus shares are issued to capitalise a part of the company's retained earnings.
●​ They do not represent a cash outflow and maintain the company's cash reserves.

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●​ Bonus shares cannot be issued in lieu of dividends.

Rights Issue (RI)

●​ Definition: An offer to current shareholders to purchase additional shares in the company at a
discounted price on a pro-rata basis.​
Regulation:
●​ Governed by Section 62 of the Companies Act.
●​ Pre-emptive in nature, meaning shareholders have the first right of refusal.
●​ Notes:
●​ The rights issue allows current shareholders to avoid dilution of their ownership.
●​ Shareholders can transfer their rights if they choose not to purchase additional shares.
●​ Companies opt for rights issues to raise capital while respecting the preferential rights of
existing shareholders.

Private Placement
●​ Definition: Sale of securities to a preselected number of individuals and institutions rather than
on the open market.​
Regulation:
●​ Detailed in Section 42 of the Companies Act, 2013.
●​ Limited to a specific number of investors (200 or fewer in a financial year).
●​ Notes:
●​ Private placements are not open to the general public.
●​ It's a faster and less costly way of raising capital compared to public issues.
●​ Offerings are typically made to institutional investors and high-net-worth individuals.

In addition to the types of issues, there are specific regulatory and procedural requirements that
companies must adhere to when issuing shares, including proper documentation, adherence to the
prescribed timelines for allotment, and fulfilling reporting obligations to regulatory authorities like the
Registrar of Companies (ROC) and SEBI.

Type of Notes and Additional

Issue Definition and Key Points Conditions and Regulations Information

- IPOs require compliance with SEBI

- IPO: Unlisted company - IPO marks a company's
regulations, company law, and stock
offers securities for the first transition from private to
Public exchange rules.
time. public.
Issue - FPOs follow after the company is
- FPO: Subsequent public - FPOs diversify the equity
already listed and wants to raise
issues. base or raise additional funds.
more capital.

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- Authorisation by AOA. <br> - - Capitalises part of the

- Issuance of additional shares Shareholder approval in general company's retained earnings.
Bonus
to existing shareholders from meeting. <br> - No default in <br> - No cash outflow;
Issue
the company's reserves. payment of interest or principal on preserves cash reserves. <br>
debt. - Not in lieu of dividends.

- Governed by Section 62 of the - Protects against ownership

- Offer to current Companies Act. <br> - Pre-emptive dilution. <br> - Rights can be
Rights
shareholders to buy additional rights must be observed. <br> - transferred. <br> - Used for
Issue (RI)
shares at a discounted price. Notice period of 15–30 days for capital raising while
shareholders. respecting shareholder rights.

- Not open to the general

- As per Section 42 of the public. <br> - Less regulatory
Private Companies Act, 2013. <br> - Limited and procedural burden
- Sale of securities to a select
Placemen to 200 investors per financial year. compared to public issues.
group of investors.
t <br> - Excludes QIBs and ESOP <br> - Often aimed at
offerings. institutional investors and
high-net-worth individuals.

The case of Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment
Corporation Limited (SHIC) versus the Securities and Exchange Board of India (SEBI) revolves around the
issuance of Optionally Fully Convertible Debentures (OFCDs) by the appellants, part of the Sahara group.

Here is a summarised analysis of the case details:

●​ Background: SIRECL and SHIC raised approximately INR 23,000 crores from investors through
the issuance of OFCDs. This was done by passing a special resolution as per Section 81(1A) of the
Companies Act, and a Red Herring Prospectus (RHPs) was filed with the Registrar of Companies
(ROC), stating the companies did not intend to list the shares on any stock exchange.
●​ Purpose of Fundraising: The companies declared that the raised funds were meant for financing
various infrastructure projects, including the construction of bridges and modernisation of
transportation systems like airports and railways.
●​ Legal Issue: SEBI received complaints alleging that the Sahara group was issuing housing bonds
without adhering to the appropriate rules and regulations set by RBI/MCA/NHB. This led to
scrutiny from SEBI.
●​ Supreme Court's Observations: The Court noted that OFCDs are in the nature of debentures. The
issue of OFCDs was not considered a private placement because it was offered to more than 50
persons, which classified it as a public issue. Consequently, SEBI had jurisdiction over the matter
as per Section 55A of the Companies Act, which pertains to the regulation of securities and the
protection of investor interests in unlisted public companies.
●​ Conclusion: The Supreme Court concluded that the appellant companies had knowingly issued
securities through what was ostensibly a private placement to bypass various laws and
regulations.

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The key takeaway from this case is the clarification of what constitutes a public issue versus a private
placement. The action by Sahara was deemed a public issue since it involved more than 50 persons,
bringing it under SEBI’s jurisdiction and subjecting it to public issue regulations. This case underscores
the necessity for companies to strictly adhere to securities laws and the consequences of attempting to
circumvent legal requirements for issuing financial instruments.

Company ABC offers shares exclusively to existing employees, and their families and friends. Would this
amount to private placement?

Yes, offering shares exclusively to existing employees, their families, and friends can amount to a private
placement, provided the offering satisfies the conditions laid out for private placements under the
Companies Act, 2013. According to Section 42 of the Companies Act, 2013, and the rules issued
thereunder, a private placement is characterised by an offer of securities or shares to a select group of
persons by a company (other than by way of a public offer) through issue of a private placement offer
letter.

However, there are specific conditions that need to be met:

●​ The offer of securities or shares can be made to a maximum of 200 people in total in a financial
year (not counting qualified institutional buyers and employees offered securities under a stock
option scheme).
●​ The offer and invitation to subscribe to shares cannot be made to the public at large.
●​ All the requirements specified under Section 42 of the Companies Act, 2013, regarding private
placements must be adhered to. This includes the preparation of a private placement offer letter,
maintaining a complete record of private placement offers, and filing the return of allotment with
the Registrar of Companies, among other procedural requirements.
●​ The company must ensure that the offer is not advertised and that it is only made to persons
whose names are recorded by the company beforehand as being offered securities.

If the number of offerees exceeds the stipulated limit or if any other conditions of private placement are
not met, the offer might be deemed a public offer, subjecting the company to the regulatory
requirements of a public offering, including the need to comply with the more stringent disclosure and
procedural norms required for a public issue under the Securities and Exchange Board of India (SEBI)
regulations.

Private placement offered in 2 bouts to 110 people each within a financial year- is this private
placement?

Under the Companies Act, 2013, in India, a private placement is required to be made to not more than
200 individuals in aggregate in a financial year. This limit excludes qualified institutional buyers (QIBs)
and employees who are offered securities under an employee stock option plan (ESOP).

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If a private placement is offered in two separate tranches to 110 individuals each within the same
financial year, it would aggregate to 220 individuals. This exceeds the statutory limit of 200 individuals
and, therefore, would not qualify as a private placement according to the conditions prescribed under
the Act. In this scenario, the offer may be treated as a public issue and would be subject to the provisions
applicable to public offerings, including the requirement to comply with the procedures and disclosure
obligations under the Securities and Exchange Board of India (SEBI) regulations.

It is essential for companies to carefully plan and execute private placements to ensure compliance with
the legal thresholds and requirements. Failure to do so can lead to regulatory action and may necessitate
the company to undertake additional legal and procedural compliances as mandated for public issues.

Assignment: Write a short note on Sahara India Real Estate Corp Ltd and Ors. V. SEBI

Session 8

Srishti-Sneha-JLSR reduction in share capital.pdf

Here's a summarised analysis of the key points:

●​ Concept of Share Capital Reduction: It involves decreasing a company’s shareholder equity
through methods like share cancellations and repurchases, often aimed at restructuring capital
to increase shareholder value or in response to operating losses.
●​ Reasons for Capital Reduction: Can include distributing assets to shareholders, tax
considerations, compensating for deficits, or when the company has excess capital that cannot
be profitably used.
●​ Legal Framework: Governed by Section 66 of the Companies Act, 2013. Previously managed by
civil courts, post-amendment, the National Company Law Tribunal (NCLT) oversees capital
reduction, ensuring it doesn't adversely affect any parties and is in line with the law.
●​ Procedure for Reduction with Tribunal Sanction: Involves a specific resolution by the company,
application to the tribunal, notice to relevant governmental bodies, and compliance with several
procedural safeguards to ensure fairness to creditors and shareholders.
●​ Reduction without Tribunal Sanction: Can occur via buyback of shares under Section 67,
forfeiture of shares for non-payment, surrender of shares, diminution of capital, or redemption
of shares as specified under relevant sections of the Companies Act.
●​ Judiciary’s Role and Precedents: Courts typically do not interfere with a company’s internal
decision to reduce capital unless it is against public interest, unfair to shareholders, or creditors’
rights are not protected. Several landmark cases like those involving Tamil Nadu Newsprint and
Papers Ltd., Sandvik Asia, and Cadbury India Limited have shaped the jurisprudence in this area.

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●​ Regulatory Oversight: SEBI and stock exchanges have roles in protecting the interests of
minority shareholders, particularly in listed companies, where they can object to schemes of
reduction not in the public interest.
●​ Importance of Fair Valuation: Courts have emphasised the need for fair valuation of shares
during reduction and the consideration of minority shareholder interests, often requiring
independent valuations.
●​ Public Policy Considerations: Reduction schemes must align with public policy and broader
societal interests, as per judicial interpretations.

In conclusion, the reduction of share capital is a regulated process that must be approached with a
comprehensive understanding of both legal and financial implications. It requires careful balancing of the
interests of the company, its shareholders, creditors, and regulatory bodies, ensuring that any reduction
is fair, equitable, and not prejudicial to any stakeholders.

Buy Back of Shares:

●​ The process where a company repurchases its own shares from existing shareholders is known
as a buyback.
●​ This method is used to reduce share capital without needing to undergo the reduction process
that requires approval from the Court or the National Company Law Tribunal (NCLT).
●​ Unlisted and private companies are governed by the Companies Act for buybacks, while listed
companies must also adhere to the SEBI (Securities and Exchange Board of India) Buy Back
regulations.

Reasons for Share Buyback:

●​ Serves as an alternative method for capital reduction without the need for court/NCLT approval.
●​ Aims to improve earnings per share (EPS) by reducing the number of shares outstanding.
●​ Enhances return on capital and increases long-term shareholder value.
●​ Provides an additional exit strategy for shareholders, especially when shares are undervalued or
thinly traded.
●​ Helps consolidate the stake in the company, which can be beneficial for controlling interests.
●​ Can be used as a defensive strategy to prevent hostile takeover attempts.
●​ Allows the company to return surplus cash to its shareholders in a tax-efficient manner.
●​ Facilitates the achievement of an optimum capital structure for the company.
●​ Supports and potentially stabilises share price during times of market volatility or sluggish
conditions.

The summary encapsulates the strategic reasons behind share buybacks and the regulatory framework
governing this process. Companies may opt for a buyback as a means to efficiently manage their capital
structure and provide value to shareholders.

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Companies Act- Sec 68, 69, 70

68. (1) Purchase can be made out of:

●​ its free reserves;

●​ the securities premium account; or
●​ the proceeds of the issue of any shares or other specified securities:

• No buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier
issue of the same kind of shares or same kind of other specified securities.

68. (2) Preliminary Conditions:

●​ must authorised by its articles;

●​ a special resolution has been passed at a general meeting of the company authorisinging the buy-back, but
the same is not required when:

i. the buy-back is 10% or less of the total paid-up equity capital and free reserves of the company; and ii. such
buy-back has been authorized by the Board by means of a resolution passed at its meeting;

●​ the buy-back is twenty-five per cent or less of the aggregate of paid-up capital and free reserves of the
company. But in case of Equity Shares, the same shall be taken as 25% of paid up equity capital only.
●​ Debt equity ratio should be 2:1

Where: Debt is aggregate of secured and unsecured debts owed by the after buy-back
Equity: is aggregate of the paid-up capital and its free reserves:

●​ all the shares or other specified securities for buy-back are fully paid-up;
●​ If shares or securities are listed, buy back will be in accordance with the regulations made by the
Securities and Exchange Board in this behalf; and
●​ the buy-back in respect of unlisted shares or other specified securities is in accordance Share Capital and
Debentures Rules, 2014.
●​ No offer of buy-back shall be made within a period of one year from the date of the closure of the
preceding offer of buy-back, if any.

●​ Section 68(1) - Sources of Buyback:

○​ Free reserves (e.g., retained earnings not allocated for any specific purpose)
○​ The securities premium account (e.g., the excess of proceeds over the face value from
the issuance of shares)
○​ Proceeds of the issue of any shares or specified securities
○​ Example: A company selling shares at a premium can use the excess received over the
nominal value of shares (securities premium) to buy back its shares.
●​ Section 68(1) - Restrictions:
○​ Buyback cannot be made from the proceeds of an earlier issue of the same kind of
shares or specified securities.
○​ Example: If a company issued equity shares to raise capital, it cannot use the funds from
this to buy back equity shares.
●​ Section 68(2) - Preliminary Conditions for Buyback:
○​ Must be authorised by the company's articles of association.

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○​ A special resolution is required at a general meeting for buyback unless:

■​ The buyback is 10% or less of the total paid-up equity capital and free reserves,
which can be authorised by a Board resolution.
■​ Example: If the total paid-up capital and reserves are INR 100 crore, the
company can buy back shares worth up to INR 10 crore with Board approval
alone.
○​ The buyback is 25% or less of the aggregate of paid-up capital and free reserves. In the
case of equity shares, this limit is 25% of the paid-up equity capital.
○​ The debt-to-equity ratio post-buyback should not be more than 2:1.
■​ Example: If a company has INR 50 crore in equity, it should not have more than
INR 100 crore in debt after the buyback.
○​ All shares or specified securities for buyback must be fully paid up.
○​ For listed securities, buyback must comply with SEBI regulations.
○​ For unlisted securities, buyback must comply with the Share Capital and Debentures
Rules, 2014.
○​ No buyback offer can be made within one year from the closure of the preceding
buyback.
●​ Section 69 - Obligation to Buyback:
○​ Specifies the obligations of the company when conducting a buyback, such as sources
of funds and procedural compliance.
●​ Section 70 - Prohibition for Buy-back in Certain Circumstances:
○​ Prohibits buyback if the company has defaulted on repayment of deposits, payment of
declared dividends, or redemption of debentures or preference shares.
○​ Example: If a company has failed to repay a fixed deposit on maturity, it cannot proceed
with a share buyback until the default is remedied.

Reduction of Share Capital

○​ Against the very ethos of the company as company is normally formed to increase share capital and not
reduce it
○​ The share capital of a company is the only security on which the creditors rely. Any reduction of share
capital, therefore, diminishes the fund out of which they are to be paid.
○​ The need for reduction, however may arise in various circumstances primarily prompted either by loss or
the need for consolidation of position and earning.

Procedure for Reduction of Share Capital:-

1.​ Special resolution for the reduction of capital,

2.​ Apply to the tribunal by way of petition to confirm the special resolution under section 66 of the
Companies Act.​
The creditors are entitled to object where the proposed reduction of share capital involves either:
1.​ the diminution of liability in respect of unpaid capital

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2.​ the payment to any share holder of any paid-up share cap[ital, or in any other case, if the tribunal so
directs
○​ If any creditor objects, either his consent to the proposed reduction should be obtained or he should be
paid off or his payment secured.
○​ However the tribunal may dispense with the consent of a creditor on the company securing payment of
the debt or claim by appropriating the full amount or that fixed by the tribunal.

Reduction of share capital, despite seeming contrary to the typical objectives of a company aimed at
increasing capital, is a strategic move under certain circumstances. Here are the key points, including the
procedural steps as per the Companies Act, with examples where applicable:
●​ Contrary to Company Ethos: Reduction of share capital might appear against the company's
ethos, which is generally to increase share capital. However, it may be necessary for various
strategic reasons.
●​ Security for Creditors: Share capital is a primary security for creditors; its reduction may
decrease the fund available for their repayment. For example, if a company with a share capital
of ₹10 crores reduces it to ₹7 crores, the creditors' security diminishes by ₹3 crores.
●​ Circumstances Necessitating Reduction: The need for reduction may arise due to losses or the
need for consolidation to strengthen the company's position and earnings. A company might
reduce its capital to write off accumulated losses, thereby presenting a more realistic financial
position.
●​ Procedure for Reduction of Share Capital:
●​ Special Resolution: The company must pass a special resolution for the reduction of
capital, indicating the company's and its shareholders' agreement to the reduction.
●​ Tribunal Application: Apply to the tribunal with a petition to confirm the special
resolution under Section 66 of the Companies Act. This involves a legal process where
the company's reasons and plans for capital reduction are reviewed.
●​ Creditors' Rights and Objections:
●​ Creditors can object to the reduction if it involves diminution of liability in respect of
unpaid capital or payment to any shareholder of any paid-up share capital.
●​ In case of objections, the company must either obtain the creditor's consent, pay off or
secure the creditor's payment.
●​ Example: If a creditor is owed ₹2 crores by the company, and the reduction of capital
affects the company's ability to repay, the creditor can object. The company might then
decide to secure the debt by setting aside funds or reaching an agreement with the
creditor.
●​ Tribunal's Power to Dispense with Consent: The tribunal may allow the company to proceed
with the reduction without a creditor's consent, provided the company secures the payment of
the debt or claim. This could involve setting aside a specific amount determined by the tribunal
as security for the debt.

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●​ Securing Debts: The company may be required to appropriate a full amount or an amount fixed
by the tribunal to secure the payment of debts or claims. This ensures that creditors are
protected against potential losses due to the capital reduction.

This structured approach balances the company's strategic needs with the protection of creditors'
interests, ensuring that the process is conducted fairly and transparently.

• Tamil Nadu Newsprint and papers Ltd. V. Registrar of Companies, 1995

(4) TMI 222 Madras High Court- allowed reduction of excess amount raised from 98 crores to 50 crores by
proportionate return to shareholders, partly in cash, partly by issue or irredeemable debentures.

The case of Tamil Nadu Newsprint and Papers Ltd. v. Registrar of Companies, 1995 (4) TMI 222 Madras
High Court provides an illustrative example of the reduction of share capital in practice. Here are the
details in bullet points:
●​ Background: Tamil Nadu Newsprint and Papers Ltd. proposed a reduction of its share capital
from ₹98 crores to ₹50 crores. This significant reduction was aimed at adjusting the company's
capital structure to its actual financial needs and performance.
●​ Method of Reduction: The reduction was to be carried out by returning a proportionate amount
to shareholders, partly in cash and partly by the issue of irredeemable debentures. This
approach balanced the return of excess capital to shareholders while maintaining some level of
equity within the company.
●​ Court's Decision: The Madras High Court allowed the reduction of share capital as proposed by
Tamil Nadu Newsprint and Papers Ltd. This decision underscored the court's recognition of the
company's rationale behind the reduction and its method of executing the reduction.
●​ Legal Compliance: The case demonstrated adherence to the legal procedure for capital
reduction, including obtaining approval from the court after satisfying requirements regarding
creditors' protection. The company's approach ensured that the interests of both shareholders
and creditors were considered and protected.
●​ Significance: This case serves as an example of how companies can effectively reduce their
share capital while complying with legal requirements and safeguarding the interests of
stakeholders. It highlights the flexibility within the legal framework to accommodate strategic
financial decisions by companies.
●​ Impact on Creditors and Shareholders: By opting for a mix of cash returns and irredeemable
debentures, the company managed to reduce its share capital without significantly impacting its
liquidity or operational capabilities. This method also provided value to shareholders, offering
them immediate liquidity through cash and long-term value through debentures.
This case exemplifies the procedural and strategic considerations involved in the reduction of share
capital within the Indian legal and corporate framework, showcasing the balance between corporate
objectives and the protection of stakeholders' interests.

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• OCL India Ltd. AIR 1998 Ori 153 Orissa High Court allowed for reduction of excess raised though a rights issue for a
project.

The case of OCL India Ltd., AIR 1998 Ori 153 Orissa High Court is another pivotal example concerning the
reduction of share capital, demonstrating the legal framework and judicial stance on such matters within
the Indian context. Here's a detailed breakdown:
●​ Context and Background: OCL India Ltd. had raised excess funds through a rights issue intended
for a specific project. Post raising the funds, it was determined that the capital raised was more
than what was needed, leading to the decision to reduce the share capital.
●​ Method of Reduction: Although the specific method of reduction (e.g., returning funds to
shareholders, adjusting against losses, etc.) is not detailed, the court's approval indicates that
OCL India Ltd. proposed a method that was deemed reasonable and equitable by the judiciary.
Companies typically opt for methods such as paying off excess to shareholders, issuing
debentures, or writing off losses.

The concept of reducing share capital through a rights issue might seem counterintuitive at first, because
a rights issue typically involves issuing new shares to existing shareholders, potentially increasing the
company's share capital rather than reducing it. However, in certain contexts, a rights issue can indirectly
lead to a reduction of share capital or be part of a broader strategy that includes a reduction of share
capital. Here's how this can work:
●​ Rights Issue to Repay Debt: A company may undertake a rights issue to raise funds specifically
to repay outstanding debt. While the immediate effect is an increase in share capital, the
repayment of debt improves the company's balance sheet and can lead to a reduction in overall
capital employed. The reduction in debt can be seen as a rebalancing of the capital structure
rather than a direct reduction of share capital.
●​ Avoiding Dilution: In a scenario where a company wishes to reduce its share capital (for
example, to write off accumulated losses) without diluting existing shareholders' equity, it might
first increase its share capital through a rights issue. The funds raised could then be used to
improve the company's financial health or repay debt, after which a formal capital reduction
process could be initiated. This step might involve consolidating shares or reducing the nominal
value of shares, effectively reducing the share capital to a level that reflects the company's
revised financial position.
●​ Excess Capital Adjustment: If a company finds itself with excess capital following a rights
issue—perhaps because the funds raised exceed the actual needs for a planned project or due to
overestimation of requirements—it may decide to reduce its share capital. This could involve
returning the excess funds to shareholders in a manner compliant with legal requirements,
thereby adjusting the capital to a more appropriate level.

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●​ Capital Restructuring: A rights issue followed by a share capital reduction could be part of a
larger capital restructuring plan. For instance, a company might issue rights to raise funds with
the specific intent of repurchasing its own shares or paying off liabilities that are then followed
by a reduction in share capital. This restructuring can help in optimizing the company's equity
structure, making it more efficient and tailored to its operational needs.
●​ Example Scenario: A company might issue rights to its shareholders to raise funds at a time
when it is seeking to streamline operations and focus on core competencies. The funds raised
could be used to settle outstanding debts or buy back shares. Subsequently, the company might
proceed with a share capital reduction, either by reducing the nominal value of shares or by
cancelling shares that were bought back. This process allows the company to adjust its capital
structure in a way that reflects its current strategic direction and financial health.

In practice, the reduction of share capital through or following a rights issue is a strategic decision and
requires careful planning, legal compliance, and communication with shareholders and other
stakeholders. The process must be carried out in accordance with the Companies Act and, usually,
requires approval from both the shareholders (through a special resolution) and the relevant regulatory
or judicial authorities.

Transfer and Transmission of Securities

○​ Shahzadi Begum Saheba v. Giridharilal Sanghi AIR 1976 AP 273

○​ A share is freely transferrable and there cannot be any absolute restriction imposed by articles. Articles
may prescribe the mode of transfer and procedural restrictions.
○​ Transfer refers to right of every member to pass on ownership, pledge or mortgage his shares.
○​ Transmission of shares takes place under the following cases:

(i) On death of the registered share holder

(ii) Where he is adjudged as an Insolvent;
(i) Where the shareholder is a company, it goes into liquidation.

The concepts of transfer and transmission of securities are fundamental to understanding the rights and
obligations associated with share ownership. Let's break down these concepts with the context of the
case law and examples for clarity.

Transfer of Shares
●​ Definition: Transfer of shares refers to the voluntary act of a shareholder to pass on the
ownership, pledge, or mortgage his shares to another person. This is an active process initiated
by the shareholder to change the ownership of the shares.
●​ Legal Framework: As highlighted in Shahzadi Begum Saheba v. Giridharilal Sanghi, AIR 1976 AP
273, a share is freely transferable, but this freedom can be subject to procedural restrictions or

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modes of transfer as prescribed by the articles of association of the company. However, any
absolute restriction on the transferability of shares imposed by the articles would be invalid.
●​ Example: Suppose Mr. A owns 100 shares of XYZ Ltd. He decides to sell 50 shares to Mr. B. They
follow the procedure laid out in the company's articles of association, which might include filling
out a share transfer form and submitting it to the company along with the share certificates.
Upon approval, the shares are transferred to Mr. B, and the company's register of members is
updated to reflect this change.

Transmission of Shares
●​ Definition: Transmission of shares refers to the automatic transfer of shares as a result of the
operation of law. Unlike transfer, transmission is not initiated by the shareholder but occurs due
to certain events.
●​ Cases of Transmission:
○​ On Death of the Registered Shareholder: The shares are transmitted to the legal heirs or
persons named in the will of the deceased shareholder.
○​ Where the Shareholder is Adjudged as an Insolvent: The shares are transmitted to the
official assignee or receiver, as the case may be.
○​ Where the Shareholder is a Company, and It Goes into Liquidation: The shares are
transmitted to the liquidator.
●​ Example 1 (Death): If Mr. C, a shareholder of ABC Ltd., passes away, his shares will be
transmitted to his legal heirs or the executor of his will, subject to the company’s articles and the
relevant legal procedures. This does not require the heirs to take any active steps for the transfer
but to provide evidence of their entitlement.
●​ Example 2 (Insolvency): If Mr. D, a shareholder, is declared insolvent, his shares in DEF Ltd.
would be transmitted to the trustee in bankruptcy or official assignee, who may then sell these
shares as part of the insolvency proceedings.
●​ Example 3 (Liquidation): Should GHI Ltd., a corporate shareholder in JKL Ltd., go into liquidation,
the shares it holds in JKL Ltd. would be transmitted to the liquidator appointed for GHI Ltd. The
liquidator could then sell these shares as part of the liquidation process to pay off creditors.

In both transfer and transmission, the key difference lies in the initiation and reason behind the change in
ownership.

While transfer is a deliberate act by the shareholder, transmission is triggered by specific events and
operates by law.

These processes ensure that shares remain liquid assets, albeit with certain legal and procedural
safeguards to protect the interests of all stakeholders involved.

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Debentures

○​ Section 2(30) of the Companies Act, 2013 define "debenture" which includes debenture stock, bonds or
any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the
company or not.
○​ Thus, Debenture is a written instrument acknowledging a debt to the Company.
○​ It contains a contract for repayment of principal after a specified period or at intervals or at the option of
the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on
fixed dates.

Debentures are a key financial instrument used by companies to borrow funds from the public. They
represent a debt of the company and come with various terms and conditions regarding security,
redemption, convertibility, and transferability. Let's explain the types of debentures as indicated in the
provided diagram, along with examples for each:

Based on Risk
1.​ Secured Debentures: These are backed by the company's assets, meaning that if the company
defaults, the debenture holders can claim their money by selling the secured assets.
●​ Example: A debenture issued by a real estate company might be secured against its
office buildings.
2.​ Unsecured Debentures: Also known as naked debentures, these are not secured by any of the
company’s assets. They are riskier than secured debentures.
●​ Example: A company might issue unsecured debentures to raise funds for new projects
without assigning any specific assets as security.

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Based on Redemption
1.​ Redeemable Debentures: These debentures come with a specific date of redemption on which
the principal amount is repaid to the debenture holders.
●​ Example: A 10-year redeemable debenture will be repaid at the end of the 10-year
period.
2.​ Irredeemable Debentures: Also known as perpetual debentures, they do not have a fixed date of
redemption and are repayable on the winding-up of the company or upon the issuer's
discretion.
●​ Example: A company might issue irredeemable debentures that it plans to pay back
only when it is financially advantageous to do so or upon liquidation.

Based on Conversion
1.​ Convertible Debentures: These can be converted into equity shares of the company after a
certain period of time, as per the terms of the issue.
●​ Example: A company may issue debentures that are convertible into shares after 5 years
at a predetermined rate.
2.​ Non-Convertible Debentures: These cannot be converted into equity shares and are repayable
on the maturity date.
●​ Example: A financial institution might issue non-convertible debentures to raise funds
for its long-term financial investments.

Based on Transferability
1.​ Bearer Debentures: These are transferable by mere delivery and are not recorded in the
company's register of debenture holders.
●​ Example: A bearer debenture can be transferred from one person to another by simply
handing over the physical debenture certificate.
2.​ Registered Debentures: These are transferable only by executing a transfer deed and are
recorded in the company's register.
●​ Example: If Mr. E wants to transfer his registered debentures to Mr. F, he must endorse
the transfer deed, and the company will record Mr. F as the new holder in its books.

In practice, companies issue debentures to diversify their borrowing sources. Secured debentures are
generally preferred by risk-averse investors, while unsecured ones may offer higher interest rates to
compensate for the increased risk. Redeemable debentures provide a clear timeline for investment
return, whereas irredeemable debentures might appeal to those looking for long-term investments.
Convertible debentures are attractive for investors betting on the company's future growth, as they offer
the potential for capital gains in addition to interest income.

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Finally, the choice between bearer and registered debentures can depend on the investor's need for
liquidity and anonymity, or the desire for formal recognition and the protections it offers.

Investor Protection

○​ Mundhra, Harshad Mehta, Ketan Parekh Current Legislative infrastructure for Investor protection:
○​ Companies Act, 2013
○​ Companies Rules for Prospectus and raising of Capital
○​ SCRA
○​ SEBI Act, 1992
○​ SEBI Regulations- Over 60
○​ Issue of Capital and Disclosure Requirements
○​ Prohibition of Fraudulent and Unfair Trade Practice Act
○​ Insider Trading
○​ Substantial Acquisition and takeover
○​ FEMA, 1999 and FDI policy
○​ Prevention of Money Laundering Act, 2002​
IBC Code, 2016

Legislation/Regulation Purpose Investor Protection Measures

Mandates detailed disclosures, directors'

Governs the incorporation, regulation, and
Companies Act, 2013 responsibilities, audit requirements, and
winding up of companies.
shareholder rights.

Companies Rules for

Prescribes the format and content of the Ensures companies provide essential and
Prospectus and Raising
prospectus for raising capital. accurate information to investors.
of Capital

Securities Contracts Controls over stock exchanges, prohibition

(Regulation) Act (SCRA), Regulates trading of securities. of certain trading types, and regulatory
1956 oversight.

Grants SEBI regulatory and enforcement

SEBI Act, 1992 Establishes SEBI for market oversight. powers to protect investors and regulate
the securities market.

Comprehensive regulations addressing

SEBI Regulations (Over Cover various aspects of the securities
insider trading, mutual funds, market
60) market.
conduct, etc.

Issue of Capital and

Imposes requirements for disclosures, use
Disclosure Regulates the issuance of securities by
of issue proceeds, and protection of
Requirements (ICDR) companies.
investor funds during issues.
Regulations

Prohibition of
Fraudulent and Unfair Protects investors against market
Prohibits fraudulent market practices.
Trade Practice manipulation and fraudulent activities.
Regulations

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Insider Trading Prohibits trading by insiders with Ensures fair trading and maintains market
Regulations non-public information. integrity.

Substantial Acquisition Ensures fair treatment of shareholders and

Governs acquisition of shares and company
of Shares and Takeovers requires disclosure during significant share
takeovers.
Regulations acquisitions and takeovers.

Foreign Exchange
Management Act Oversees foreign investments and protects
Regulates cross-border investments and
(FEMA), 1999 and domestic investors and the economy from
foreign exchange.
Foreign Direct disruptive capital flows.
Investment (FDI) Policy

Prevention of Money Prevents conversion of illicit gains into

Laundering Act (PMLA), Prevents money laundering activities. legitimate assets, which can distort asset
2002 prices and harm investors.

Aims to maximize asset value, promote

Insolvency and
Consolidates laws relating to insolvency entrepreneurship, and balance interests of
Bankruptcy Code (IBC),
and bankruptcy. all stakeholders including investors in
2016
insolvency.

Assignment: Explain the concept of buy back and reduction of share capital.

The concepts of buy-back and reduction of share capital are both mechanisms employed by companies
to manage their capital structure for various strategic reasons. While they share the commonality of
reducing the company's share capital, they are distinct processes governed by different regulatory
frameworks and with different implications for the company and its shareholders.

Buy-Back of Shares
A buy-back is when a company purchases its own outstanding shares from the shareholders. The
Companies Act of 2013, under sections 68 to 70, lays out the framework for buy-backs in India. When a
company buys back its shares, those shares are either cancelled or held as treasury shares, thereby
reducing the total number of shares in circulation.

Reasons for Buy-Back:

●​ Surplus Cash: A company may decide to buy back shares when it has excess cash that it does
not need for immediate reinvestment or operational needs.
●​ Earnings Per Share (EPS) Improvement: Reducing the number of shares increases EPS, which can
make the company appear more attractive to investors.
●​ Share Price Support: Buy-backs can signal the management’s confidence in the company,
potentially supporting or increasing the share price.

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●​ Defence Strategy: It can be used as a tactic to prevent hostile takeovers by reducing the number
of shares available for potential acquirers.
●​ Capital Structure Optimization: Companies may buy back shares to change their debt-to-equity
ratio, often to increase return on equity.

Procedure for Buy-Back:

●​ Board Resolution or Special Resolution: Depending on the size of the buy-back, authorization
may be required from the board or the shareholders through a special resolution.
●​ Buy-Back Offer: The company makes an offer to the shareholders, specifying the number of
shares it intends to buy back and the price range.
●​ Funding: The buy-back must be financed out of the company's free reserves, securities premium
account, or proceeds of any shares or other specified securities.
●​ Regulatory Compliance: The company must adhere to the buy-back regulations, maintaining a
certain debt-equity ratio and ensuring that the buy-back does not adversely affect the
company's ability to meet its debt obligations.

Reduction of Share Capital

A reduction of share capital, on the other hand, is a process by which a company decreases its share
capital. The Companies Act, 2013, under sections 66 and related rules, provides the legal framework for
this process. Reduction can happen in several ways, including writing off losses, paying off shareholders,
and restructuring the company’s capital after a buy-back.

Reasons for Reduction of Share Capital:

●​ Elimination of Accumulated Losses: A reduction can clean up the balance sheet by writing off
accumulated losses, which may not be recoverable.
●​ Return of Surplus Capital: If the company's assets are more than it needs to cover its liabilities
and growth plans, it might return capital to shareholders.
●​ Restructuring: If a company is downsizing or changing its business model, it may reduce its
capital to reflect its new structure.

Procedure for Reduction of Share Capital:

●​ Special Resolution: A special resolution must be passed by the shareholders authorizing the
reduction.
●​ Tribunal Approval: The company must apply to the National Company Law Tribunal (NCLT) for
approval of the reduction, providing a full disclosure of its financial position.
●​ Protection of Creditors: The tribunal must ensure that creditors are protected, which may
involve the company providing security for the payment of debts.

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●​ Registration of Order: Once the tribunal approves the reduction, the order must be registered
with the Registrar of Companies.

Differences Between Buy-Back and Reduction:

●​ Intent: Buy-backs are often conducted to improve financial ratios or manage excess cash, while
reductions are more strategic and structural in nature.
●​ Method: Buy-back involves the actual purchase of shares, while reduction can involve writing
off debts or directly decreasing share capital without purchasing shares.
●​ Regulatory Process: Buy-backs can usually be completed following board or shareholder
approval, subject to regulatory limits, while reductions require a more extensive process,
including tribunal approval.

Impact on Shareholders: In both scenarios, the interests of shareholders can be significantly affected.
Buy-backs can offer an exit route at a premium price, often seen as beneficial for shareholders.
Reductions can also be positive if they lead to a stronger balance sheet, although they may not offer an
immediate cash benefit like a buy-back.

Market Perception: The market may perceive buy-backs as a sign of strength since they can indicate that
the company’s shares are undervalued or that the company is confident about its future. Conversely, a
reduction in capital might be viewed with caution, as it could suggest that the company is contracting or
has excess capital due to a lack of profitable investment opportunities.

Conclusion: Both buy-backs and reductions of share capital can be vital tools for corporate
management. They serve different purposes and are subject to distinct legal procedures and regulations.
Properly executed, they can both contribute to shareholder value, although they do so in different ways
and with different implications for the company’s capital structure and market perception. It is important
for management to communicate the rationale, benefits, and risks associated with either process to
shareholders and the market to maintain trust and support for these corporate actions.

Session 9
Directors play a crucial role in the governance and management of a company, serving as a bridge
between the shareholders and the day-to-day operations of the company. They are appointed to the
Board of Directors and hold significant responsibilities, as outlined by company law.

Definition and Role of Directors

●​ According to Section 2(34) of the Companies Act, 2013, a "director" means a director appointed
to the Board of a company.
●​ The Board of Directors constitutes the management of the company, alongside the Manager and
the shareholders, who typically exercise their powers in an Annual General Meeting (AGM).

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●​ As per Section 179 of the Companies Act, 2013, read with Rule 8, the Board of Directors is
entitled to exercise all the powers and to do all the acts that the company is authorised to do,
except those that are expressly required by the Act or by the company's Articles of Association
to be done in an AGM.

Powers and Position of Directors

●​ Directors are the individuals who, as per the "Old Act," occupy the position of a director, by
whatever name they are called.
●​ The Board of Directors operates collectively to make decisions and set the company’s strategic
direction.

Legal Judgments on Directors

●​ In the case of Oriental Metal Pressing Works (P.) Ltd. v. B.K Thakoor [1961] 31 Comp. Cas. 143, it
was established that only a natural person can hold the position of a director.
●​ The Supreme Court in Dale & Carrington Investment (P.) Ltd. v. P.K Prathapan [2004] 54 SCL 601
(SC) elucidated the position of a director as a fiduciary, meaning they must act in the best
interests of the company.

Directors as Agents and Trustees

●​ Director as an Agent: Directors act on behalf of the company. They can be liable in situations
where an agent would be liable. If the liability ought to pass to the principal (the company), then
it is the company that is liable.
●​ Director as a Trustee: The term "trustee" is not fully accurate and can cause confusion when
applied to directors. While directors do have a fiduciary duty to the company, they do not hold
its property as trustees in the traditional sense. The fiduciary aspect implies that directors must
act loyally and in good faith.

Fiduciary Duties and Duties of Care and Skill

●​ As fiduciaries, directors owe duties of loyalty and good faith to the company. They must place
the company's interests above their own and avoid conflicts of interest.
●​ They also have duties of care and skill, which require them to act with a certain level of
competence and diligence that is reasonably expected from someone in their position.

General Duties of a Director:

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General Duties of a Director

1.​ Duty to Act Bona Fide (In Good Faith)
●​ Directors must make decisions honestly and in the best interests of the company, rather
than for any personal gain.
●​ Example: A director should not approve a contract with a supplier owned by a family
member if it's not the most beneficial deal for the company.
2.​ Duty to Disclose Self-Interest
●​ Directors must disclose any personal interest they have in a transaction the company is
considering.
●​ Example: If a director stands to benefit from a company transaction due to a stake in
another company involved, this conflict of interest must be disclosed to the board.
3.​ Duty of Unfettered Discretion
●​ Directors should not be influenced by external pressures and should use their
independent judgment in decision-making.
●​ Example: Directors should not accept directives from a major shareholder that might
conflict with the company’s interests.
4.​ Duty to Confine Within the Purposes of the Company
●​ Directors must ensure that the company’s activities stay within the scope of its
objectives as outlined in its memorandum of association.
●​ Example: A director of a manufacturing company must not engage in unrelated business
activities like investing in real estate unless it's within the company's stated objectives.

The case of Percival vs. Wright (1902) established that directors do not owe a fiduciary duty to individual
shareholders, but rather to the company as a whole.

Duties of a Director under Section 166 of the Companies Act

1.​ Act in Accordance with the Company’s Articles
●​ Directors must follow the rules and regulations as laid out in the company’s articles of
association.
●​ Example: If the articles state that a board decision requires a majority vote, a director
must adhere to this rule when making decisions.
2.​ Act in Good Faith to Promote the Company’s Objects
●​ Directors must act in a way that benefits the company and its members collectively.
●​ Example: Investing in new technology that will benefit the company long-term, even if it
means short-term financial sacrifices.
3.​ Exercise Duties with Due Care, Skill, and Diligence

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●​ Directors must perform their duties with a reasonable level of competency and
thoughtfulness.
●​ Example: A director should thoroughly evaluate potential risks before entering into a
significant business deal.
4.​ Not Involved in Conflicts of Interest
●​ Directors must avoid situations where their personal interests conflict with those of the
company.
●​ Example: A director must not use company property for personal gain or profit from
confidential information.
5.​ Not Achieve Undue Gain or Advantage
●​ Directors should not exploit their position for personal gain beyond what is fair and
permitted.
●​ Example: A director must not accept bribes or kickbacks from potential contractors.
6.​ Not Assign Their Office
●​ A director’s position cannot be delegated unless allowed by the company’s articles.
●​ Example: A director cannot allow a friend or relative to make decisions in their stead.
7.​ Penalties for Non-Compliance
●​ Directors who violate these duties may face substantial fines.
●​ Example: A director who fails to disclose a conflict of interest may be fined under the
provisions of the Act.
These duties underscore the high standard of conduct expected from directors, ensuring they act
ethically, transparently, and in the best interests of the company. They are designed to promote
confidence and fairness in corporate governance, which is crucial for the health of the economy and the
protection of stakeholders’ interests.

Section 152: Appointment of Directors

●​ First Directors: The first directors of a company are usually determined by the Articles of
Association (AOA). If the AOA does not make any provisions, the individuals who are the
subscribers to the memorandum (the founding members) are deemed to be the first directors.
For a One Person Company (OPC), the sole member is deemed to be the first director.
●​ General Meeting: Subsequent appointments of directors are typically made at the company's
Annual General Meeting (AGM).
●​ DIN and No Disqualification: Directors must have a Director Identification Number (DIN), and
they should not be disqualified from acting as directors.

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Examples for Section 152

●​ First Directors: In a new company, ABC Ltd., where the AOA does not specify the first directors,
the subscribers to the memorandum who are individuals will automatically become the first
directors.
●​ OPC: In an OPC called XYZ Enterprises, the sole member, Mr. John, will be the first director until
he appoints someone else following the company's regulations.

Qualifications and Disqualifications

●​ Share Qualification: As prescribed by the AOA, a director may need to hold a certain number of
shares within two months of appointment.
●​ Disqualification: Includes unsoundness of mind, insolvency, or conviction for an offence
involving moral turpitude where more than six months of imprisonment is given, and five years
have not elapsed since release.
●​ Restriction: A person cannot be a director in more than 20 companies at the same time.

Examples for Qualifications and Disqualifications

●​ Share Qualification: A director of DEF Ltd. must acquire 100 shares of the company within two
months of their appointment if such a condition is stipulated in the AOA.
●​ Disqualification: If Mr. Smith, a director of GHI Ltd., is convicted of fraud (an offence involving
moral turpitude) and sentenced to prison for one year, he will be disqualified from serving as a
director in any company for five years following his release.

Who Appoints Directors

●​ First Board: Appointed by the AOA, or if not specified, then the signatories to the Memorandum
of Association (MOA) become the directors.
●​ By AGM: Directors are appointed by the shareholders at the AGM, with two-thirds of the board
being subject to retirement by rotation and eligible for re-appointment. Institutional Directors
and nominated directors do not retire by rotation.

Number of Directors (Section 149)

●​ Minimum Number of Directors:
●​ Public Company: Three
●​ Private Company: Two
●​ One Person Company: One
●​ Maximum Number of Directors: Fifteen (without a special resolution)

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Examples for Section 149

●​ Minimum Number of Directors: JKL Ltd., a private company, must have at least two directors on
its board.
●​ Maximum Number of Directors: MNO Ltd. has 15 directors and wants to appoint a 16th director.
To do so, they must pass a special resolution in a general meeting.

Categories of a director

The Companies Act, 2013 of India delineates several categories of directors that companies are required
to or may appoint to their Board of Directors, ensuring a diverse and compliant governance structure.
Here's a summary of the key categories:
●​ Resident Director: According to Section 149(3) of the Companies Act, 2013, every company's
Board of Directors must include at least one resident director. This is defined as a person who
has stayed in India for at least 182 days in the preceding calendar year, ensuring that there is
always a director who is familiar with Indian conditions and regulations.
●​ Women Director: The Act, under Section 149(1)(a) second proviso, mandates the appointment of
at least one woman director on the board of certain categories of companies. These include any
listed company and any public company having either a paid-up capital of Rs. 100 crore or
more, or a turnover of Rs. 300 crore or more. This provision aims to promote gender diversity in
corporate leadership.
●​ Nominee Director: Per Section 161(3), the board may appoint any person as a director nominated
by any institution pursuant to the provisions of any law currently in force, any agreement, or by
the Central or State Government by virtue of its shareholding in a Government company. This
allows stakeholders or governments to have representation on the board.
●​ Independent Director: Section 149(4) requires every listed public company to have at least
one-third of its total number of directors as independent directors. The Central Government
may also prescribe the minimum number of independent directors for any class or classes of
public companies. Independent directors are crucial for ensuring unbiased oversight and
governance, with qualifications detailed in Section 149(6), including integrity, relevant expertise,
and experience, along with no pecuniary relationships that could affect independence.
●​ Alternate Director: As per Section 161(2), a company may appoint an alternate director to serve
during the absence of a director from India for a period of not less than three months. This
ensures that the board's functioning is not hindered by geographical absences. The alternate
director's term is capped by the term of the director they replace and ends upon the original
director's return to India.

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These provisions in the Companies Act, 2013, are designed to ensure that companies have a balanced,
diverse, and effectively governed board, which is crucial for transparent, ethical, and efficient corporate
governance.

Category Section Requirement/Description

Must have at least one director who has stayed in India for at least 182 days in
Resident Director 149(3)
the preceding calendar year.

Required for listed companies and public companies with a paid-up capital of
Women Director 149(1)(a) Rs. 100 crore or more, or a turnover of Rs. 300 crore or more. At least one
woman director on the board.

May be appointed by the board as nominated by any institution in pursuance of

Nominee Director 161(3) any law, agreement, or by the Central/State Government due to its shareholding
in a Government company.

Listed public companies must have at least one-third of their total number of
Independent 149(4) & directors as independent directors. Independent directors are defined by their
Director 149(6) integrity, relevant expertise, and experience, with no pecuniary relationships
affecting independence. Specific qualifications are detailed in Section 149(6).

May be appointed if a director is absent from India for at least three months,
Alternate Director 161(2) with the term not exceeding that of the original director and ending upon the
original director's return to India.

The provisions regarding the maximum number of directorships a person can hold are outlined in
Section 165 of the Companies Act, 2013. Here's a concise summary of the key points:

Provision Details

Maximum Number of
A person can hold up to 20 directorships, including any alternate directorship.
Directorships

Limitation for Public The number of directorships in public companies, or private companies that are
Companies either holding or subsidiary companies of a public company, is limited to 10.

Members' Authority to The members of a company can further restrict the above-mentioned limit by
Restrict Directorships passing a special resolution.

This framework ensures a balance, allowing individuals to serve on multiple boards while preventing
over-commitment that could impair their ability to effectively contribute to each company's governance.

The term "Managing Director" is defined under Section 2(54) of the Companies Act, 2013. This definition
is pivotal for understanding the roles and responsibilities attributed to such a position within a company's
governance structure.

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Here's an explanation of what it entails:

●​ A Managing Director is a director who is given substantial powers over the management of the
company. This means that the individual is not just a director but one with significant authority to
make decisions affecting the company's day-to-day operations and strategic direction.
●​ The basis for an individual to be designated as a Managing Director can vary. This designation
can be made through different means:
●​ The Articles of Association of the company: This is a document that outlines the
regulations for a company's operations and defines the company's purpose. If the
articles specify the position of a Managing Director or outline the provisions for such a
role, a director can be appointed to this position accordingly.
●​ An agreement with the company: A specific agreement between the director and the
company can also serve as the foundation for entrusting a director with the powers of a
Managing Director.
●​ A resolution passed in its general meeting: The shareholders of the company can pass a
resolution in a general meeting, assigning the role of Managing Director to a specific
director.
●​ A resolution passed by its board of directors: The board itself may decide to appoint
one of its members as the Managing Director through a resolution.
●​ The role includes anyone occupying the position by any name. The definition clarifies that the
title "Managing Director" is not restricted to those specifically using this title. It encompasses any
director who, regardless of their official title, is entrusted with substantial management powers.

In essence, a Managing Director is a key figure within a company, equipped with the authority to oversee
and direct its operations and management. This role is crucial for the implementation of the company's
strategic objectives and the management of its daily affairs, ensuring that the company adheres to its
defined path for growth and success.

In the case of Wasava Tyres v. Printers (Mysore) Ltd., 2007, the Karnataka High Court dealt with the issue
of whether a Managing Director had the authority to file a suit on behalf of the company without explicit
authorisation from the Board of Directors. The appellants, who were tenants of the respondent company,
were directed by the trial court to vacate the leased premises, a decision made in favour of the
respondent company. The crux of the appellants' argument against this decision was the purported lack
of proper authorisation for the Managing Director to initiate legal proceedings on behalf of the company,
thereby challenging the legal validity of the suit.

The court's rejection of this contention hinged on the interpretation of the powers of a Managing Director
as outlined in the Companies Act. Specifically, the court referenced Section 2(26) of the Companies Act,

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1956, which corresponds to Section 2(54) of the Companies Act, 2013. This legislation defines a Managing
Director as a director who, by various means such as the company's articles, an agreement with the
company, or resolutions passed by the general meeting or the board, is entrusted with substantial
powers of management over the affairs of the company. The law implies that such powers include a
wide range of activities necessary for the day-to-day management of the company, and by extension,
would naturally encompass the authority to initiate legal proceedings if deemed necessary for the
company's benefit.

The court's interpretation signifies that actions taken by a Managing Director within the scope of
managing the company's affairs are presumed to be within their authorised powers, unless specifically
restricted. Thus, the filing of a lawsuit, being a part of managing the company's day-to-day affairs and
protecting its interests, falls within the ambit of the Managing Director's substantial management powers.
The judgement underscores the implicit authority vested in the role of a Managing Director to undertake
necessary legal actions for safeguarding the company's rights and interests, affirming the position that
such actions are within their purview of authorised activities.

The appointment of a Managing Director within a company is subject to specific prerequisites and carries
implications that distinguish this role from that of an ordinary director.

Here’s a breakdown of the key points:

●​ Initial Requirement as a Director: A fundamental prerequisite for someone to be appointed as a
Managing Director is that the individual must first be appointed as a director of the company.
This initial step is crucial because it places the individual within the governance framework of
the company, making them a part of the board before they can assume the specialised role of a
Managing Director.
●​ Distinct from an Ordinary Director: Despite the requirement to be a director first, a Managing
Director is not on the same footing as an ordinary director once appointed to the role. The
distinction arises from the additional powers and responsibilities vested in a Managing Director.
These include substantial powers over the day-to-day management and decision-making within
the company, which go beyond the functions typically associated with ordinary directors. This
differentiation underscores the enhanced role a Managing Director plays in steering the
company's affairs.
●​ Resignation from the Managing Director Role: A Managing Director has the ability to resign from
their managing directorship while retaining their position as a director on the board. This
flexibility allows for a change in the level of responsibility or a shift in focus within the company's
leadership without necessitating a complete departure from the company's governance
structure. It provides a mechanism for transition within the company's leadership roles, ensuring
continuity and stability in governance.

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These points highlight the structured approach to the appointment of a Managing Director,
acknowledging the importance of this role within a company's hierarchy and governance. The process
ensures that Managing Directors are well integrated into the corporate governance framework, equipped
with the authority needed to manage effectively, and yet retain the flexibility to adjust their roles within
the company as necessary.

The liability of directors under the Companies Act, 2013, especially concerning fraud and the definition of
an "officer in default," is a critical area that underscores the accountability of directors and other key
managerial personnel in a company's operations. Here's an explanation of these provisions, along with
examples to illustrate the concepts.

Aspect Details

- Includes acts, omissions, concealment, or abuse of position with intent to deceive or gain
undue advantage.
Fraud (Section 447)
- Wrongful gain: Gain by unlawful means of property not entitled to.

- Wrongful loss: Loss by unlawful means of property one is entitled to.

- Includes whole-time directors, key managerial personnel, directors under whose direction
the board operates, etc.
Officer in Default
- Specific roles (e.g., finance director, company secretary) can be explicitly held liable for
certain violations.

- Limited to acts/omissions with their knowledge, through board processes, and with their
Liability of
consent or connivance, or due to a lack of diligence.
Independent and
Non-executive
- Aims to alleviate concerns around their liability but raises questions on diligence and
Directors
attributed knowledge.

Examples:
●​ Fraud: A director falsifying profit figures to attract investment is committing fraud, resulting in
wrongful gain (additional investment) and wrongful loss (shareholders' financial damage).
●​ Officer in Default: A company secretary may be held liable for failing to ensure the filing of
annual returns, being an officer in default.
●​ Independent and Non-executive Directors: If a fraudulent transaction was approved in a board
meeting attended by an independent director who failed to act, their liability would depend on
their level of knowledge, consent, or diligence displayed in preventing the act.

Vicarious liability is a legal concept where a party is held responsible for the actions or omissions of
another party. In the context of corporate law, this often relates to companies being held accountable for
the acts of their employees or directors under certain conditions. Below are brief explanations of notable

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Indian Supreme Court cases related to vicarious liability, showcasing how this concept applies in various
scenarios:

1. Nat'l Small Indus. Corp. Ltd. v. Harmeet Singh Paintal & Anr., (2010) 3
S.C.C. 330 (India)
Case Summary: This case involved the National Small Industries Corporation Limited and revolved
around the liability of the corporation for the actions of its employees. The Supreme Court held that a
company could be held vicariously liable for the wrongful acts committed by its employees if those acts
were done within the course of their employment, emphasizing the importance of the relationship
between the wrongful act and the employee's official duties.

Concept: This case underscores the principle that a corporate entity can be held responsible for the acts
of its employees, provided those acts are related to their employment and are within the scope of their
duties.

2. K.K. Ahuja v. V.K. Vora, (2009) 10 S.C.C. 48 (India)

Case Summary: The issue in this case was related to the liability of company directors for the offences
committed by the company. The Supreme Court clarified the circumstances under which directors of a
company could be held vicariously liable for the acts of the company, specifically in cases of criminal
acts. The court noted that directors could only be held liable if there was sufficient evidence of their
active role or negligence in the commission of the offence.

Concept: This case is significant for delineating the limits of vicarious liability of directors, establishing
that mere position as a director does not automatically result in liability for the company's offences
without evidence of personal involvement or negligence.

3. Shiv Kumar Jatia vs State of NCT of Delhi, (2019) in the criminal appeal
no.1263 of 2019
Case Summary: This appeal before the Supreme Court concerned the liability of a hotel owner for an
accident that occurred on the hotel premises, leading to the death of a guest. The court examined the
extent of responsibility of the hotel management (and by extension, the owner) for ensuring the safety of
its guests. The decision highlighted the importance of direct responsibility and oversight in preventing
accidents and ensuring safety, rather than strictly vicarious liability.

Concept: The emphasis in this case was on the direct liability arising from negligence and the duty of
care owed by business owners to their patrons, rather than on vicarious liability. It illustrates how liability

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for negligence requires a direct link between the duty of care owed and the breach of that duty leading
to harm. <Prof spoke in the class that director/owner was not liable for the negligence>

These cases collectively shed light on the nuances of vicarious liability in the corporate context,
illustrating how the principle is applied depending on the relationship between the perpetrator of a
wrongful act and their role within the company, as well as the direct involvement or negligence of
higher-ranking officials or directors in the acts committed by the company or its employees.

Directors of companies not only have responsibilities and potential liabilities under the Companies Act,
2013, but their actions and the actions of the companies they govern can also attract liabilities under
various other legislations in India. These laws ensure that directors are accountable for ensuring their
companies comply with a broad spectrum of legal obligations, from tax laws to environmental
regulations. Below is an overview of director liabilities under different acts:

1. Income Tax Act

Directors can be held liable for tax dues of the company in certain situations, especially if the company
fails to pay its taxes. Provisions under the Income Tax Act can hold directors personally liable for the
company's tax defaults, particularly in cases of willful neglect or default.

2. Negotiable Instruments Act

Under the Negotiable Instruments Act, specifically Section 138, directors can be held personally liable in
cases where a cheque issued by the company is dishonoured due to insufficient funds, provided they
were in charge of and responsible for the company's business at the time the cheque was issued.

3. Environmental Legislations
Directors can be held liable under various environmental laws, such as the Environment (Protection) Act,
1986, if the company is found to be in violation of environmental standards or causes environmental
damage. This includes situations where due diligence or preventive measures were not taken.

4. Labour Legislations
Under various labour laws, including the Factories Act, 1948, and the Employees' Provident Funds and
Miscellaneous Provisions Act, 1952, directors can be held liable for non-compliance with labour
standards, such as safety regulations, payment of wages, and provision of social security benefits.

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5. Indian Penal Code (IPC)

Directors may face criminal liability under the IPC for offences committed by the company with their
direct or indirect consent, connivance, or where they can be attributed with negligent conduct leading to
the commission of the offence.

6. Financial Legislations
This includes laws like the Securities and Exchange Board of India (SEBI) Act, 1992, where directors can
be held liable for violations relating to securities market manipulation, fraud, insider trading, and
non-compliance with SEBI regulations.

7. Other Criminal Legislations

Directors can also be held liable under other specific criminal legislations related to areas such as
corruption, money laundering (Prevention of Money Laundering Act, 2002), and other economic
offences where their involvement or negligence leads to the company committing the offence.

The liability of directors under these acts underscores the importance of diligent and informed
management practices. Directors need to ensure not only compliance with the specific laws governing
corporate operations but also with a broader set of regulations that reflect their company's economic,
social, and environmental impact. This holistic approach to governance is crucial for mitigating legal risks
and promoting corporate accountability.

The concept of removal of directors is an essential aspect of corporate governance, providing a

mechanism for shareholders to hold directors accountable. Section 169 of the Companies Act, 2013,
outlines the process for the removal of directors by simple resolution passed by the body of
shareholders.

However, this provision does not apply to directors of a private company who are appointed for life or to
directors of a public company who are appointed under a system of proportional representation to
ensure minority representation.

The cases mentioned highlight various legal interpretations and applications of this provision:

1. LIC vs. Escorts (1986) 1 SCC 264 SC

This landmark case involved the Life Insurance Corporation of India (LIC) holding shares in Escorts Ltd.
LIC attempted to change the composition of the board by removing certain directors. The Supreme
Court observed that while the Companies Act does not explicitly require reasons to be stated for the
removal of a director, the attempt by LIC to remove the directors was seen as a move to thwart the

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decision of the majority shareholders. This case illustrates the balance between the rights of majority and
minority shareholders in the governance of a company.

Concept:
The ruling underscored that although no reasons are required for the removal of directors under the law,
any action taken by minority shareholders to control or change the board must still respect the overall
governance structure and the interests of the majority shareholders.

2. Queens Kuries and Loans Pvt. Ltd vs. Sheena Jose (1993) 76 Com Cas 821
(Ker)
In this case, the Kerala High Court held that reasons must be stated for the removal of a director, treating
it as a matter of substantive right rather than merely procedural. This judgment emphasised that
directors have the right to defend themselves against removal, indicating that the process is not merely
administrative but involves significant rights.

Concept:
The case highlighted that the removal of directors is a significant matter that affects the rights of the
individuals involved. Therefore, transparency and the provision of reasons are essential to ensure
fairness and the right to a defense.

3. Shindler vs. Northern Raincoat [1960] 1 W.L.R. 1035

This case from the UK dealt with the removal of a director where the Articles of Association (AOA) of the
company allowed for removal by the chairman. The director challenged his removal, but it was held that
reliance on the AOA for both appointment and removal is valid, and if the AOA are amended
appropriately, removal can proceed.

Concept:
The case underscores the authority of a company's AOA in governing the terms of directors'
appointment and removal, highlighting the contractual nature of the director-company relationship.

4. Bushnell vs. Faith [1970] AC 1099

In this case involving a private company, the Articles of Association provided treble voting rights to a
director who was sought to be removed. The House of Lords upheld the AOA's provision, allowing the
director to use those voting rights in resisting his removal.

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Concept:
This case demonstrates the power of AOA in defining the governance rules within a company, including
special rights that can protect directors from removal. It also illustrates the principle that internal
company rules, when lawfully adopted, are binding and enforceable.

These cases collectively provide insights into the legal frameworks and judicial interpretations
surrounding the removal of directors. They highlight the importance of the AOA, the balance of rights
between majority and minority shareholders, and the procedural and substantive rights of directors
facing removal.

The powers of the board of directors are a fundamental aspect of corporate governance, delineating the
scope of authority between the board and the shareholders. The board's general management power is
pivotal for the company's operations, and the legal framework generally protects this autonomy from
being usurped by shareholders. However, there are mechanisms through which shareholders can
influence or question the board's decisions under specific circumstances.

The cases and principles mentioned elucidate these dynamics:

1. Automatic Self-cleaning Filters Syndicate Company v. Cunningham

[1906] 2 Ch 34
This case highlights the principle that the board of directors cannot be compelled by shareholders to
undertake specific actions through a resolution at a General Meeting (GM). It establishes the autonomy of
the board in managing the company's affairs, emphasizing that while shareholders may suggest or make
regulations for guidance, they cannot override the board's decisions or invalidate prior actions.

Principle: The board's autonomy in decision-making is protected, underscoring the separation of powers
within a company.

2. Scott v. Scott
In this instance, a resolution was passed by members against a decision made by the directors. The court
held that since the powers are vested in the directors, only they can exercise this power, reaffirming the
directors' exclusive right to manage the company's affairs.

Principle: This case further reinforces the concept that the management powers of the company are
solely within the board's purview.

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3. Murarka Paint and Varnish Works vs Mohanlal Murarka AIR 1961 Cal 251
The court held that the management powers being vested in the board, its decision to institute a case
was within its authority, and shareholders had no right to question this decision. This judgment
emphasises the board's authority to make decisions on legal actions without needing to seek approval
from the shareholders.

Principle: The case illustrates the board's prerogative in legal matters and decision-making, reinforcing
the board's autonomy in the management of the company.

4. Derivative and Representative Actions

●​ Derivative Action: This mechanism allows shareholders to sue on behalf of the company in
situations where the board fails to protect the company's interests. This is an exception to the
general rule of board autonomy, recognizing that there may be special circumstances where
intervention by shareholders is necessary to safeguard the company's interests.
●​ Representative Action: Sometimes, a group of shareholders may have a grievance against the
company that they pursue as a collective, representing a broader interest within the
shareholder community.

5. Eastmen Co (Kilner House) Ltd. v. Greater London Council [1982] 1 WLR 2

This case illustrates the principle of derivative action, where shareholders derive their right to sue from
the company's rights, stepping in to protect the company's interests when the board fails to do so.

6. Brich v. Sullivan (1957) 1 W.L.R. 1274

This case supports the existence of a right to sue in situations where there is a failure on the part of the
board to act in the company's best interests. It highlights the legal recognition of circumstances where
shareholders can take action to address wrongs done to the company.

General Principle: While the board of directors holds the primary authority for managing the company,
the law recognizes exceptions where shareholders can intervene, either through derivative or
representative actions, to protect the company's interests. These cases collectively underscore the
balance between board autonomy and shareholder rights in corporate governance, ensuring that
directors are accountable while also safeguarding the company's welfare.

The roles and responsibilities of chairpersons in different contexts within a company, such as the
Chairman of the Board, Chairman of General Meetings, Chairman of the Company, and Chairman of
Committees, are defined by various provisions within the Companies Act, 2013 (CA 2013) and the Listing

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Obligations and Disclosure Requirements (LODR) Regulations set by the Securities and Exchange Board
of India (SEBI).

Let's delve into each role, particularly focusing on Section 104 of CA 2013 for the Chairman of General
Meetings, and explore how Listing Regulations come into play.

a) Chairman of the Board

The Chairman of the Board plays a pivotal role in steering the direction of the company. This position is
typically elected by the board members from among themselves. The Chairman of the Board is
●​ responsible for leading the board of directors,
●​ facilitating effective discussions,
●​ ensuring the board's responsibilities are met,
●​ guiding the company's strategic direction, and
●​ representing the company in an official capacity.
The role is more defined by the company's Articles of Association and corporate governance guidelines
than by specific sections of CA 2013. In the context of listed companies, LODR regulations require the
board to have an appropriate balance of executive and non-executive directors, where the chairman
often has a significant influence on ensuring this balance and governance standards.

b) Chairman of General Meetings

Section 104 of the Companies Act, 2013, specifically addresses the appointment of a chairman for
general meetings. According to this section, unless the articles of the company provide otherwise, the
members present at the meeting shall elect a chairman of the meeting on a show of hands. If a poll is
demanded on the election of the chairman, it shall be taken forthwith in accordance with the provisions
of the Act, and the person elected shall be the chairman for the remainder of the meeting. The
chairman's role in this context is to ensure that the meeting is conducted in an orderly manner, facilitating
discussions, ensuring compliance with legal and procedural requirements, and overseeing voting
processes.

c) Chairman of the Company

The term "Chairman of the Company" is not specifically defined in CA 2013 but generally refers to the
individual serving as the chairman of the board of directors. This role may encompass broader
responsibilities beyond just leading the board, including significant influence over corporate policies,
strategic decisions, and acting as a liaison between the board and the company's executive
management.

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d) Chairman of Committees
Committees within a company, such as audit, nomination and remuneration, and stakeholders'
relationship committees, play crucial roles in focusing on specific areas of governance and operations.

The Chairman of these committees is responsible for leading the committee's deliberations, ensuring that
the committee fulfils its roles and responsibilities as defined by the CA 2013, LODR Regulations, and the
company's governance policies. These responsibilities include overseeing the process of disclosures,
compliance with regulations, reviewing financial statements, and ensuring effective communication
between committee members.

Listing Regulations
The SEBI's LODR Regulations provide a comprehensive framework for corporate governance and
disclosure requirements for listed companies. These regulations specify requirements for the
composition of the board, the role of various committees, and the conduct of general meetings, among
others. The chairman, especially in the context of listed companies, must ensure compliance with these
regulations, promoting transparency, accountability, and effective governance.

In summary, the roles of chairpersons in various capacities within a company are guided by a mix of
statutory provisions, corporate governance standards, and the company's internal policies. Section 104
of CA 2013 specifically deals with the chairman of general meetings, while LODR Regulations outline
broader governance responsibilities, especially in the context of listed companies.

Assignment: Write a note on directorship with an analysis of “independent director”

Directorship and the Role of Independent Directors: An Analysis

Directorship within a company is a pivotal role, embodying the governance, oversight, and strategic
direction of an organisation. Directors, collectively forming the board, are entrusted with the
responsibility of making decisions that shape the future of the company, safeguarding stakeholders'
interests, and ensuring compliance with legal and regulatory frameworks. Among these roles, the
concept of the "independent director" stands out as a cornerstone of modern corporate governance,
aimed at reinforcing objectivity, integrity, and transparency in boardroom decisions.

Understanding Directorship
The role of directors, as defined under the Companies Act, 2013 (CA 2013) in India, encompasses a wide
range of duties and responsibilities, from the strategic management of the company to ensuring statutory
compliance and fiduciary duties towards the company and its shareholders. Directors are appointed by

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the shareholders and are accountable to them for the company’s performance and adherence to legal
standards. The CA 2013 outlines the qualifications, appointment process, duties, and liabilities of
directors, ensuring that directorship is conducted in a manner that promotes trust and confidence among
investors and other stakeholders.

Evolution of the Independent Director

The concept of independent directors has evolved significantly, especially in the wake of corporate
scandals that highlighted the need for more rigorous oversight and unbiased judgement in corporate
governance. Independent directors are those who do not have a material pecuniary relationship with the
company, its holding, subsidiary or associate companies, or their promoters or directors, which may
affect their independence of judgment. They serve as a means to incorporate an unbiased perspective in
the board’s deliberations, making decisions that are in the best interests of the company and its
stakeholders, free from any conflicts of interest.

Legal Framework and Listing Regulations

The legal framework for independent directors in India is primarily outlined in the Companies Act, 2013,
and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2014 (LODR). These laws
and regulations set the criteria for eligibility, appointment, duties, and responsibilities of independent
directors. For instance, Schedule IV of the CA 2013 provides a code for independent directors, detailing
guidelines for professional conduct, role and functions, and duties. Similarly, the LODR mandates the
appointment of independent directors for listed companies, ensuring a balanced board composition that
can effectively oversee management and protect the interests of minority shareholders.

Significance of Independent Directors

The significance of independent directors lies in their role in fostering corporate governance through
impartial and objective oversight. They are instrumental in:
●​ Ensuring Corporate Integrity: By providing an independent judgment on issues of strategy,
performance, risk management, resources, key appointments, and standards of conduct.
●​ Enhancing Governance: Through their participation in various committees, such as audit,
nomination and remuneration, and corporate social responsibility committees, independent
directors help ensure that the company adheres to the highest standards of governance and
ethics.
●​ Protecting Stakeholders’ Interests: Independent directors act as guardians of the interests of
minority shareholders and other stakeholders by ensuring that decisions are made in the best
interests of the company as a whole, without undue influence from controlling shareholders or
management.
●​ Risk Mitigation: Their oversight role in financial matters and internal controls helps in identifying
and mitigating risks before they escalate, contributing to the sustainable growth of the company.

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Challenges and Criticisms

Despite their crucial role, the effectiveness of independent directors has been subject to scrutiny and
criticism. Challenges include finding truly independent directors who are not influenced by personal or
professional relationships, ensuring they have the necessary skills and knowledge to contribute
effectively to the board’s functioning, and the risk of them becoming "rubber stamps" for decisions made
by controlling shareholders or management. These challenges necessitate ongoing reforms and
measures to strengthen the framework for independent directorship, enhancing their ability to contribute
to corporate governance.

Future Directions
The future of directorship, particularly regarding the role of independent directors, lies in continuous
improvement and adaptation to changing business environments. This includes:
●​ Enhanced Training and Orientation: Providing comprehensive training to independent directors
about their roles, responsibilities, and the company's business model and risks.
●​ Greater Diversity: Encouraging diversity in board composition, not just in terms of gender, but
also in expertise, experience, and cultural background, to bring a variety of perspectives to
board deliberations.
●​ Strengthening Evaluation Processes: Implementing robust performance evaluation processes for
independent directors to ensure their effectiveness and contribution to the board.
●​ Leveraging Technology: Utilising technology to improve board processes, facilitate better
information flow, and enhance decision-making efficiency.

Conclusion
In conclusion, the directorship, with a particular emphasis on the role of independent directors, plays a
critical role in the governance and success of companies. By ensuring objectivity, accountability, and
transparency, independent directors significantly contribute to the integrity and performance of
companies. While challenges exist, the continuous evolution of the legal and regulatory framework,
coupled with efforts to enhance the effectiveness of independent directors, promises to strengthen
corporate governance and foster trust among stakeholders in the long term. The journey towards
achieving exemplary corporate governance is ongoing, and independent directors are at the heart of this
endeavour, shaping the future of ethical and effective corporate leadership.

Session 10

Oppression and Mismanagement.pdf

The document addresses several critical aspects:

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●​ Decision-Making Dynamics: It discusses the roles of majority and minority stakeholders in a

company's decision-making processes, highlighting the potential for the majority to disregard
the minority's concerns and opinions, which can lead to oppression and mismanagement.
●​ Legal Framework: It mentions the legal provisions under the Companies Act of 2013, specifically
Sections 241 to 246, which aim to prevent such oppression and mismanagement. The analysis
questions what constitutes oppression and mismanagement since the Act does not precisely
define these terms. The interpretation of these concepts has evolved over time, with oppression
being characterised by a lack of morality and fairness, and mismanagement being understood as
a deviation from proper management and statutory provisions.
●​ Board and Director Roles: The paper touches on the roles of the Board of Directors, Independent
Directors, and shareholders in company decision-making. It refers to Section 149 of the
Companies Act, which details the appointment and qualifications of directors and introduces the
concept of independent directors.
●​ Case Law: The document references legal cases such as 'Shailesh Chawla v. Vinod Kumar
Mahajan' and 'Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd.', discussing the
interpretation of independent directors and the legitimacy of board decisions.
●​ Evolution of Laws: The evolution of laws on oppression and mismanagement in both Indian and
English company law is examined. It notes significant legislative changes and the borrowing of
laws from the UK to address these issues, particularly referencing various sections of the English
Companies Acts of 1948, 1985, and 2006, which influenced Indian legislation.
●​ Remedies and Tribunal Goals: The paper explains the remedies available for oppression and
mismanagement, including the role of the National Company Law Tribunal (NCLAT) under
Section 241 of the Companies Act. It emphasises the inclusivity of the law for both minority and
majority stakeholders and the importance of maintaining harmony among all members of a
company.
●​ Analysis and Conclusion: The goal of the tribunal in handling cases involving oppression and
mismanagement is consistent, aiming to provide solutions rather than merely address
complaints. The document concludes by affirming the law's goal to resolve issues and provide a
friendly and safe environment for all members of the company.

This summary condenses the key points from the images you've uploaded, focusing on the central
themes and conclusions drawn by the author. If you need a more detailed analysis or specific excerpts
from the text, I would need to access the content of the images. Since my current capabilities do not
include extracting text from images, you may need to provide the text in a readable format for further
analysis.

CYRUS MISTRI AND OPPRESSION AND MISMANAGEMENT - TBD

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Class Notes

Oppression and Mismanagement

In the context of corporate governance, the concepts of oppression and mismanagement are integral to
understanding the balance of power between majority and minority shareholders. Here's a detailed
explanation:

●​ Balancing Majority and Minority Rights: Corporate governance structures must strike a balance
between the rights and powers of majority and minority shareholders. Majority shareholders
typically have control over the strategic direction of the company due to their larger
shareholding. However, this dominance in decision-making can potentially lead to the
oppression of minority shareholders – those with less power and fewer shares. Corporate law
and governance frameworks aim to ensure that the majority cannot abuse their power and that
the interests of minority shareholders are protected.
●​ Mandate to Protect the Minority: There is a legal and ethical mandate to protect minority
shareholders. This protection is not just a matter of maintaining equity among shareholders; it's
also about ensuring the integrity of the market and the corporate ecosystem. If potential
investors believe that their investment will not be protected against the whims of the majority,
they are less likely to invest, which ultimately affects the overall health of the market. Laws and
regulations, therefore, include provisions to prevent actions by the majority that are oppressive
or unfairly prejudicial to the minority.
●​ Governance Challenges: Protecting minority shareholders while allowing the majority to exercise
their rights poses a complex challenge in corporate governance. The majority must be able to
steer the company without undue restrictions, yet not at the expense of the minority's interests.
This balance is difficult to achieve because what is advantageous for the company as a whole
may not always align with the interests of all shareholders.
●​ Incorporation of Natural Justice, Equity, and Fairness: To address this challenge, principles of
natural justice, equity, and fairness are embedded into corporate laws and governance codes.
These principles serve as a moral and legal compass to guide actions and policies within
companies. They ensure that decisions are made transparently, that all shareholders have a
voice, and that their rights are safeguarded. For example, in many jurisdictions, minority
shareholders have the right to challenge decisions they believe are oppressive or unfairly
prejudicial, and the courts can intervene to protect their interests.

These principles are not merely theoretical; they are enshrined in laws such as the Companies Act in
many jurisdictions, which provide mechanisms for minority shareholders to address grievances related
to oppression and mismanagement. These may include rights to demand a company meeting, apply to

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the court for relief against oppressive conduct, and in some cases, require the majority to buy out the
minority at a fair value.

This framework is vital for maintaining trust in the corporate sector and ensuring that all investors,
regardless of the size of their shareholding, can invest with confidence that their rights and interests will
be protected.

The case of Foss v. Harbottle establishes a fundamental principle in corporate law known as the "proper
plaintiff rule." This rule asserts that when a wrong is alleged to have been done to a company, the
company itself is the proper party to bring legal action, not individual shareholders. This principle
maintains the autonomy of the corporate entity and its governance structure, ensuring that internal
grievances are addressed through the company's constituted mechanisms, like the board of directors,
rather than through individual lawsuits by shareholders.

In the Foss v. Harbottle case, two shareholders of The Victoria Park Company accused the company’s
directors of misapplying, alienating, and wasting the company’s assets. The court ruled that the
shareholders could not sue in their capacity for wrongs allegedly done to the company. Instead, the
company itself must take action either through management or by a derivative action.

This ruling is significant because it underpins the majority rule principle within company law. It implies
that if the majority of shareholders are dissatisfied with the conduct of the directors, they have the
power through general meetings to change the directors and take appropriate action. This preserves the
collective decision-making process and prevents multiple potentially conflicting lawsuits by individual
shareholders.

However, there are notable exceptions to this rule, which include:

●​ Ultra vires acts or illegality: Actions that are beyond the company's powers or illegal cannot be
ratified by the shareholders or directors.
●​ Actions requiring a special majority: If certain acts require a special resolution and are
undertaken without it, individual shareholders may challenge them.
●​ Invasion of individual rights: Shareholders can enforce rights arising out of the company's Act or
Articles of Association.
●​ Fraud on the minority: If the majority are conducting fraud to the disadvantage of the minority,
this cannot be ratified.
●​ Wrongdoers in control: If those in control are responsible for the wrongs, they cannot ratify their
own misdeeds.

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The principle laid out in Foss v. Harbottle has been pivotal for the development of corporate law, guiding
the legal framework for internal company disputes and protecting the integrity of corporate governance

Foss v. Harbottle
The Case
●​ Background: Foss and Turton, minority shareholders in the Victoria Park Company, claimed the
company's property was mismanaged and funds were misused by the directors. They sought to
sue on behalf of the company.
●​ Decision: The court dismissed the action, establishing principles in corporate law that remain
crucial today.

Key Principles:
1.​ Proper Plaintiff Rule: If a wrong is done to the company, the company itself is the proper party to
bring a lawsuit to seek redress. This means individual shareholders generally cannot sue for
wrongs done to the company.
2.​ Majority Rule Principle: Where the alleged wrong could potentially be approved or ratified by a
simple majority of shareholders in a general meeting, then the courts will not interfere.

Rationale Behind the Principles

●​ Preventing Multiplicity of Lawsuits: Allowing every shareholder to sue would generate chaos.
These rules consolidate authority under the company.
●​ Respecting Corporate Autonomy: Courts honor the ability of the company, through a majority
decision, to make its own strategic and management choices,even if not optimal.

Exceptions to Foss v Harbottle

The strict rules in Foss v Harbottle created potential for injustice if those controlling the company were
the wrongdoers.

To mitigate this, courts have carved out exceptions, including:

●​ Wrongdoer Control: Minority shareholders can sue on behalf of the company (derivative action)
where those in control are the ones accused of wrongdoing.The control must prevent the
company from suing itself.
●​ Fraud on the Minority: Where wrongdoing constitutes a fraud on minority shareholders,
bypassing company rights.
●​ Ultra Vires Acts: Actions outside the company's objects/constitution may be challenged by
shareholders.
●​ Breach of Personal Rights: Actions infringing on individual shareholders' rights separate from
their status as shareholders are actionable.

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Important Notes:
●​ The "reflective loss" principle still bars shareholders from suing to recoup decreases in share
value mirroring damage done to the company itself.
●​ Specific rules for derivative actions can differ between jurisdictions.

Sections 244 and 241 of the Indian Companies Act, 2013 outline the rights of members of a company to
apply for relief against oppression and mismanagement.

Section 244 stipulates who may file an application alleging acts of oppression or mismanagement:
●​ For companies with share capital, the right to apply is granted to:
●​ Not less than 100 members of the company or not less than one-tenth of the total
number of its members, whichever is less, or
●​ Any member(s) holding not less than one-tenth of the issued share capital of the
company, provided they have paid all calls and other sums due on their shares.
●​ For companies without share capital, the right to apply is granted to not less than one-fifth of the
total number of its members.

The Tribunal may waive these requirements upon application, allowing members who do not meet these
criteria to apply.

Section 241 provides the grounds on which members can apply for relief, including circumstances where:
●​ The affairs of the company are being conducted in a manner prejudicial to the public interest or
in a manner prejudicial or oppressive to the member(s) or to the interests of the company, or
●​ There has been a material change in management or control of the company (not involving
creditors or shareholders) that is likely to lead to conduct of the company's affairs in a manner
prejudicial to the company's interests or its members.

Under sub-section (2), the Central Government can itself apply to the Tribunal if it believes that the
company's affairs are being conducted in a manner prejudicial to the public interest.

These provisions are designed to protect minority shareholders from the actions of the majority that are
detrimental to either the minority shareholders' interests, the company's interest, or the public interest. It
provides a mechanism for such minority shareholders to seek relief from the National Company Law
Tribunal (NCLT).

The consent in writing from the other members entitled to apply is required if the application is made on
behalf of others. This consent is important to prevent frivolous litigation by a very small number of
members.

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The provisions under Section 241 and 244 are critical for maintaining fairness and balance in corporate
governance, ensuring that the interests of minority shareholders are not sidelined by the majority and
that companies are managed for the benefit of all stakeholders, including the public at large.

Examples of when shareholders can apply for relief under Sections 244 and 241 of the Indian Companies
Act, 2013, due to acts of oppression or mismanagement might include:
●​ Ultra Vires Acts: If the majority shareholders were to approve an action that is beyond the scope
of the company's objectives as stated in its memorandum of association, minority shareholders
could seek relief. This could be, for example, if a manufacturing company suddenly decides to
venture into financial services without the proper amendments to its memorandum.
●​ Diversion of Assets: If the directors or majority shareholders direct the company's funds to
non-company activities or to their personal accounts, minority shareholders could apply for
relief. An example could be the diversion of company funds to a project in which the directors
have a personal interest, which is not part of the company's business.
●​ Denial of Dividends: If a company is profitable and there is no reasonable justification for not
declaring dividends, yet the majority shareholders decide against it to oppress the minority
shareholders, the latter may seek redress.
●​ Exclusion from Decision-Making: If the company's affairs are being conducted in a manner
where minority shareholders are systematically excluded from decision-making or from
important information, they could file a complaint.
●​ Mismanagement Leading to Losses: In cases where the actions of the directors or the majority
shareholders lead to significant financial losses or damage to the company's reputation, minority
shareholders could invoke these sections.
●​ Material Changes in Management: If there is a sudden and unjustified removal of key
management personnel or a shift in control of the company that prejudices the minority
shareholders, they may seek intervention from the Tribunal.
●​ Actions Requiring Special Majority: If certain decisions that legally require a supermajority or a
special resolution are taken without such a majority, affected shareholders may have grounds to
apply for relief. For instance, altering the company's articles of association to the disadvantage of
a minority group without the required majority vote can be challenged.

These are hypothetical scenarios based on the provisions of the Companies Act, 2013. For actual cases
and legal advice, consulting with a legal professional who specialises in corporate law would be
necessary.

Kalinga Tubes Ltd v. Shanti Prasad Jain [(1964) 1 Comp LJ 117]:

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○​ Unfair use of Power-lack of confidence in the way company affairs conducted- minority resentment not
oppression. It was categorically held that the conduct complained of must relate to the manner of
management of the affairs of the company and must be such so as to oppress a minority of the members
including the petitioners qua shareholders. The burden to prove oppression or mismanagement is upon the
petitioner. The Court, however, will have to consider the entire materials on records and may not insist
upon the petitioner to prove the acts of oppression.

The case of Kalinga Tubes Ltd v. Shanti Prasad Jain highlights an important aspect of corporate
governance concerning the oppression of minority shareholders. The court in this case clarified what
constitutes 'oppression' under company law.

The contention revolved around the use of power by the majority shareholders and the management of
the company's affairs. The minority shareholders felt that the way the company was being run did not
instil confidence and was prejudicial to their interests. However, the court emphasised that mere
resentment or lack of confidence does not equate to oppression. For a claim of oppression to be upheld,
the conduct in question must be burdensome, harsh, and wrongful; it must be an action that is
oppressive to the minority shareholders in their capacity as shareholders.

The burden of proof lies with the petitioner – the one claiming oppression. To meet this burden, the
petitioner must provide substantial evidence showing that the company's affairs are being conducted in
a manner oppressive to them. The court assesses all the available material and evidence on record to
determine whether there has been oppression or mismanagement.

This case is significant because it sets a high bar for claims of oppression, requiring clear evidence of
conduct that is oppressive towards the minority shareholders and affects them directly. It's not sufficient
to demonstrate mere mismanagement or poor decision-making; there must be a demonstration of a
prejudicial use of power that directly impacts the minority shareholders' rights and interests.

M.C Duraiswamy Vs. Shakti Sugars 1978 Indlaw MAD 112- Consenting members must know what they are​
consenting to.

The case of M.C. Duraiswamy vs. Shakti Sugars Ltd. delves into the requirements for minority
shareholders to give consent for initiating legal action under sections relating to oppression and
mismanagement within the framework of the Indian Companies Act.

In this case, the Madras High Court considered whether the consent given by the members for filing a
petition was valid. The consent statement was a general one, without specifics about the allegations or
the relief sought. The court held that for consent to be considered valid under the then section 399(3) of
the Companies Act, 1956, the members should have been fully aware of the details of the action, the
relief being sought, and the grounds for the relief. In other words, the consenting members needed to
have an understanding of what they were consenting to, which implies an informed and deliberate
agreement to the particulars of the petition, not just a general assent.

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This decision underlines the need for an 'intelligent consent,' where the consenting parties are expected
to have a clear understanding of the specific issues and the remedies being sought. It suggests that a
'blanket consent' without details is not sufficient, as members must demonstrate an application of their
mind to the issues at hand.

The principles established in this case have been discussed and considered in subsequent cases and
legal discourse, shaping the understanding of what constitutes informed consent in the context of
corporate litigation by minority shareholders.

For more detailed legal analysis, you can refer to Indian legal resources or consult with a legal
professional who specializes in corporate law.

Rajahmundry Electric Supply Company vs. A. Nageshwara Rao AIR 1956 SC 213 - Withdrawal of consent subsequent​
Must have suffered as a shareholder- Lundie Bros Ltd [(1965)2 All ER 692]​
Section 241- if oppression justifies winding up- relief may be sought by shareholder so oppressed.

In the case of Rajahmundry Electric Supply Company vs. A. Nageshwara Rao, the Supreme Court of India
addressed issues concerning the internal management of a company and the circumstances under which
the court would intervene. The case established that for the invocation of just and equitable clauses for
winding up a company, there must be substantial reasons that justify a lack of confidence in the
management of the company's affairs. Misconduct or mismanagement that led to the company's
insolvency or other serious issues that affected the proper governance of the company could warrant
such action. The case also determined that the validity of members' consent for action is assessed at the
time of the institution of the application and is not affected by subsequent withdrawals of consent. This
principle ensures that the issues of mismanagement and oppression can be addressed effectively
through legal proceedings, keeping in mind the broader interests of the company and its stakeholders​

The Supreme Court's ruling in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad clarified the meaning
of 'oppression' within the context of company law. It was determined that oppression must relate to the
manner in which a company's affairs are conducted, and the conduct must be oppressive to minority
members. For such a claim to be valid, it must be shown that the majority uses their voting power in a
manner detrimental to the minority's interests, either for personal gain or through wrongful authority
usurpation.

In Binani Metals Ltd. and Triton Trading Co. Pvt. Ltd. vs. Gallant Holdings Ltd., it was established that a
complaint of oppression must be specific about what the act of oppression is, who is responsible for it,

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how it is oppressive, whether it involves the company's affairs, and if the company itself is part of the
wrongful act. These cases emphasise the need for clear, detailed allegations when claiming oppression,
ensuring that only legitimate grievances are brought before the court, and frivolous claims are minimised.

In "Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd." (1981), the Supreme
Court of India held that for a complaint of oppression to be valid, the aggrieved party must demonstrate
that the majority's actions lack probity and fairness and are detrimental to their legal and proprietary
rights as shareholders. The conduct must be a continuous act, not a one-off event, up to the filing of the
petition.

In "Chatterjee Petrochem (Mauritius) Company and Ors. vs. Haldia Petrochemicals Ltd. and Ors." (2013),
the Court determined that relief for oppression is appropriate when a shareholder's statutory rights are
affected.

Lastly, in "Aruna Oswal v. Pankaj Oswal and Others" (2020), it was clarified that the waiver of the
minimum requirement to file under Section 241 of the Companies Act should not be based solely on an
inheritance claim when a nomination exists.

These cases collectively underscore that oppression in a corporate setting involves a systemic pattern of
harmful conduct against minority shareholders, undermining their rights as granted by company law and
the company's articles of association.

Cyrus Investments Private Limited v TATA Sons Limited and others-March 21 2021

Facts
●​ Cyrus Mistry: Appointed Chairman of Tata Sons in 2012. Removed as Chairman in 2016 and
subsequently as a director of the company.
●​ Cyrus Investments and Mistry family: Challenged Mistry's removal at the National Company Law
Tribunal (NCLT).
Timeline
●​ NCLT (First Ruling): Dismissed the case, finding Mistry and Cyrus Investments ineligible to file a
complaint under Sections 241 and 242 of the Companies Act,2013 (which address oppression
and mismanagement within companies).
●​ NCLAT (Appellate Tribunal): Overturned the NCLT's initial ruling, allowing the case to proceed.
●​ NCLT (Second Ruling): Heard the case on its merits and again dismissed it.
●​ NCLAT (Final Appeal): Ruled in favor of Mistry, finding that Tata Sons acted in an oppressive
manner and directed his reinstatement as Executive Chairman.
●​ Supreme Court: Overturned the NCLAT decision and ruled in favor of Tata Sons.

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Key Legal Issues

●​ Eligibility to file complaint: Did Cyrus Investments and the Mistry family have the necessary
shareholding (at least 10%) to bring a case under Sections 241 and 242 of the Companies Act,
2013?
●​ Oppression and Mismanagement: Did Tata Sons' actions toward Cyrus Mistry and his removal
amount to oppression and mismanagement?
●​ Powers of the Board: Did the Board of Tata Sons have valid reasons and procedural fairness in
removing Cyrus Mistry?

Supreme Court Ruling

The Supreme Court's ruling focused on these central points:
●​ Board Autonomy: The court largely upheld the power of the Board of Directors in Tata Sons to
make decisions, emphasizing the principle of business judgment.
●​ No "Quasi-Partnership": The Supreme Court rejected the NCLAT's view that the relationship
between Tata Sons and the Shapoorji Pallonji Group (the parent company of Cyrus Investments)
had elements of a 'quasi-partnership'. This determination weakened the argument for Mistry's
reinstatement.
●​ Procedural Fairness: The court found that sufficient reasons were provided to justify Mistry's
removal as Chairman (specifically concerning poor performance ),thus there was procedural
fairness.

Significance
The case highlighted significant areas of Indian corporate law regarding:
●​ The power balance between shareholders and company boards.
●​ The rights of minority shareholders.
●​ The interpretation of oppression and mismanagement in business affair

Mismanagement
Mismanagement: General Concept
Mismanagement generally refers to situations where the business affairs of a company are conducted in
a manner that is either inefficient, improper, or prejudicial to the interests of the company, its
shareholders, or wider stakeholders.

Key Examples of Mismanagement:

●​ Financial Mismanagement: Misuse of company funds, poor financial controls, or negligent
accounting practices.
●​ Strategic Mismanagement: Adopting flawed business strategies, making poor investment
decisions, or failing to adapt to market conditions.

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●​ Operational Mismanagement: Ineffective management of resources, leading to inefficiencies,

delays, or quality issues.
●​ Breach of Fiduciary Duties: Directors acting in their own self-interest rather than the interests of
the company and shareholders.

Case: Rajamundary Electric Corporation v A. Nageshwara Rao

This landmark case set precedents regarding prevention of mismanagement within companies. Some
key principles highlighted include:
●​ Protecting Shareholder Interests: Courts should intervene in cases where shareholders' interests
are threatened due to mismanagement or actions prejudicial to the company itself.
●​ Powers of Appointment: In instances of clear mismanagement, courts can appoint
administrators to ensure the company's proper functioning.

Powers of the NCLT

The National Company Law Tribunal (NCLT) under sections 241 and 244 of the Companies Act, 2013,
plays a crucial role in addressing mismanagement in India. Its powers include:
●​ Investigating Mismanagement: NCLT can investigate allegations of mismanagement or
oppression.
●​ Issuing Orders: NCLT can issue various orders to remedy issues, including regulating company
conduct, restricting share transfers, changing management,etc.
●​ Winding Up Orders: In cases of extreme mismanagement, the NCLT can order the winding up of
a company.

Key Points to Remember

●​ Mismanagement and oppression are serious concerns within companies, potentially causing
widespread harm if unaddressed.
●​ Several legal precedents and statutory bodies in India are designed to combat mismanagement
and protect stakeholders.

The Tribunal, when addressing issues of oppression and mismanagement under Section 242 of the
Companies Act, has the authority to order a wide range of remedies. These can include:
●​ Directing the future conduct of the company's affairs.
●​ Mandating the purchase of shares of the complaining members by other members or the
company itself.
●​ If the company is purchasing shares, reducing its share capital accordingly.
●​ Placing restrictions on the transfer or allotment of the company's shares.
●​ Terminating, setting aside, or modifying agreements involving the company and its directors,
managers, or any other personnel, ensuring the terms are just and equitable.

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●​ Similar actions concerning agreements with parties other than directors or managers, with due
notice and consent of the concerned parties.

These powers of the Tribunal aim to rectify the situations of injustice and ensure fair treatment of all
members within the company.

Assignment: Write a comprehensive paper on Oppression and Mismanagement

Oppression and Mismanagement in Indian Corporate Law
Oppression and mismanagement are detrimental forces in corporate governance, jeopardising the
interests of shareholders, employees, creditors, and wider stakeholders. India's Companies Act, 2013
(Sections 241-246) establishes a legal framework to combat these threats, safeguarding minority
shareholder rights and upholding principles of fairness, transparency, and accountability in corporate
leadership.

Understanding Oppression and Mismanagement

●​ Oppression: Characterised by acts of the majority shareholders or the company's management
that are unjust, discriminatory, or inflict harm upon minority shareholders or the company itself.
These actions manifest as burdensome, prejudicial, or wrongful behaviours directly undermining
stakeholder interests.
●​ Mismanagement: Signifies instances where the company's affairs are conducted imprudently,
negligently, or incompetently, causing harm to the company, its members, or the public interest.
Mismanagement encompasses financial improprieties, fraudulent practices, operational
inefficiencies, and breaches of fiduciary responsibility.

Oppression Examples
●​ Denying Shareholder Rights:
○​ Blocking dividends without justifiable reason.
○​ Preventing access to company information or financial statements.
○​ Obstructing voting rights of minority shareholders.
●​ Self-Dealing by Majority:
○​ Forcing company into contracts favouring majority shareholders at unfair terms.
○​ Selling company assets to controlling members at below-market value.
○​ Diverting business opportunities away from the company for personal gain.
●​ Exclusion from Decision-Making:
○​ Making major strategic decisions without consulting minority shareholders.
○​ Removing minority shareholders from the board of directors without appropriate cause.
●​ Excessive Remuneration:

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○​ Paying management or controlling shareholders exorbitant salaries or bonuses

unaligned with company performance.
Mismanagement
●​ Financial Misconduct:
○​ Misappropriation of company funds.
○​ Engaging in fraudulent accounting or reporting practices.
○​ Repeatedly making reckless or unprofitable investments.
○​ Poor internal controls leading to financial losses.
●​ Operational Issues:
○​ Chronic product delays or quality problems.
○​ Inefficient supply chain management leading to unnecessary costs.
○​ Persistent disregard of environmental or safety regulations.
●​ Breach of Duties:
○​ Directors prioritising their own interests over those of the company.
○​ Lack of oversight causing repeated mistakes or failures.
○​ Ignoring conflicts of interest that harm the company.
Illustrative Scenarios
●​ Scenario 1 (Oppression): Two brothers own 70% of a company. They vote to award themselves
massive salaries, leaving little for dividends. The minority shareholder (sister with 30%) suffers
financially.
●​ Scenario 2 (Mismanagement): The CEO consistently diverts resources towards an unprofitable
pet project despite market research advising against it, causing company losses.
●​ Scenario 3 (Both): Controlling shareholders force the company to sell valuable property to
another company they own at an unfair price (oppression), while ignoring quality control leading
to harmful defective products (mismanagement).
Important Notes
●​ The lines between oppression and mismanagement can occasionally blur.
●​ Isolated incidents might not reach the legal threshold; proving a pattern of harmful behaviour is
often necessary.
●​ Context matters. What seems unreasonable in a large company, might be necessary in a startup
operating under constraints.

Legal Provisions in India

The Companies Act, 2013 addresses oppression and mismanagement through these key provisions:
●​ Section 241: Empowers shareholders to petition the National Company Law Tribunal (NCLT) if
they experience oppression or if the company's operation jeopardises public interest.
●​ Section 242: Outlines the NCLT's far-reaching authority to issue orders designed to rectify
oppressive or mismanaged conduct. Remedies include regulation of future company activities,

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purchase of shares by other members or the company,removal or appointment of directors, and

in extreme cases, winding up.
●​ Sections 243-245: Address matters such as protections for directors against arbitrary removal,
shareholding thresholds for filing complaints, and provisions for class-action suits to promote
broader accountability.

Process and Remedies

Concerned stakeholders initiate action by filing a complaint with the NCLT. Upon determination of valid
oppression or mismanagement claims, the NCLT wields power to issue broad corrective orders. These
remedies prioritise safeguarding minority shareholder interests while restoring sound corporate
practices.

Conclusion
The Companies Act, 2013 offers a robust means for countering oppression and mismanagement within
Indian corporations. This framework serves as a check against misuse of power by those in control, and
promotes ethical management, accountability, and ultimately, better corporate governance in India.

Session 11

Meetings
Meetings play a pivotal role in the governance of corporations, embodying the principles of democracy
by facilitating the coming together of shareholders and directors to deliberate and make decisions on
company affairs. The significance of meetings in the corporate context is underscored by their function
as a forum for exercising shareholder control over directors, an aspect central to the democratic
functioning of a company. This control, however, has been described as increasingly illusory in nature,
particularly in the context of modern corporations with their vast, dispersed shareholder bases.

The Illusory Nature of Shareholder Control

The excerpt highlights a critical issue in corporate governance: the diminishing practical ability of
shareholders to exercise control over directors. This phenomenon can be attributed to several factors:
●​ Dispersion of Capital: As capital becomes more dispersed among a large number of small
shareholders, individual influence over the company's affairs significantly diminishes.
●​ Passive Investment Approach: Many shareholders, content with receiving satisfactory dividends,
pay little attention to their investments, lacking the initiative to actively participate in company
governance.
●​ Resource Constraints: The average shareholder often lacks the time, money, and experience
necessary to effectively exercise their rights, such as attending meetings or engaging in proxy
battles.

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●​ Organisational Challenges: The logistical challenge of organising a large and geographically

dispersed shareholder base can prevent effective collective action.

Meetings as a Democratic Function

Despite the challenges, meetings remain a fundamental aspect of the democratic governance of
companies. They provide a structured opportunity for shareholders to express their views, vote on
important matters, and influence the direction of the company. The legal requirement for meetings, as
seen in cases like Sharp v. Dawes, which established the minimum requirement for a meeting as the
presence of at least two people, underscores their importance in corporate governance.

Legal Exceptions and Flexibility

The legal framework governing corporate meetings also recognizes exceptions to the traditional
requirements, accommodating the practical realities of business operations. A notable example is the
case of East v Bennet Bros. Ltd., where it was deemed acceptable for a meeting of preference
shareholders to be attended by a single person who held all the preference shares. This case illustrates
the legal system's flexibility in recognizing the varied forms of corporate structures and share ownership
patterns, acknowledging that the principles of democracy and effective governance can be maintained
even in scenarios that depart from traditional norms.

Conclusion
Corporate meetings serve as a cornerstone of democratic governance within companies, offering a
platform for shareholders to exercise their rights and influence the company's direction. While the
increasing dispersion of capital and the passive nature of many investors have challenged the practical
exercise of shareholder control, the legal framework continues to evolve to ensure that the essence of
democracy is preserved within the corporate context. Cases like Sharp v. Dawes and East v Bennet Bros.
Ltd. highlight the adaptability of legal principles to the realities of corporate governance, ensuring that the
spirit of democratic participation is maintained even as the corporate landscape evolves.

Annual General Meeting (AGM)

Under the Companies Act, meetings are a crucial aspect of corporate governance, facilitating
stakeholders' participation in the company's decision-making process. Among these, shareholder
meetings are of paramount importance, with the Annual General Meeting (AGM) being a key event.
Here's a closer look at the regulatory framework governing AGMs as per the Companies Act:

Annual General Meeting (AGM)

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The AGM is a mandatory yearly gathering of a company's interested shareholders. At the AGM, directors
of the company present an annual report containing information for shareholders about the company's
performance and strategy.

Legal Provisions under the Companies Act

- **Section 96**: This section mandates that every company, except a One Person Company (OPC),
must hold an AGM each year. Companies are obliged to ensure that not more than fifteen months elapse
between two AGMs. The significance of this stipulation is to guarantee regular and transparent
communication between the company's management and its shareholders.

Timing and Scheduling of AGMs

- **First AGM**: For the first AGM, the Act provides a bit of leeway. A company is required to hold its first
AGM within nine months from the closing of the first financial year. This exception is made to
accommodate the varied financial year end dates that companies may have upon their establishment.
- **Subsequent AGMs**: After the first AGM, companies must hold each subsequent AGM within six
months from the end of the financial year. This ensures that shareholders are kept informed of the
company's annual financial performance in a timely manner.

Importance of AGMs

AGMs serve several critical functions in the corporate governance landscape:

- Financial Reporting: Shareholders are presented with the company's financial statements, providing a
clear view of its financial health and performance.
- Election of Directors: AGMs often include the election of directors to the company's board, allowing
shareholders to influence who is making strategic decisions.
-Dividend Declarations: Decisions on the declaration of dividends are typically approved at AGMs.
-Corporate Accountability: AGMs allow shareholders to question the board of directors about the
company's performance and strategies, enhancing corporate accountability and transparency.

Compliance and Documentation

Companies must meticulously document the proceedings of AGMs and comply with the regulatory
requirements, including timely filing of financial statements and reports presented during the AGM with
regulatory authorities. Non-compliance with the requirements for AGMs can result in penalties and legal
issues for the company.

Conclusion

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The AGM is a cornerstone of corporate democracy, enabling shareholders to exercise their rights,
participate in key corporate decisions, and stay informed about the company's operations and financial
status. The regulatory framework provided under the Companies Act ensures that AGMs are conducted
in a manner that promotes transparency, accountability, and regular shareholder engagement, which are
essential for the healthy functioning of the corporate ecosystem.

Notice of AGM

The Companies Act requires companies to adhere to specific guidelines regarding the notice period for
conducting an Annual General Meeting (AGM). These stipulations are crucial for ensuring that all eligible
participants are given adequate time to prepare for the meeting, thereby facilitating informed
participation and decision-making.

Notice for Annual General Meeting (AGM) - Section 101

Under Section 101 of the Companies Act, the provisions for issuing a notice for an AGM include:
●​ Notice Period: A clear notice of at least 21 days must be given to eligible parties before the
meeting. This notice can be issued either in writing or through electronic means, ensuring
accessibility and convenience for all shareholders.
●​ Contents of the Notice: The notice must explicitly state the place, day, date, and hour of the
meeting. Additionally, it should include a statement outlining the business to be transacted at the
meeting. This requirement ensures transparency and allows shareholders to understand the
matters up for discussion or decision.
●​ Recipients of the Notice: The notice must be circulated to every member of the company,
including the legal representatives of any deceased member and the assignee of any insolvent
member. Additionally, the company's auditor(s) and every director must also receive the notice.
This comprehensive distribution ensures that all relevant parties are informed and have the
opportunity to participate in the AGM.

Case Examples Illustrating the Importance of Compliance

●​ Shree Meenakshi Mills Co. Ltd.: This case from December 1934, where a meeting was adjourned
to March 1935 and the next meeting was not held until February 1936, serves as a historical
example of non-compliance. The company was prosecuted for failing to hold an AGM in 1935
and was fined accordingly. This case underscores the legal requirement to hold annual meetings
without fail and the consequences of non-compliance.
●​ Kastoor Mal Banthiya: This case involved two brothers who were the only members of a
company. When one brother was seriously ill at the time the AGM was called, the failure to hold
the meeting was not considered a willful default due to the circumstances. This example

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highlights that while compliance with AGM regulations is strictly enforced, exceptions may be
made under extenuating circumstances, recognizing the importance of reasonableness in the
application of the law.

Conclusion
The legal requirements surrounding the notice for an AGM underscore the commitment of the
Companies Act to ensure fair, transparent, and inclusive corporate governance practices. By mandating a
specific notice period and detailing the information that must be included in the notice, the Act aims to
protect the rights of shareholders and other stakeholders to participate in key corporate decisions. The
cases of Shree Meenakshi Mills Co. Ltd. and Kastoor Mal Banthiya illustrate the practical implications of
these requirements and the importance of adherence to ensure the smooth functioning of corporate
democracy.

Quorum of meeting
Quorum, a fundamental concept in the context of corporate meetings, refers to the minimum number of
members who must be present at a meeting to legally conduct the business of the company. The
quorum requirement ensures that decisions are made with a sufficient level of participation, reflecting
the democratic ethos of corporate governance. Section 103 of the Companies Act outlines the specific
requirements for quorum in both public and private companies, underscoring its importance in the
decision-making process.

Quorum Requirements Under Section 103

For Public Companies:

●​ If the total number of members as on the date of the meeting does not exceed 1,000, a
minimum of 5 members personally present is required to constitute a quorum.
●​ If there are more than 1,000 but less than 5,000 members, the quorum increases to 15 members
personally present.
●​ For companies with more than 5,000 members, at least 30 members personally present are
needed to form a quorum.

For Private Companies:

●​ A private company requires only 2 members personally present to constitute a quorum,
reflecting the typically smaller size of these entities compared to public companies.

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Adjournment Due to Lack of Quorum

If the quorum is not achieved within half an hour from the scheduled time of the meeting, the meeting is
automatically adjourned to the same day in the next week, at the same time and place, or to such other
date and time as the Board may determine. If at the adjourned meeting the quorum is still not met within
half an hour from the scheduled time, the members present at that time will constitute the quorum,
regardless of their number. This provision ensures that company business can proceed despite initial
difficulties in meeting quorum requirements.

Importance of Quorum
The stipulation of a quorum serves multiple purposes in corporate governance:
●​ Legitimacy: It ensures that decisions are made with a minimum level of participation, lending
legitimacy to the proceedings of the meeting.
●​ Participation: By setting a quorum, the Act encourages active participation by members in the
company's decision-making process.
●​ Protection of Interests: It prevents major decisions from being made by a very small number of
members, which could potentially skew decisions in favor of a minority to the detriment of the
broader membership base.

Extraordinary General Meeting (EGM)

The concept of an Extraordinary General Meeting (EGM) under the Companies Act is a crucial
mechanism that allows for the consideration of urgent matters that arise between Annual General
Meetings (AGMs). These meetings are exceptional in nature and are convened to address specific issues
that are too significant to wait until the next AGM. The legal framework governing EGMs is outlined in
Sections 100 and 98 of the Companies Act, providing a structured approach to their convening, conduct,
and the role of the Tribunal in certain scenarios.

Extraordinary General Meeting (EGM) Provisions

Section 100(1) & (2) - Convening an EGM

●​ Board's Authority to Convene: According to Section 100(1), the board of directors has the
discretion to call an EGM whenever it deems fit, reflecting the need for flexibility in addressing
unforeseen or urgent business matters that require shareholder input or approval.
●​ Requisition by Members: Section 100(2) allows for the requisition of an EGM by members. This
requisition must be made by a number of members holding not less than one-tenth of the
paid-up share capital of the company that carries voting rights. This provision ensures that
shareholders have a significant say in the company's affairs, particularly in urgent or
extraordinary situations.

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Procedure if Quorum Not Met

●​ If a quorum is not present at the initially scheduled EGM, and the meeting is adjourned, the
reconvened meeting may be cancelled if the quorum is still not met. This underscores the
importance of quorum in validating the decisions made during such meetings.

Tribunal's Role in EGMs - Section 98

●​ The Tribunal has the authority to order the convening of an EGM on the application of a member
or director who is entitled to vote at such a meeting. This is a critical measure to ensure that the
governance of the company can continue effectively, even in situations where internal
disagreements or logistical issues prevent the convening of an EGM through normal procedures.
●​ Additionally, under Section 97, the Tribunal can call an AGM in the event of a default by the
company in holding its scheduled AGM, further emphasizing the Tribunal's role in ensuring
compliance with statutory meeting requirements.

Judicial Precedent: Ruttonjee and Company Ltd.

The case of Ruttonjee and Company Ltd. serves as a significant example of the judiciary's cautious
approach towards exercising its power to order the convening of meetings. In this instance, a division
within the company's board led to a dispute over the legitimacy of directors, with one faction seeking
judicial intervention to convene a meeting. The court's refusal to order the meeting highlights the
principle that the power to convene meetings through judicial or tribunal intervention is to be exercised
sparingly and judiciously, typically in circumstances where it is absolutely necessary to ensure the
proper governance of the company.

Board Meetings: Section 173

Board meetings are a critical component of corporate governance, providing a structured forum for
directors to discuss and make decisions on the company's affairs. The legal framework governing the
conduct of board meetings in India is detailed in Section 173 of the Companies Act. This section outlines
the requirements for the frequency of meetings, the use of technology for meetings, notice periods, and
quorum requirements, ensuring that the board's deliberations are conducted efficiently and
transparently.

Section 173 - Board Meetings

Frequency and Timing

●​ All Companies: The first board meeting must be held within thirty days of the company's
incorporation. Subsequently, at least four meetings should be held each year, with not more
than 120 days between two meetings.

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●​ One Person Company (OPC): An OPC is required to convene at least one board meeting in each
half of a calendar year, and the gap between the two meetings should not exceed 90 days.

Use of Technology
●​ Meetings can be conducted via video conferencing or other audio-visual means, allowing for
flexibility and ensuring participation regardless of geographical constraints.

Notice Requirements
●​ A minimum notice of not less than seven days is required to be given to every director at their
registered address, either by post or electronic mode. Meetings can also be called at shorter
notice under certain conditions.
●​ In the absence of an independent director at the meeting, the decisions taken must be circulated
to all directors and ratified by at least one independent director to ensure fairness and
transparency.

Quorum
●​ The quorum for a board meeting is one-third of the total strength of the board of directors or
two directors, whichever is higher, ensuring that decisions are made with adequate
representation.

Legal Precedents and Interpretations

Smith v. Paringa Mines

This case involved a scenario with two directors, where one did not attend a meeting, and decisions
were made in an unconventional setting. It highlights the flexibility in conducting board meetings and the
importance of participation by directors.

Barron v. Potter
This case, which took place at a railway station, further illustrates the flexibility in meeting locations as
long as the quorum and other legal requirements are met.

Quorum Interpretations
●​ Sharp v. Dawes & East v. Bennet Bros. Ltd.: These cases demonstrate the legal interpretations of
quorum requirements, highlighting that even a single person can constitute a quorum under
specific circumstances, such as holding proxies or being the sole preference shareholder.

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●​ Henderson v. Louttit and Co. Ltd. & re London Flats Ltd.: These cases address the necessity of
maintaining a quorum throughout the meeting and the practical challenges associated with this
requirement.

Indian Law on Quorum

In Indian law, the emphasis is on the presence of a quorum at the time of the transaction of business. The
notion that a quorum must be present throughout the meeting is recognized as impractical. Therefore, a
quorum is presumed, and the decisions made are protected unless a lack of quorum is apparent or
notified, safeguarding the interests of outsiders and ensuring the legitimacy of the board's decisions.

Resolution
Resolutions are formal decisions made by the members or directors of a company during meetings,
serving as a primary means of conducting the company's business. They are crucial for operational and
strategic decision-making, embodying the collective will of the shareholders or the board. In the context
of company law, resolutions are generally categorised into two main types: ordinary resolutions and
special resolutions, each with its specific requirements and implications for corporate governance.

Ordinary Resolutions
An ordinary resolution is the most common type of resolution passed at general meetings. It requires a
simple numerical majority of the votes of members who are present and voting at the meeting. In other
words, to pass an ordinary resolution, more than 50% of the votes cast by members must be in favour.

Ordinary resolutions are used for routine business at general meetings unless the law or the company's
Articles of Association specify that a special resolution is needed. Examples of matters typically decided
by ordinary resolutions include the appointment of auditors, the approval of annual accounts, and the
election of directors.

Special Resolutions
A special resolution, on the other hand, requires a higher threshold for approval. It is passed if at least
three times the number of votes cast against the resolution is in favour of it among the members present
and voting. This effectively means a 75% majority of votes in favour is required for the resolution to pass.
Special resolutions are required for more significant actions, reflecting their importance and the potential
impact on the company and its stakeholders.

Actions Requiring Special Resolution

Several key corporate actions mandate the passing of a special resolution, including but not limited to:
●​ Alteration of the Articles of Association: Any changes to a company's Articles of Association,
which govern its internal management and operations, must be approved by special resolution.

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●​ Change of Company Name: Changing the company's name, subject to approval by the Registrar
of Companies, requires a special resolution.
●​ Alteration of the Object Clause in the Memorandum of Association: Modifying the objectives for
which the company was established necessitates a special resolution.
●​ Reduction of Share Capital: Companies looking to reduce their issued share capital must obtain
approval through a special resolution.
●​ Issue of Shares to Persons Other Than Existing Shareholders: Special resolutions are needed for
preferential allotments, which offer shares to individuals who are not currently shareholders,
often as part of strategic financing arrangements.
●​ Voluntary Winding Up: Initiating a voluntary winding up of the company requires the passing of
a special resolution.

The requirement for a special resolution underscores the significant nature of these decisions, ensuring
that they receive a higher level of scrutiny and support from the shareholders. It is a mechanism
designed to protect the interests of all stakeholders by requiring a substantial consensus for major
changes affecting the company's structure, operations, or strategy.

CSR
Corporate Social Responsibility (CSR) represents a business model and ethical framework that suggests a
company has a responsibility to act for the social good. The term itself was officially coined by Howard
Bowen in 1953, marking a pivotal moment in the way businesses began to consider their broader impact
on society beyond mere profitability. Bowen's work laid the groundwork for what has evolved into a
comprehensive approach to sustainable business practices, emphasizing environmental stewardship,
social equity, and economic prosperity.

Historical Roots of CSR

The concept of CSR, while officially named in the mid-20th century, has deeper historical roots,
particularly in the United States. Early examples of business practices reflecting CSR principles can be
traced back to philanthropic efforts by industrialists who invested in community development projects,
educational initiatives, and charitable contributions.

However, the formal consideration of CSR in business practices gained significant momentum in the 20th
century, particularly with the emergence of the Trusteeship management concept in the 1930s. This
concept raised critical questions about the social responsibilities of corporations, challenging businesses
to consider their impacts on society at large.

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CSR in Modern Business Practices

In contemporary times, CSR has become an integral part of business strategy for many companies
worldwide. It encompasses a wide range of practices, from environmental sustainability efforts to
initiatives aimed at improving labor policies, promoting fair trade, and undertaking community
development projects.

CSR Legislation in India: Section 135 of the Companies Act

In India, the legal framework for CSR is outlined in Section 135 of the Companies Act, 2013, which
mandates CSR activities for companies meeting certain financial thresholds. The applicability of CSR
obligations under Section 135 is as follows:
●​ Companies with a net worth of Rs 500 crore or more
●​ Companies with a turnover of Rs 1,000 crore or more
●​ Companies with a net profit of Rs 5 crore or more during the immediately preceding financial
year

These criteria ensure that companies with significant resources contribute to social and environmental
objectives, aligning India's corporate sector with global CSR standards.

CSR Activities and Reporting

Under the Companies Act, eligible companies are required to spend at least 2% of their average net
profits made during the three immediately preceding financial years on CSR activities. The Act also
mandates the formation of a CSR Committee responsible for recommending and monitoring the CSR
activities of the company. The range of activities that qualify as CSR initiatives is broad, covering
everything from poverty alleviation and education to environmental sustainability and gender equality.

The framework for Corporate Social Responsibility (CSR) in India is robustly outlined in the Companies
Act, 2013, particularly in Section 135 and the Companies (CSR Policy) Rules, 2014. This legislative
framework mandates certain companies to undertake CSR activities, aiming to ensure that corporations
contribute positively to societal and environmental welfare beyond their business interests. Here's a
detailed look at the key aspects of CSR as per the Indian legal context:

CSR Applicability (Rule 3(1) of Companies (CSR Policy) Rules, 2014)

CSR obligations apply to every company, including holding, subsidiary, and foreign companies having a
branch or project office in India, if they meet any of the following financial criteria in the immediately
preceding financial year:
●​ Net worth of Rs 500 crore or more,

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●​ Turnover of Rs 1,000 crore or more, or

●​ Net profit of Rs 5 crore or more.

CSR Committee Composition and Role

Companies meeting the CSR criteria must constitute a CSR Committee consisting of at least three
directors, with at least one being an independent director. In companies not required to have an
independent director, the CSR Committee can be constituted without one. The Committee's primary
roles include:
●​ Formulating and recommending a CSR Policy to the Board,
●​ Recommending the expenditure to be incurred on CSR activities,
●​ Monitoring the CSR policy from time to time.

2020 Amendment to CSR Committee Requirements

With the amendment effective from January 22, 2021, companies required to spend less than Rs 50 lakhs
on CSR activities do not need to form a separate CSR Committee. Instead, the Board of Directors will
perform the functions of the CSR Committee.

Role of the Board

The Board of Directors has the responsibility to:
●​ Review the CSR Committee's recommendations,
●​ Approve the CSR Policy and ensure its disclosure,
●​ Ensure that at least 2% of the company's average net profits over the previous three financial
years is spent on CSR activities annually.

CSR Policy and Activities

The CSR Policy outlines the company's approach, including guiding principles for selecting,
implementing, and monitoring CSR activities as well as formulating an annual action plan. CSR activities
must align with Schedule VII of the Companies Act, 2013, encompassing various domains such as
education, poverty, gender equality, health, environmental sustainability, and national relief funds,
among others.

Execution of CSR Activities

Companies can undertake CSR activities either directly or through:
●​ A Section 8 company, registered public trust, or society initiated by the company or along with
another company,
●​ Entities established by the government or recognized by an Act of Parliament,

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●​ Organisations with a proven track record in similar activities.

Entities undertaking CSR activities must register with the Central Government by filing form CSR-1
electronically.

Management of CSR Surplus and Excess Expenditure

Any surplus generated from CSR activities must not be counted as business profits and should be
reinvested in CSR projects, transferred to the Unspent CSR Account, or to a fund specified in Schedule
VII within six months of the fiscal year-end. Furthermore, if a company spends more than the mandated
amount on CSR in a given year, it may offset this excess against future CSR expenditure obligations for up
to three subsequent financial years, provided the Board passes a resolution to this effect.

The comprehensive approach outlined in the Companies Act, 2013, and its subsequent amendments
underlines India's commitment to ensuring corporate contributions towards sustainable development
and societal welfare, reflecting a global trend towards integrating social responsibility into the core
business strategy.

Assignment: Write a short note on Meeting, Quorum and Resolutions

Meetings, quorum, and resolutions constitute the backbone of corporate governance, providing a
structured framework through which companies make decisions, govern their affairs, and engage with
stakeholders. Understanding these elements is crucial for ensuring effective management and
compliance with legal and regulatory requirements.

Meetings
In the corporate context, meetings are gatherings where members (typically shareholders or directors)
come together to discuss and decide on company affairs. Meetings can be of various types, including
Annual General Meetings (AGMs), Extraordinary General Meetings (EGMs), and board meetings, each
serving different purposes. AGMs are held annually to approve annual accounts, elect directors, appoint
auditors, and address shareholders' queries. EGMs are convened to decide on urgent matters that arise
between AGMs. Board meetings involve the company's board of directors discussing and making
decisions on the company's strategic direction and oversight.

Quorum
Quorum refers to the minimum number of members that must be present at a meeting to legally conduct
business. The requirement for a quorum is a safeguard against decisions being made without sufficient
representation. The Companies Act stipulates specific quorum requirements for different types of
meetings. For example, a public company's board meeting typically requires the presence of one-third of
its total strength or two directors, whichever is higher, to constitute a quorum. These requirements

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ensure that decisions are made with adequate participation and consensus among the members or
directors present.

Resolutions
Resolutions are formal decisions made by the members or directors of a company during meetings. They
are the primary means through which companies conduct their business and make decisions.
Resolutions can be categorized into ordinary and special resolutions based on the level of approval
needed:
●​ Ordinary Resolutions require a simple majority (more than 50%) of the votes cast by members
present and voting. They are used for routine decisions, such as the approval of financial
statements or the election of directors.
●​ Special Resolutions require a higher threshold for approval, typically at least 75% of the votes
cast by members present and voting. Special resolutions are necessary for more significant
decisions, such as amending the Articles of Association, changing the company name, or altering
the company's share capital structure.
The process of proposing, discussing, and voting on resolutions is a critical aspect of corporate
democracy, ensuring that key decisions reflect the collective will of the shareholders or the board, as
applicable.

Conclusion
Meetings, quorum, and resolutions are integral to the governance of companies, facilitating
decision-making and ensuring that actions are taken in the best interests of the company and its
stakeholders. These elements embody the principles of transparency, accountability, and participation,
which are essential for the integrity and success of any corporation. By adhering to the statutory
requirements and best practices related to meetings, quorum, and resolutions, companies can effectively
navigate the complexities of corporate governance and achieve their strategic objectives.

Session 12

Concept of Compromise, Amalgamation, Mergers, and Acquisitions

Compromise

Compromise refers to an agreement between parties to settle disputes by mutual concessions. In the
context of corporate law, it often involves a settlement where each party gives up something to reach a
mutually acceptable resolution. This can occur in various scenarios such as disputes between

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shareholders, disagreements on the management of the company, or conflicts over specific corporate
actions.

Amalgamation

Amalgamation is the process where two or more companies combine to form a new entity. This process
involves the pooling of assets and liabilities of the amalgamating companies into a new company. The
main objectives of amalgamation are to achieve economies of scale, expand business operations, reduce
competition, and enhance the financial and operational strength of the new entity.

Key Features of Amalgamation:

1.​ Pooling of Resources: All assets and liabilities of the amalgamating companies are transferred to
the new company.
2.​ Dissolution of Original Entities: The original companies cease to exist, and a new company is
formed.
3.​ Legal Procedures: It requires approval from regulatory authorities such as the Reserve Bank of
India (RBI) for banking companies as per Section 44A of the Banking Regulation Act, 1949​​.
4.​ Shareholder Approval: The amalgamation scheme must be approved by a majority of
shareholders of each company involved.

Mergers

Merger is a form of corporate strategy involving the combination of two companies into a single entity,
where one company survives, and the other is absorbed. Mergers are typically executed to achieve
growth, diversify product lines, eliminate competition, and gain market share.

Types of Mergers:
1.​ Horizontal Merger: Between companies operating in the same industry.
2.​ Vertical Merger: Between companies in different stages of production in the same industry.
3.​ Conglomerate Merger: Between companies in unrelated businesses.

Steps Involved in Mergers:

1.​ Due Diligence: Comprehensive analysis of the financial, legal, and operational aspects of the
target company.
2.​ Valuation: Determining the value of the target company.
3.​ Negotiation: Terms of the merger are negotiated and finalized.
4.​ Regulatory Approvals: Necessary approvals from regulatory bodies are obtained.
5.​ Integration: Combining the operations, cultures, and systems of the merging companies.

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Acquisitions

Acquisition is a corporate action where one company purchases most or all of another company's shares
to gain control of that company. The acquiring company becomes the owner of the target company and
integrates its operations into its own.

Types of Acquisitions:
1.​ Friendly Acquisition: The target company agrees to be acquired.
2.​ Hostile Acquisition: The acquiring company proceeds with the acquisition despite the opposition
from the target company's management.
3.​ Reverse Acquisition: A private company acquires a public company to bypass the lengthy
process of going public.

Legal Framework for Acquisitions:

1.​ Companies Act, 2013: Sections 232-234 govern mergers and acquisitions, requiring approval
from the National Company Law Tribunal (NCLT).
2.​ Securities Regulations: SEBI regulations, particularly for listed companies, must be adhered to
during acquisitions.
3.​ Competition Law: Approval from the Competition Commission of India (CCI) to ensure the
acquisition does not create monopolistic power.

Practical Examples and Legal Authorities

1.​ Merger of Private Sector Banks: As per the Reserve Bank of India's Master Directions on the
Amalgamation of Private Sector Banks, mergers require the approval of the RBI and must follow
strict guidelines to ensure fairness and transparency​​.
2.​ Case Law: In Vinayak Devanna Nayak v. Ryot Sewa Sahakari Bank Ltd., the Supreme Court
addressed issues related to the amalgamation and its impact on stakeholders​​.

Conclusion

Understanding the concepts of compromise, amalgamation, mergers, and acquisitions is essential in

corporate law. Each of these actions has specific legal requirements, regulatory approvals, and
implications for the companies involved. They are strategic tools used by businesses to grow,
restructure, and achieve various operational and financial objectives.

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Here's a table summarizing the differences between amalgamation and merger:

Aspect Amalgamation Merger

Definition Combination of two or more One company absorbs another, with

companies to form a new entity the absorbed company ceasing to
exist

Legal Entity New legal entity is created No new legal entity; the acquiring
company continues

Process Combines assets, liabilities, and Transfers assets, liabilities, and

businesses into a new entity businesses to the surviving company

Accounting Pooling of interests method or Purchase method

Treatment purchase method

Continuity New name and identity for the new The acquiring company retains its
entity name and identity

Shareholders' Shareholders of amalgamating Shareholders of the merged

Interests companies become shareholders of company receive shares of the
the new entity surviving company

Regulatory Sections 230-234 of the Companies Sections 230-234 of the Companies

Framework (India) Act, 2013; approval from NCLT, Act, 2013; approval from NCLT,
shareholders, and creditors shareholders, and creditors

Examples Amalgamation of Bank of Baroda, Merger of Vodafone India and Idea

Vijaya Bank, and Dena Bank to form Cellular to form Vodafone Idea
Bank of Baroda

Objective Form a new company to consolidate One company takes over another to
operations and resources expand its operations

Impact on Existing Original companies cease to exist Only the absorbed company ceases
Companies to exist; the acquiring company
continues

This table provides a clear and concise comparison of the key differences between amalgamation and
merger.

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Modes of Undertaking Mergers and Acquisitions (M&A): Agreements and Schemes

Schemes in M&A
In the context of Mergers and Acquisitions (M&A), "schemes" refer to statutory mechanisms used to
facilitate various corporate restructuring activities. These schemes are typically governed by the
Companies Act, 2013, and require approval from the National Company Law Tribunal (NCLT). Schemes
provide a structured and legally binding method to reorganise a company’s structure, assets, liabilities,
and ownership.

Types of Schemes
1.​ Amalgamation
●​ Definition: Amalgamation involves merging two or more companies to form a new
entity or to merge one or more companies into an existing company. The assets and
liabilities of the amalgamating companies are transferred to the amalgamated company.
●​ Objective: The primary objective of amalgamation is to achieve synergies by combining
the strengths and resources of two or more companies. This can lead to enhanced
operational efficiency, market share expansion, and increased shareholder value.
●​ Procedure: The amalgamating companies draft a scheme of amalgamation and seek
approval from their respective boards. The scheme is then presented to the
shareholders and creditors for approval. After obtaining their consent, the scheme is
submitted to the NCLT for final approval.
●​ Example: The merger of Vodafone India and Idea Cellular to form Vodafone Idea
Limited. Another example is SBI's amalgamation with its associate banks, where assets
and liabilities were transferred to SBI, creating a larger banking entity.
2.​ Demerger
●​ Definition: A demerger is a form of corporate restructuring where a company transfers
one or more of its undertakings to another company. This results in the original
company being split into two or more entities.
●​ Objective: The objective of a demerger is to segregate distinct business units or
undertakings into separate entities. This allows each entity to focus on its core
operations, attract targeted investment, and enhance operational efficiencies.
●​ Procedure: The demerging company prepares a scheme detailing the assets and
liabilities to be transferred to the new entity. This scheme must be approved by the
board, shareholders, and creditors, followed by NCLT approval.

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●​ Example: The demerger of Reliance Industries Limited’s telecommunications business

into Reliance Jio Infocomm Limited. Another example is the demerger of Piramal
Enterprises' financial services and pharmaceuticals businesses into two separate
entities.
3.​ Slump Sale
●​ Definition: A slump sale refers to the transfer of one or more undertakings as a 'going
concern' for a lump sum consideration without assigning individual values to the assets
and liabilities.
●​ Objective: The objective of a slump sale is to transfer a business unit or undertaking as a
going concern for a lump sum consideration. This allows the seller to exit non-core
businesses and the buyer to acquire an operational business without detailed valuation
of individual assets and liabilities.
●​ Procedure: The company identifies the undertaking to be sold and negotiates terms with
the buyer. The sale agreement is approved by the board and shareholders. If necessary,
regulatory approvals are obtained.
●​ Example: The sale of Essar Oil to Rosneft in 2017, where Essar Oil's entire business,
including its refinery and retail outlets, was sold as a going concern. Another example is
the slump sale of Tata Teleservices' consumer mobile business to Bharti Airtel.
4.​ Capital Reduction
●​ Definition: Capital reduction involves decreasing a company's shareholder equity
through share cancellations, share buybacks, or returning surplus capital to
shareholders. This is usually done to reorganise a company's capital structure or
eliminate accumulated losses.
●​ Objective: The objective of capital reduction is to reorganise a company's capital
structure, eliminate accumulated losses, or return surplus capital to shareholders. This
can improve the company's financial health and enhance shareholder value.
●​ Procedure: The company drafts a resolution for capital reduction and seeks approval
from the board and shareholders. The resolution is then submitted to the NCLT for
confirmation.
●​ Example: Tata Motors' capital reduction plan to adjust its accumulated losses against its
share premium account. Another example is Wipro’s capital reduction scheme to return
surplus cash to shareholders by cancelling a portion of its equity shares.
5.​ Compromise or Arrangement between a Company and its Members
●​ Definition: This scheme involves an agreement between a company and its
shareholders to restructure the company's capital, assets, or liabilities. This can include
changes to the shareholding pattern, issuance of new shares, or conversion of shares.
●​ Objective: This scheme aims to restructure the company’s capital, assets, or liabilities
through agreements with shareholders. Objectives can include altering the shareholding

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pattern, issuing new shares, or converting shares to optimise the company's capital
structure.
●​ Procedure: The company proposes a scheme of arrangement and seeks approval from
the board, shareholders, and creditors. The scheme is then submitted to the NCLT for
approval.
●​ Example: Larsen & Toubro’s restructuring of its shareholding pattern through a scheme
of arrangement to streamline its ownership structure. Another example is Reliance
Industries' scheme of arrangement to restructure its petrochemicals and refining
business into separate entities.
6.​ Compromise or Arrangement between a Company and its Creditors
●​ Definition: This type of scheme involves an agreement between a company and its
creditors to restructure its debt obligations. This can include extending repayment
terms, converting debt to equity, or reducing the debt amount.
●​ Objective: The objective here is to restructure the company's debt obligations to ensure
financial stability and continued operations. This can involve extending repayment
terms, converting debt to equity, or reducing the debt amount.
●​ Procedure: The company negotiates a debt restructuring plan with its creditors and
seeks approval from the board and creditors. The plan is then submitted to the NCLT for
sanction.
●​ Example: Jet Airways' resolution plan involving compromise agreements with its
creditors to restructure its outstanding debts. Another example is Bhushan Steel's debt
restructuring plan approved by its creditors and sanctioned by the NCLT as part of its
insolvency resolution process.
7.​ Either with Third Parties or Related Entities
●​ Definition: Schemes can also involve arrangements with third parties (such as new
investors or acquirers) or related entities (such as subsidiaries or sister companies).
These schemes can facilitate various forms of corporate restructuring, including
acquisitions, joint ventures, or internal reorganisations.
●​ Objective: Optimise operations, enhance synergies, and attract investments through
various restructuring forms.
●​ Procedure: The company drafts a scheme involving third parties or related entities and
seeks necessary approvals from the board, shareholders, creditors, and regulatory
authorities. The scheme is then presented to the NCLT for approval.
●​ Example: The internal restructuring of Tata Group’s various entities through schemes of
arrangement to consolidate its business operations and improve synergies among its
subsidiaries. Another example is the restructuring of Adani Group’s various businesses
through schemes of arrangement to optimise operations and enhance shareholder
value.

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Conclusion
Schemes provide a legal and structured method for companies to undertake various forms of corporate
restructuring, including mergers, demergers, slump sales, capital reductions, and compromises or
arrangements with members or creditors. These schemes ensure compliance with statutory
requirements and provide a transparent process for stakeholders to participate in and approve the
proposed changes.

Companies Act, 2013: Sections 230 - 240

Compromises, Arrangements, Amalgamations & Reconstructions

Sections 230 to 240 of the Companies Act, 2013, deal with various forms of corporate restructuring,
including compromises, arrangements, amalgamations, and reconstructions. Here’s a concise overview:

1. Compromise

●​ Definition: A compromise involves settling disputes between a company and its creditors or
members. There must be some dispute regarding the enforcement of rights or what those rights
entail.
●​ Legal Insight: In Mercantile Investment & General Trust Company v. International Company of
Mexico, it was held that a compromise does not include exchanging one right (e.g., a secured
debenture) for another (e.g., a preference share) unless disputes or difficulties in enforcing the
original rights exist.

2. Arrangement

●​ Definition: An arrangement refers to any reorganisation of the company's share capital, assets,
or liabilities that isn't strictly a merger or demerger. This can include the restructuring of share
capital, conversion of securities, or any other financial restructuring.
●​ Scope: Arrangements are broader than compromises and can be used for various forms of
corporate restructuring.

3. Amalgamation

●​ Definition: Amalgamation is the process of merging two or more companies into a single entity.
The merged entities lose their separate identities and form a new company or merge into an
existing one.
●​ Purpose: Amalgamations are typically aimed at achieving synergies, expanding market share,
and improving operational efficiencies.

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4. Reconstruction

●​ Definition: Reconstruction involves reorganising the company's structure, typically following

financial distress, to ensure its survival and return to profitability.
●​ Methods: This can involve asset sales, capital reductions, or other financial adjustments.

Key Provisions Under Sections 230 - 240

1.​ Section 230: Deals with power to compromise or make arrangements with creditors and
members.
●​ Procedure: Requires an application to the National Company Law Tribunal (NCLT),
approval by a majority in number representing three-fourths in value of creditors or
members, and a sanction by the NCLT.
2.​ Section 231: Provides the power to enforce compromises and arrangements.
3.​ Section 232: Specific provisions for mergers and amalgamations.
●​ Procedure: Involves drafting a scheme of amalgamation, approval from the boards of
the companies involved, obtaining consent from shareholders and creditors, and NCLT
sanction.
4.​ Section 233: Simplified procedure for mergers and amalgamations of certain companies.
●​ Scope: Applies to mergers of small companies, holding and subsidiary companies, or
other classes of companies as may be prescribed.
5.​ Section 234: Deals with mergers and amalgamations of companies with foreign companies.
●​ Requirement: Requires adherence to regulations framed by the Reserve Bank of India
(RBI).
6.​ Section 235: Provisions relating to the acquisition of shares of dissenting shareholders.
7.​ Section 236: Covers the purchase of minority shareholding.
8.​ Section 237: Powers of the Central Government to provide for amalgamation of companies in the
public interest.
9.​ Section 238: Registration of offer of schemes involving the transfer of shares.
10.​ Section 239: Preservation of books and papers of amalgamated companies.
11.​ Section 240: Liability of officers in respect of offenses committed prior to the amalgamation.

Conclusion

Sections 230 to 240 of the Companies Act, 2013 provide a comprehensive legal framework for various
corporate restructuring activities, including compromises, arrangements, amalgamations, and
reconstructions. These sections ensure that such activities are carried out in an orderly, transparent, and
legally compliant manner, safeguarding the interests of all stakeholders involved.

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Meaning of the Word “Arrangement”

The term "arrangement" has a broad meaning, encompassing more than "compromise" and involving
some element of give and take. Here are examples of "arrangement":
1.​ Debenture Holders:
●​ (a) Extending time for payment.
●​ (b) Accepting cash payment less than the face value.
●​ (c) Giving up security partially or fully, exchanging debentures for shares, or varying
rights attached to debentures.
2.​ Creditors:
●​ Taking cash as part payment and the balance in shares or debentures.
3.​ Preference Shareholders:
●​ (a) Giving up rights to arrears of dividends.
●​ (b) Accepting a reduced future dividend rate or varying class rights.

Compromise and Arrangement

Purpose: Proposed by a company to resolve disputes or restructure its operations, debts, or capital.

Parties Involved: Can involve the company and its creditors or the company and its members
(shareholders).

Class Treatment: Proposals must be made to each "class" of creditors or members separately. This is
crucial to ensure fair treatment and has been a significant point of litigation.

Key Judicial Cases:

1.​ D.A. Swamy vs. India Meters (1994 79 CompCas 27 Mad)
●​ Issue: The proposal clubbed multiple classes of unsecured creditors together.
●​ Objection: One group of creditors objected, arguing that their interests were not being
treated distinctly.
●​ Outcome: The Madras High Court upheld the objections, emphasizing that each class of
creditors must be treated separately in a compromise or arrangement.
2.​ Premier Motors vs. Ashok Tandon (1971 41 CompCas 656 All)
●​ Issue: The proposal treated creditors of the same class but with different maturity
statuses similarly.
●​ Outcome: This case highlighted the importance of considering the different statuses
within the same class to ensure fair treatment.

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Confiscatory Arrangements:
●​ These are arrangements perceived as unfairly depriving parties of their rights or interests, often
involving significant reductions in claims or alterations to terms that creditors or members
would not voluntarily accept.

Legal Framework:
●​ Governed by Sections 230 to 240 of the Companies Act, 2013, these sections outline the
procedures and requirements for proposing, approving, and implementing compromises and
arrangements.

Advantages of Schemes

1.​ Single Window: No need for separate shareholder approvals for individual transactions like
amendment of Memorandum of Association (MOA), capital reduction, or change in name.
2.​ Easier Regulatory and Third-Party Approvals: Streamlined process for obtaining necessary
consents and approvals from regulatory bodies and third parties.
3.​ Capped Stamp Duty: In Maharashtra, the stamp duty is capped at INR 50 crores, making it
cost-effective.
4.​ Composite Transactions: Allows multiple corporate actions to be combined into a single
scheme, simplifying the process.
5.​ Open Offer Exemption: Exemptions under Regulation 10(1)(d)(ii) & (iii) of the SEBI SAST
Regulations, 2011, reducing the burden of making an open offer.
6.​ Tax Friendly: Potential for tax benefits, making schemes financially advantageous.

Illustrative List of Corporate Actions Subsumed in a Scheme

1.​ Change of Name: Simplifies the process of changing the company's name through a scheme.
2.​ Approval of Related Party Transactions: Facilitates the approval of transactions with related
parties, ensuring compliance with legal requirements.
3.​ Increase or Reorganisation of Authorized Share Capital: Streamlines the process of increasing or
reorganising the company's share capital.
4.​ Amendment of MOA and Articles of Association (AOA): Allows for amendments to the
foundational documents of the company in a consolidated manner.
5.​ Modification of ESOP Terms: Enables changes to Employee Stock Option Plan (ESOP) terms,
benefiting employee compensation schemes.

These advantages and corporate actions illustrate the flexibility and efficiency provided by schemes,
making them a preferred method for corporate restructuring and other significant changes within a
company.

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Journey of a Scheme

Pre-NCLT Stage NCLT Stage Post-NCLT Stage

Notices to Regulatory Bodies

Scheme Drafting Filing NCLT Order with ROC
and Creditors

Valuation Report, Fairness

Opinion, Accounting Treatment Holding/Dispensation of Stamp Adjudication of the
Certificate, Net Worth Meetings Scheme
Certificate

Board/Audit Committee Execution of Implementation

Filing Chairperson’s Report
Approval Agreement (if necessary)

If Target is Listed, Compliances Completion of Conditions

Filing RD’s Report
Under SEBI Scheme Circulars Precedent

Petition Filing for Second Motion Payment of Stamp Duty on

Filing Scheme with NCLT
Hearing Scheme

NCLT Hearing (1st Motion) Notice of Final Hearing Scheme Comes into Effect

Board Meeting to Take Note of

NCLT Hearing (2nd Motion)
Effectiveness

NCLT Order Sanctioning the

Scheme

Disadvantages of Schemes

●​ Longer Duration: The process can be time-consuming, often taking several months or even
years to complete due to the multiple stages of approval and regulatory scrutiny.
●​ Approval of Each Class of Shareholders & Creditors Required: Requires approval from each
class of shareholders and creditors, with a majority in number representing at least 75% in value.
This can be challenging to achieve and may delay the process.
●​ Autonomy Compromised: Involves significant intervention by the National Company Law
Tribunal (NCLT) and adherence to various legal requirements, which can limit the autonomy of
the company in executing its restructuring plans.
●​ Confidentiality Cannot Be Maintained: Due to the need for extensive disclosures and
notifications to shareholders, creditors, and regulatory bodies, maintaining confidentiality
throughout the process can be difficult.

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Fast Track Mergers – Section 233

Fast track merger route is available for:

●​ (a) Merger between two or more small company(ies);
●​ (b) Merger between a holding company and its wholly owned subsidiary;
●​ (c) Merger or amalgamation between two or more startup companies; or
●​ (d) Merger or amalgamation between one startup company and one small company.

Definition of “small company” in terms of section 2(85):

●​ A company, other than a public company, with:
●​ (i) Paid-up share capital not exceeding fifty lakh rupees, or such higher amount as may
be prescribed, not exceeding ten crore rupees.
●​ (ii) Turnover as per profit and loss account for the immediately preceding financial year
not exceeding two crore rupees, or such higher amount as may be prescribed, not
exceeding one hundred crore rupees.

Definition of “startup company” in terms of Rule 25 of the Companies (Compromises, Arrangements &
Amalgamations) Rules, 2015:
●​ A private company recognised as such in accordance with notification no. GSR 127 (E), dated
February 19, 2019, issued by DPIIT.

Procedure for Approval - Fast Track Merger

●​ Approval of the Board of Directors of the Company: Initial approval is obtained from the
company's board of directors to proceed with the merger.
●​ Notice to the Registrar of Companies and Official Liquidator: Notices are sent to the registrar of
companies and the official liquidator inviting objections or suggestions regarding the scheme.
●​ Approval Threshold: An objective threshold of approval from at least 90% of shareholders and
90% of creditors (by value) is required.
●​ No Objections within 30 Days: If no objections are raised within 30 days of the notice, the
scheme is deemed to be accepted, and a final order is obtained from the Registrar of Companies
(ROC).
●​ Register and Implement the Scheme: The scheme is registered and implemented within 30 days
of the final order.

Gower: Reconstruction and Amalgamation

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In general, the expression ‘reconstruction’ ‘reorganisation’ or ‘scheme of arrangement’ is employed when

only one company is involved and the rights of the investors and, sometimes, of its general creditors are
varied— the last expression being more commonly employed when creditors’ rights are affected.

Under an amalgamation, merger or takeover two (or more) companies are merged, either de jure by a
consolidation of their undertakings, or de facto by the acquisition of a controlling interest in the share
capital of one by the other or of the capital of both by a new company.

●​ For under some types of reconstruction, creditors generally, as well as investors may be
affected, so that creditor protection is involved as well as investor protection.
●​ In practice, however, reconstructions mainly affect share and debenture holders; indeed,
ordinary trade creditors are far less likely to suffer under a reconstruction than are debenture
holders despite the fact that the latter are secured creditors.

Reconstruction and Amalgamation

●​ Reconstruction: Change in objects- Change in ownership
●​ Amalgamation: Joining of Companies
●​ Sale of Shares
●​ Sale of Undertaking
●​ Sale and Dissolution
●​ Scheme of Arrangement
●​ MOA and requirements

Mergers and Acquisitions in India (article)

Introduction

●​ Significance: Mergers and acquisitions (M&A) have become crucial in the modern corporate
world for restructuring businesses.
●​ Origins: The concept of M&A in India was initiated by government bodies and major financial
institutions to restructure the corporate sector.
●​ Economic Context: Since the 1991 economic reforms, Indian companies have increasingly turned
to M&A as a key strategic decision due to heightened global competition.

Trends in Mergers and Acquisitions

●​ Historical Changes: M&A trends have evolved, with Indian companies acquiring foreign
enterprises becoming more common.

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●​ Factors Influencing M&A: Key factors include favorable government policies, economic
buoyancy, corporate liquidity, and proactive attitudes of Indian entrepreneurs.

Definitions and Types of Mergers

●​ Merger: A full combining of two previously separate companies into a new entity.
●​ Acquisition: Taking ownership of another business, which can be through share purchase or
asset purchase.
●​ Joint Venture: A contractual agreement between two or more companies for a specific business
venture.
●​ Strategic Alliance: Collaboration between businesses to minimize risk and maximize leverage.
●​ Partnership: A business where two or more individuals co-own and profit from the business.

Kinds of Mergers

●​ Horizontal Merger: Between companies in direct competition.

●​ Vertical Merger: Between a customer company and a supplier company.
●​ Conglomerate Merger: Between companies with no common business areas, which can be
further categorised into product expansion, market-augmentation, and pure conglomerate
mergers.

Legal Procedures for Mergers and Acquisitions

●​ Legislative Framework: Governed by the Indian Companies Act, 1956, particularly sections 391 to
396.
●​ Tribunal's Role: The Tribunal is responsible for sanctioning compromises or arrangements,
facilitating the reconstruction and amalgamation of companies.
●​ Central Government's Role: Has the power to order amalgamations in the national interest.

Thought Processes Behind Mergers and Acquisitions

●​ Economies of Scale: Reducing average costs per unit through increased production.
●​ Increased Market Share: Absorbing a significant competitor to increase market power.
●​ Cross Selling: Combining complementary products or services.
●​ Corporate Synergy: Enhancing revenue and cost savings.
●​ Tax Advantages: Utilizing the tax benefits of acquiring loss-making companies.
●​ Geographical Enhancement: Expanding market reach and stabilizing earnings.
●​ Resource Exchange: Combining resources to create value through overcoming information
asymmetry or combining scarce resources.
●​ Improved Market Reach: Enhancing industry visibility and credibility.

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Advantages of Mergers and Acquisitions

●​ Growth Platform: Provides a platform for companies to grow and expand market penetration.
●​ New Markets and Technologies: Access to new markets and cutting-edge technology.
●​ Efficiency and Profitability: Enhanced operating margins and efficiency.

Conclusion

●​ Strategic Tool: M&A are critical for corporate growth, extending operations, and increasing
profitability.
●​ Rising Trends: M&A activities are increasing across various business sectors in India, driven by
favorable FDI policies and market opportunities.
●​ Future Outlook: Indian markets are poised for significant M&A activity, offering growth
opportunities for businesses.
This summary captures the essence of the article, highlighting the importance, trends, types, legal
procedures, and advantages of mergers and acquisitions in India.

MERGERS & ACQUISITIONS AND THEIR IMPACT IN INDIA

Abstract

Mergers and acquisitions (M&A) are significant strategies for business growth and restructuring. They
allow companies to expand efficiently and ensure fair valuation.

Introduction

●​ Current Business Climate: Companies are increasingly turning to M&A due to rising competition,
changing profit margins, and evolving technologies.
●​ Mechanics of M&A: M&A involves the merging of businesses, which includes their properties
and debts. The process can lead to either the creation of a new entity or integration into an
existing one.

Historical Context

●​ Phases of M&A in India:

●​ 1916-1940: Initial phase driven by economic policies post-World War I, characterized by
horizontal mergers.
●​ 1965-1970: Marked by share market upsurge and lending rates, with mergers supported
by equities.
●​ 1992-2000: Driven by liberalization, privatization, and globalization (LPG), with
significant mergers in the communication and banking sectors.

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●​ 2000 onwards: A substantial increase in M&A activities, with notable mergers such as
Tata-Corus and Vodafone-Hutchison Essar.

Types of Mergers

●​ Horizontal Merger: Between direct competitors.

●​ Vertical Merger: Between a customer and supplier.
●​ Conglomerate Merger: Between companies with no common business areas, further categorised
into product expansion, market-augmentation, and pure conglomerate mergers.

Legal Procedures

●​ Indian Companies Act, 1956: Governs M&A with sections 391 to 396 detailing the procedures and
requirements for mergers, including approvals from the Tribunal and the Central Government.

Impact on Operating and Financial Performance

●​ Operating Performance: Studies show mixed results, with some mergers failing to achieve
synergetic gains.
●​ Financial Performance: Similar mixed outcomes, with some studies indicating a decline in
profitability, liquidity, and solvency ratios post-merger.

Methods of Valuation

●​ Balance-Sheet Methods: Includes net asset value, adjusted asset value, and liquidation value,
but often disregards intangible assets.
●​ Market-Based Methods: Includes the Earnings/Price (E/P) ratio and Price/Sales (P/S) ratio, which
are simple but may not accurately reflect the intrinsic value.
●​ Discounted Cash Flow (DCF) Method: Considers the present value of future cash flows,
providing a more accurate and practical valuation.

Research Gap and Objectives

●​ Gaps Identified:
●​ Inconsistent methodologies across studies.
●​ Limited sample sizes.
●​ Lack of comparison to industry averages.
●​ Objectives:
●​ Assess the extent and impact of M&A in India.
●​ Evaluate the performance of Indian banks post-merger.
●​ Identify factors leading to the success or failure of M&A strategies.

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Impact on the Indian Banking Sector

●​ Historical Scenario: Evolution from the early 20th century to the present, with significant
mergers like ICICI and IDBI.
●​ Recent Developments: The merger of 10 public sector banks into four major banks in 2020 to
strengthen the banking sector.

Conclusion

●​ Valuation: Accurate valuation is crucial for successful M&A. The DCF method is preferred for its
practical approach to future success potential.
●​ Success Factors: Effective M&A requires realistic valuations and the consideration of various
outcomes to mitigate prediction errors.
●​ Future Prospects: Continuous growth in M&A activities with a focus on strategic integration and
value creation.
This summary encapsulates the essence of Prabhnoor Chawla's analysis of M&A in India, highlighting
historical trends, legal frameworks, performance impacts, valuation methods, and the specific impact on
the banking sector.

Session 13

Insolvency and Bankruptcy Code, 2016: Summary

History:

●​ Previous Legal Framework: Prior to the Insolvency and Bankruptcy Code (IBC) of 2016, India had
no unified law addressing insolvency and bankruptcy. The legal provisions were scattered
across various statutes:
●​ Sick Industrial Companies (Special Provisions) Act, 1985
●​ The Recovery of Debt Due to Banks and Financial Institutions Act, 1993
●​ The Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002
●​ The Companies Act, 2013
●​ Individual Bankruptcy: Handled by the Presidency Towns Insolvency Act, 1909 and the
Provincial Insolvency Act, 1920 through the courts.
●​ Problems: The existing framework was fragmented, inefficient, and caused significant delays in
the resolution of insolvency cases.

Forums for Resolutions:

●​ Multiple forums were established under different statutes:

●​ Board of Industrial and Financial Reconstruction (BIFR)

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●​ Debt Recovery Tribunal (DRT)

●​ National Company Law Tribunal (NCLT)
●​ High Courts: Handled liquidation of companies.
●​ Lower Courts: Handled individual liquidations.
●​ Each forum had its appellate mechanisms or references to the High Court, further
complicating the resolution process.

Objective of the Code:

●​ Consolidation and Amendment: The IBC consolidates and amends laws related to reorganization
and insolvency resolution for corporate persons, partnership firms, and individuals, aiming for
timely resolution.
●​ Maximization of Asset Value: Ensures that assets are managed and resolved efficiently to
maximize value.
●​ Promotion of Entrepreneurship: Facilitates business operations by ensuring the availability of
credit and balancing stakeholders' interests.
●​ Ease of Doing Business: Improves India's business environment, attracting more investments and
fostering economic growth.
●​ Insolvency and Bankruptcy Fund: Establishes a fund to support the insolvency process and
related matters.

Why the Code:

●​ Timely Resolution: Aims to resolve insolvency cases quickly to maximize asset value.
●​ World Bank Data: India previously took 4.3 years for creditors to recover payments from
insolvent companies, ranking 136th in 2017 out of 190 nations in resolving corporate insolvency.
●​ Unified Legal Framework: Brings all insolvency laws under one umbrella to streamline and
expedite the insolvency process.

Applicability of the Code (Section 2):

●​ Companies: Applies to any company incorporated under the Companies Act, 2013, or any prior
company law.
●​ Special Acts: Includes companies governed by special Acts, except where inconsistent with
such Acts.
●​ Limited Liability Partnerships (LLPs): Covers LLPs incorporated under the Limited Liability
Partnership Act, 2008.
●​ Other Bodies: May include other bodies incorporated under any law as specified by the Central
Government.

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●​ Personal Guarantors: Applies to personal guarantors to corporate debtors.

●​ Partnership and Proprietorship Firms: Includes all partnership and proprietorship firms.
●​ Individuals: Extends to individuals, except personal guarantors.

The IBC 2016 represents a significant overhaul of the insolvency resolution framework in India,
addressing inefficiencies and creating a more robust and timely process for handling insolvencies.

Key Definitions under Section 3 of the Insolvency and Bankruptcy Code, 2016
(6) “Claim”
●​ Definition: A claim refers to a right to payment or a right to remedy for a breach of contract that
gives rise to a right to payment.
●​ Components:
●​ Right to Payment: This can be in various forms:
●​ Judgment: Whether or not the claim has been reduced to a judgment
by a court.
●​ Fixed or Disputed: The claim may be fixed (certain) or disputed.
●​ Legal or Equitable: The claim can be recognized legally or in equity.
●​ Secured or Unsecured: The claim might be backed by collateral
(secured) or not (unsecured).
●​ Right to Remedy: For breaches that lead to a right to payment under the law.
●​ Example: A supplier has delivered goods to a company, but the
company has not paid the invoice. The supplier has a claim for
payment, whether the company acknowledges the debt or disputes it.
(7) “Corporate Person”
●​ Definition: A corporate person includes:
●​ Companies: As defined under Section 2(20) of the Companies Act, 2013.
●​ Limited Liability Partnerships (LLP): As defined under Section 2(1)(n) of the LLP Act,
2008.
●​ Other Incorporated Persons: Entities incorporated with limited liability under any law,
excluding financial service providers.
●​ Example: A private limited company, an LLP, or a society registered under the Societies
Registration Act, 1860, would be considered corporate persons.
(8) “Corporate Debtor”
●​ Definition: A corporate debtor is a corporate person who owes a debt to any person.
●​ Example: A company that has taken a loan from a bank and is obligated to repay it is a
corporate debtor.

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(10) “Creditor”
●​ Definition: A creditor is any person to whom a debt is owed. It includes:
●​ Financial Creditor: Entities that lend money (e.g., banks).
●​ Operational Creditor: Entities that supply goods or services.
●​ Secured Creditor: Creditors with collateral backing the debt.
●​ Unsecured Creditor: Creditors without collateral.
●​ Decree Holder: Individuals or entities who have been awarded a judgment by a court.
●​ Example: A bank lending money to a company is a financial creditor, while a supplier
providing raw materials to a company is an operational creditor.
(11) “Debt”
●​ Definition: A debt is a liability or obligation in respect of a claim which is due from any person. It
includes:
●​ Financial Debt: Money borrowed or raised.
●​ Operational Debt: Liabilities arising from goods or services rendered.
●​ Example: An outstanding loan is a financial debt, and unpaid invoices for supplies are
operational debts.
(23) “Person”
●​ Definition: A person includes:
●​ Individual: A natural person.
●​ Hindu Undivided Family (HUF): A joint family structure recognized in Hindu law.
●​ Company: As defined under relevant corporate laws.
●​ Trust: An entity created to hold assets for the benefit of others.
●​ Partnership: A business arrangement where two or more individuals share ownership.
●​ Limited Liability Partnership (LLP): A partnership with limited liability for its partners.
●​ Other Entities: Entities established under statutes, including those resident outside India.
●​ Example: A sole trader, a family business under HUF, a corporation, a charitable trust, or
a partnership firm.
(27) “Property”
●​ Definition: Property includes:
●​ Money: Currency or monetary assets.
●​ Goods: Tangible movable items.
●​ Actionable Claims: Claims that can be enforced through legal action.
●​ Land: Real estate.
●​ Other Interests: Any present, future, vested, or contingent interests arising out of
property.
●​ Example: Cash in hand, inventory, receivables, real estate properties, and future rights
to a property under a will.

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These definitions help clarify the various aspects of the Insolvency and Bankruptcy Code, ensuring a
comprehensive understanding of the terms used within the legislation.

Section 4: Applicability of Part II

(1) Applicability to Corporate Debtors

●​ Threshold for Insolvency and Liquidation: This section specifies that Part II of the Insolvency and
Bankruptcy Code, 2016, applies to insolvency and liquidation proceedings of corporate debtors
if the minimum amount of default is at least one lakh rupees (INR 1,00,000).
●​ Government Notification: The Central Government has the authority to specify a higher
minimum amount of default, which cannot exceed one crore rupees (INR 1,00,00,000).

Proviso:

●​ Central Government's Authority: The Central Government may increase the threshold amount
by issuing a notification, but the increased amount cannot be more than one crore rupees.

Key Terms and Examples

1.​ Corporate Debtor:

●​ Definition: A corporate person who owes a debt to any person.
●​ Example: A company that has defaulted on a loan taken from a financial institution is
considered a corporate debtor.
2.​ Minimum Amount of Default:
●​ Definition: The smallest amount of unpaid debt required to initiate insolvency
proceedings under the Code.
●​ Example: If a company defaults on a payment of one lakh rupees or more, insolvency
proceedings can be initiated against it. If the Central Government specifies a higher
threshold, say fifty lakh rupees, proceedings can only be initiated if the default is at least
fifty lakh rupees.
3.​ Proviso:
●​ Definition: A clause in a statute that stipulates a condition or exception.
●​ Example: The proviso in this section allows the Central Government to increase the
minimum default amount through a notification, ensuring flexibility in the applicability of
the law based on economic conditions.
4.​ Case Example:
●​ Ms. Vidul Sharma v. Technopak Advisors Pvt. Ltd. (NCLAT, 2017):
●​ Context: This case involved the recovery of salary dues.

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●​ Details: An employee, Ms. Vidul Sharma, sought recovery of unpaid salary dues
from her employer, Technopak Advisors Pvt. Ltd.
●​ Outcome: The National Company Law Appellate Tribunal (NCLAT) handled the
case under the IBC, showcasing the Code’s application in resolving
employment-related financial disputes.

Ms. Vidul Sharma v. Technopak Advisors Pvt. Ltd. (NCLAT, 2017)

Case Background:
●​ Petitioner: Ms. Vidul Sharma
●​ Respondent: Technopak Advisors Pvt. Ltd.
●​ Court: National Company Law Appellate Tribunal (NCLAT)
●​ Year: 2017
Facts of the Case:
Ms. Vidul Sharma was an employee of Technopak Advisors Pvt. Ltd. She filed a petition under Section 9
of the Insolvency and Bankruptcy Code, 2016, seeking initiation of the corporate insolvency resolution
process (CIRP) against Technopak Advisors Pvt. Ltd. for the recovery of her unpaid salary dues.
Key Issues:
1.​ Non-Payment of Salary: The primary issue was the non-payment of salary dues by the company
to Ms. Vidul Sharma.
2.​ Application under IBC: Whether an application for recovery of unpaid salary could be admitted
under Section 9 of the Insolvency and Bankruptcy Code, 2016.
Legal Provisions Involved:
●​ Section 9 of the IBC: This section allows an operational creditor to initiate insolvency
proceedings against a corporate debtor if a payment default occurs.
●​ Operational Creditor: Defined under the IBC as a person to whom an operational debt (i.e., a
claim in respect of the provision of goods or services, including employment) is owed.
Tribunal's Observations:
●​ Operational Debt: The Tribunal noted that salary dues fall under the category of operational debt
as per the definition provided in the IBC.
●​ Proof of Debt and Default: Ms. Vidul Sharma provided sufficient evidence to prove that the
salary dues were not paid, and the default amount exceeded the minimum threshold of one lakh
rupees as stipulated by the IBC.
Decision:

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●​ Admittance of Petition: The NCLAT admitted the petition filed by Ms. Vidul Sharma, initiating the
corporate insolvency resolution process against Technopak Advisors Pvt. Ltd.
●​ Interim Resolution Professional (IRP): An Interim Resolution Professional was appointed to take
over the management of the company and to manage the CIRP.
Significance of the Case:
1.​ Employee Rights under IBC: This case highlighted that employees could use the IBC framework
to recover unpaid salaries, treating such dues as operational debt.
2.​ Broad Application of IBC: It demonstrated the broad applicability of the IBC, including its use for
recovering unpaid dues in employment, thereby enhancing the protection of employee rights.
3.​ Operational Creditors: The decision underscored the status of employees as operational
creditors and their right to initiate insolvency proceedings.
Conclusion:
The case of Ms. Vidul Sharma v. Technopak Advisors Pvt. Ltd. serves as a landmark decision, illustrating
the effective use of the Insolvency and Bankruptcy Code, 2016, for the resolution of employment-related
financial disputes. It reinforced the applicability of the Code in various contexts and affirmed the legal
rights of employees to seek timely payment of their dues through the insolvency process.

Section 5: Definitions for Part II of the Insolvency and Bankruptcy Code, 2016
(9) “Financial Creditor”
●​ Definition: A financial creditor is any person to whom a financial debt is owed. This also includes
a person to whom such debt has been legally assigned or transferred.
●​ Example: If a bank lends money to a company, the bank is the financial creditor. If this
debt is sold to another financial institution, the new institution becomes the financial
creditor.
(10) “Financial Debt”
●​ Definition: A financial debt is a debt along with interest, if any, which is disbursed against the
consideration for the time value of money. It includes various forms of borrowing.
●​ Components:
●​ a) Money Borrowed Against Interest: This includes traditional loans taken from
financial institutions where interest is payable.
●​ Example: A business loan taken by a company from a bank with an
interest obligation.
●​ b) Acceptance Credit Facility: Any amount raised through acceptance under
credit facilities or its de-materialised equivalent.
●​ Example: A company raising funds through a letter of credit issued by a
bank.
●​ c) Note Purchase Facility: Amounts raised through the issuance of bonds, notes,
debentures, loan stock, or similar instruments.

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●​ Example: A company issuing corporate bonds to raise capital.

●​ d) Finance or Capital Lease: Liability in respect of any lease or hire purchase
contract deemed as a finance or capital lease under the Indian Accounting
Standards or other prescribed standards.
●​ Example: A company leasing equipment where the lease agreement
qualifies as a capital lease.
●​ e) Receivables Sold or Discounted: Receivables sold or discounted, except
those sold on a non-recourse basis.
●​ Example: A company selling its accounts receivable to a factoring
company with recourse.
●​ f) Transactions with Commercial Effect of Borrowing: Amounts raised under
transactions that have the commercial effect of a borrowing, including forward
sale or purchase agreements.
●​ Explanation: Amounts raised from allottees under real estate projects
are considered as having the commercial effect of a borrowing.
●​ Example: Advances taken from buyers by a real estate developer for
under-construction projects.
●​ g) Derivative Transactions: Any derivative transaction entered for protection
against or benefiting from fluctuation in any rate or price, with the market value
of such transaction considered for valuation.
●​ Example: A company entering into a currency swap agreement to
hedge against foreign exchange risk.
●​ h) Counter-Indemnity Obligations: Obligations in respect of guarantees,
indemnities, bonds, documentary letters of credit, or other instruments issued
by banks or financial institutions.
●​ Example: A company providing a counter-guarantee for a bank
guarantee issued on its behalf.
●​ i) Guarantees or Indemnities: Liability in respect of any guarantee or indemnity
related to the items referred to in sub-clauses (a) to (h).
●​ Example: A company guaranteeing a loan taken by its subsidiary.

By defining financial creditors and financial debt, the Insolvency and Bankruptcy Code ensures clarity in
identifying the parties involved in financial obligations and the nature of these obligations, thereby
facilitating a structured insolvency resolution process.

Definitions for Part II of the Insolvency and Bankruptcy Code, 2016

(16) “Operational Creditor”

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●​ Definition: An operational creditor is a person to whom an operational debt is owed. This also
includes any person to whom such debt has been legally assigned or transferred.
●​ Example: A supplier who provided raw materials to a company and has not been paid is
an operational creditor. If this claim is sold to another entity, that entity becomes the
operational creditor.
(17) “Operational Debt”
●​ Definition: An operational debt is a claim related to the provision of goods or services, including
employment. It also encompasses debts in respect of the payment of dues arising under any law
for the time being in force and payable to the Central Government, any State Government, or
any local authority.
●​ Components:
●​ Provision of Goods or Services: Debts arising from supplying goods or
rendering services.
●​ Example: Unpaid invoices for supplied goods or services rendered.
●​ Employment: Claims related to salaries or wages due to employees.
●​ Example: Unpaid salary dues of employees.
●​ Statutory Dues: Debts payable under any law to the Central or State
Governments or local authorities.
●​ Example: Unpaid taxes or statutory contributions like Provident Fund or
GST.

These definitions help clarify the roles and types of debts involved in the insolvency process, ensuring
that all creditors, whether providing goods, services, or employment, or holding statutory claims, are
recognized and can seek resolution under the Insolvency and Bankruptcy Code, 2016.

Section 5: Definitions for Part II of the Insolvency and Bankruptcy Code, 2016
(6) “Dispute”
●​ Definition: A dispute includes a suit or arbitration proceedings relating to:
●​ a) The existence of the amount of debt: This pertains to disagreements about whether
the claimed debt amount is accurate or owed.
■​ Example: A company claims that it owes ₹5,00,000, but the debtor argues that
they have already paid ₹2,00,000 and only owe ₹3,00,000.
●​ b) The quality of goods or services: This involves issues regarding the standard or
condition of goods supplied or services rendered.
■​ Example: A buyer disputes an invoice on the grounds that the delivered goods
were defective or did not meet the agreed quality standards.
●​ c) The breach of a representation or warranty: This relates to claims that representations
or warranties made as part of a contractual agreement have been violated.

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■​ Example: A service provider had assured a certain performance level in their

contract, but the client claims that the service did not meet the specified
standards, constituting a breach of warranty.
Key Points:
●​ Inclusive Definition: The term "dispute" under the Code is not exhaustive but inclusive, meaning
it can encompass more than what is explicitly stated.
●​ Inclusion of Suits and Arbitration: It specifically includes any legal action or arbitration related to
the listed points.
●​ Scope for Enlargement: The definition is broad and can be expanded to include disputes that
may not be currently subject to litigation or arbitration.

Expansion of Definition:
●​ Broad Interpretation: The definition of "dispute" is intentionally broad, allowing for the inclusion
of various types of disagreements that may not necessarily be in litigation or arbitration but are
still relevant to the context of insolvency and bankruptcy.
●​ Supreme Court Guidance: The Supreme Court has clarified that the definition should be
interpreted broadly to include disputes that may not be currently litigated or arbitrated but are
relevant to the parties involved.

Conclusion:
The term "dispute" as defined in the Insolvency and Bankruptcy Code, 2016, encompasses a wide range
of disagreements, including those about the existence of debt, the quality of goods or services, and
breaches of representation or warranty. This inclusive definition ensures that all relevant disputes can be
considered in insolvency proceedings, providing a comprehensive framework for resolving financial
disagreements.

Supreme Court on Dispute under IBC

Case Reference:
●​ Mobilox Innovations Pvt Ltd v. Kirusa Software Pvt Ltd.
●​ Civil Appeal No. 9405 of 2017
Supreme Court's Interpretation of "Dispute":
1.​ Nature of Dispute:
●​ The Supreme Court clarified that disputes in the form of a suit or arbitration proceedings
must relate to one of the three specified categories (sub-clauses) either directly or
indirectly:
●​ Existence of the amount of debt.
●​ Quality of goods or services.

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●​ Breach of a representation or warranty.

2.​ Inclusive Definition:
●​ The definition of "dispute" under the IBC is inclusive, meaning it can cover more than
just the three specified categories. A dispute exists if there is a "real" disagreement
about payment between the parties.
3.​ Test of a Real Dispute:
●​ For a dispute to be considered real and valid under the IBC, it must meet certain criteria:
●​ Plausible Contention: The corporate debtor (the party that owes money) must
raise a genuine argument that requires further investigation. It shouldn't be a
weak legal argument or an assertion without evidence.
●​ Non-Spurious Defense: The defense should not be fake, mere bluster, plainly
frivolous, or vexatious. It must be a legitimate issue.
●​ Existence of a True Dispute: A real dispute must genuinely exist between the
parties, even if it may or may not ultimately succeed.

Key Points from the Judgment:

●​ Non-Disclosure Agreement (NDA): In the specific case, the respondent argued that since the
NDA did not fall within any of the three sub-clauses, there was no dispute. The Court rejected
this argument, stating that the definition of "dispute" is inclusive and broader than just the three
sub-clauses.
●​ Real Dispute: The Court emphasized that a dispute exists if there is a real contention about
payment, even if it is not part of an ongoing lawsuit or arbitration.
●​ Contextual Interpretation: The relational conditions in the three sub-clauses should be
considered in context, and not all disputes need to be in the form of suit or arbitration
proceedings.

The Supreme Court, in the Mobilox case, clarified what constitutes a "dispute" under the Insolvency and
Bankruptcy Code (IBC). Here’s a breakdown:
1.​ Definition of Dispute:
●​ A dispute can be about whether a debt is owed, the quality of goods or services
provided, or a broken promise in a contract.
●​ The term "dispute" is broad and can include more than just these three issues.
2.​ When is a Dispute Real?:
●​ A dispute is real if the company that owes money (the debtor) raises a valid concern
that needs further investigation. It shouldn't be a weak or unsupported argument.
●​ The defense should not be fake or just an attempt to avoid payment. It must be a
serious and genuine issue.

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●​ There must actually be a disagreement between the parties, even if it’s not currently
being litigated or arbitrated.
3.​ Supreme Court's Ruling:
●​ The Court said that a dispute exists if there is a genuine disagreement about payment,
regardless of whether it falls strictly within the three specified categories.
●​ The Court provided a "test of real dispute" to determine if a dispute is legitimate,
requiring the debtor to show a real, not frivolous, disagreement.

This ruling ensures that genuine disputes over payments are recognized under the IBC, providing a fair
and inclusive framework for resolving financial disagreements.

Who may initiate Corporate Insolvency?

Section 6:
Where any corporate debtor commits a default, a financial creditor, an operational creditor or the
corporate debtor itself may initiate a corporate insolvency resolution process in respect of such
corporate debtor in the manner as provided under this Chapter.

S 7: Initiation of corporate insolvency resolution process by financial creditor.—

(1) A financial creditor either by itself or jointly with other financial creditors may file an application for
initiating a corporate insolvency resolution process against a corporate debtor before the Adjudicating
Authority when a default has occurred. Explanation.—For the purposes of this sub-section, a default
includes a default in respect of a financial debt owed not only to the applicant financial creditor but to
any other financial creditor of the corporate debtor.

(2) The financial creditor shall make an application under sub-section (1) in such form and manner and
accompanied with such fee as may be prescribed.

(3) The financial creditor shall, along with the application furnish—
(a) record of the default recorded with the information utility or such other record or evidence
of default as may be specified;
(b) the name of the resolution professional proposed to act as an interim resolution
professional; and
(c) any other information as may be specified by the Board

(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under
sub-section (2), ascertain the existence of a default from the records of an information utility or on the
basis of other evidence furnished by the financial creditor under sub-section (3).

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(5) Where the Adjudicating Authority is satisfied that—

(a) a default has occurred and the application under sub-section (2) is complete, and there is
no
disciplinary proceedings pending against the proposed resolution professional, it may, by
order, admit such application; or
(b) default has not occurred or the application under sub-section (2) is incomplete or any
disciplinary proceeding is pending against the proposed resolution professional, it may, by
order, reject such Application:

Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of
sub-section (5), give a notice to the applicant to rectify the defect in his application within seven
days of receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the date of admission of the
application under sub-section (5).

(7) The Adjudicating Authority shall communicate— (a) the order under clause (a) of sub-section
(5) to the financial creditor and the corporate debtor;
(b) the order under clause (b) of sub-section (5) to the financial creditor, within seven days of
admission or rejection of such application, as the case may be

Key Terms
“Default” means non-payment of debt when whole or any part or instalment of the amount of debt has
become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

“Corporate debtor” means a corporate person who owes a debt to any person

“Financial creditor” means any person to whom a financial debt is owed and includes a person to
whom such debt has been legally assigned or transferred to.

Application by a single Financial Creditor being a part of Consortium is permitted

It does not matter whether the loan has been granted individually by the financial creditor or as part of
the consortium with other financial creditors. The Tribunal, on many occasions, has upheld this
proposition.

In an application under section 7 of the Code before the Ahmedabad Bench of the Tribunal, an objection
was raised that there are other financial creditors that are Banks and they constitute consortium of
Banks; hence an application under section 7 by one of the constituent of consortium is not maintainable.
The Bench rejected this objection in view of section 7 of the Code, which permits any one of the

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financial creditors to file an application to trigger a corporate insolvency resolution process either
jointly with other financial creditors or individually. IDBI Bank Ltd v BCC Estates Pvt Ltd, (2018) 1 Comp LJ
116 .

The Principal Bench of the Tribunal has similarly overruled an objection by the corporate debtor that the
applicant who is part of the consortium and designated as lead bank of the consortium cannot
individually enforce any right or obligation of the term loan agreement. Bank of Baroda v Amrapali
Silicon City Pvt Ltd, [2017] 143 SCL 724 : [2017] 204 Comp Cas 285

The Chandigarh Bench of Tribunal found no substance in the contention that where loan facilities were
granted by the consortium of three banks, the application without the approval of other two banks is
not maintainable. The Bench held that the bank is a financial creditor qua the loans granted by it and
entitled to make an application for initiating corporate insolvency resolution process. Punjab National
Bank v Concord Hospitality Pvt Ltd, NCLT, Chandigarh Bench in CP(IB) No. 43/CHD/PB/2017,

[s 7] Tribunal is bound to issue notice to the Corporate Debtor

In the case of Innoventive Industries Ltd v ICICI Bank, the Appellate Tribunal has discussed in detail the
issue whether it is mandatory for the Tribunal to follow the principles of natural justice while passing the
order under the Code. The Appellate Tribunal has referred to the judgment of Calcutta High Court
passed in Writ Petition No. 7144(W) of 2017 assailing the vires of section 7 of the Code and the relevant
rules under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 in Sree
Metaliks Ltd v UOI. The Appellate Tribunal held as follows:—

We are of the view and hold that the Adjudicating Authority is bound to issue a limited notice to the
corporate debtor before admitting a case for ascertainment of existence of default based on material
submitted by the corporate debtor and to find out whether the application is complete and/or there is
any other defect required to be removed. Adherence to the principles of natural justice would not mean
that in every situation the adjudicating authority is required to afford reasonable opportunity of hearing
to the corporate debtor before passing the order.

[s 7] Reasonable Opportunity to the Corporate Debtor is to be afforded before admitting Petition for
corporate insolvency resolution process
It is to be noted that the provisions of section 7 of the Code do not explicitly provide for affording
opportunity to the corporate debtor. The Gujarat High Court in Essar Steel India Ltd v Reserve Bank of
India, [2017] 143 SCL 580 (Guj) has unequivocally held as follows—
…It goes without saying that such filing (application under section 7) would not amount to admitting or
allowing the petition for insolvency without offering reasonable opportunity to the company, which is
requested to be taken into insolvency by any such person. Therefore, the adjudicating authority being

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NCLT herein, which is constituted in place of the Company Court, needs to decide on its own based
upon factual details that whether the insolvency petition is required to be entertained as such or not.

For the purpose, adjudicating authority, certainly requires to extend hearing and reasonable
opportunity to the company to explain that why such an application should not be entertained. In other
words, filing of an application may not result into mechanical admission of application as seen and
posed by RBI in impugned press release. It would be a decision based on judicial discretion by the
adjudicating authority to deal with such application in accordance with law and based upon facts,
evidence and circumstance placed before it.

Who May Initiate Corporate Insolvency?

Section 6:

●​ Initiating Parties: Any corporate debtor, financial creditor, or operational creditor can initiate a
corporate insolvency resolution process against a corporate debtor upon default.

Section 7: Initiation of Corporate Insolvency Resolution Process by Financial Creditor

1.​ Application by Financial Creditor:

●​ A financial creditor, either individually or jointly with other financial creditors, can file an
application to initiate the corporate insolvency resolution process against a corporate
debtor before the Adjudicating Authority when a default occurs.
2.​ Default:
●​ Definition: Non-payment of debt when it becomes due and payable, whether in whole
or part.
●​ Explanation: A default includes non-payment of a financial debt owed not just to the
applicant financial creditor but to any financial creditor of the corporate debtor.
3.​ Application Requirements:
●​ Form and Fee: The application must be in the prescribed form and accompanied by the
prescribed fee.
●​ Supporting Documents:
●​ Record of default from an information utility or other specified evidence.
●​ Name of the proposed interim resolution professional.
●​ Any other information specified by the Board.
4.​ Adjudicating Authority’s Role:
●​ Verification: Within fourteen days of receiving the application, the Adjudicating
Authority will verify the existence of a default based on records or evidence.
●​ Decision:

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●​ Admit the Application: If a default is found, the application is complete, and

there are no pending disciplinary proceedings against the proposed resolution
professional.
●​ Reject the Application: If no default is found, the application is incomplete, or
there are pending disciplinary proceedings. Before rejection, the applicant is
given seven days to rectify any defects.
5.​ Commencement of Insolvency Process:
●​ The process begins from the date of admission of the application.
6.​ Communication:
●​ The Adjudicating Authority communicates the order of admission or rejection to the
financial creditor and the corporate debtor within seven days.

Key Terms:

●​ Default: Non-payment of debt when due.

●​ Corporate Debtor: A corporate entity that owes a debt.
●​ Financial Creditor: A person to whom a financial debt is owed, including assignees or transferees
of the debt.

Case Law and Applications:

●​ Applications by Single Financial Creditor: A single financial creditor, even if part of a consortium,
can file an application for insolvency. Courts have upheld this, affirming that the Code allows any
financial creditor to initiate the process.
●​ IDBI Bank Ltd v. BCC Estates Pvt Ltd: The Tribunal held that any one financial creditor from a
consortium could file an application under Section 7.
●​ Bank of Baroda v. Amrapali Silicon City Pvt Ltd: The Principal Bench overruled the objection that
a lead bank cannot individually enforce the term loan agreement.
●​ Punjab National Bank v. Concord Hospitality Pvt Ltd: The Tribunal affirmed that a bank, even as
part of a consortium, is a financial creditor and can file an application without the approval of
other consortium members.

Natural Justice and Adjudicating Authority’s Duty:

●​ Innoventive Industries Ltd v. ICICI Bank:

●​ Natural Justice: The Adjudicating Authority must issue a limited notice to the corporate
debtor before admitting an application, ensuring principles of natural justice are
followed.
●​ Gujarat High Court in Essar Steel India Ltd v. Reserve Bank of India:

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●​ The Court held that the Adjudicating Authority must provide a reasonable opportunity
for the corporate debtor to be heard before admitting an insolvency application.

Summary:

The Insolvency and Bankruptcy Code, 2016, allows financial creditors, operational creditors, and the
corporate debtor itself to initiate insolvency proceedings upon default. The process involves a detailed
application and verification by the Adjudicating Authority, which must adhere to principles of natural
justice. The Supreme Court has clarified that even a single financial creditor from a consortium can
initiate proceedings, and a real dispute must be genuinely substantive to be considered valid.

Session 14

"Waterfall" Mechanism under the Insolvency and Bankruptcy Code, 2016

The "waterfall" mechanism in the Insolvency and Bankruptcy Code (IBC), 2016, refers to the statutory
order of priority for distributing the proceeds from the sale of the liquidation assets of a corporate
debtor. This ensures that claims are settled in a specific hierarchy, reflecting the importance and legal
standing of each type of creditor. The detailed order of priority is stipulated under Section 53 of the IBC.

Legal Provisions and Interpretation

●​ Equal Ranking: At each stage of distribution, all claims within the same class must be settled
either in full or in equal proportion if the proceeds are insufficient to cover all claims in that class.
●​ Contractual Arrangements: Any private agreements disrupting the statutory order of priority are
disregarded by the liquidator to maintain the integrity of the statutory hierarchy.
●​ Liquidator's Fees: Fees payable to the liquidator are deducted proportionately from the proceeds
before distribution to each class of recipients.

Order of Priority (Section 53)

Order of Priority Explanation and Details

These costs are paid in full and are prioritized to ensure that the
1. Insolvency
administrative and procedural expenses of the insolvency and liquidation
Resolution Process
process are covered first. Includes fees and expenses incurred during the
Costs and Liquidation
liquidation process, ensuring that the process itself is not hindered by a lack
Costs
of funds.

Workmen's Dues: Wages due to workmen for the period of twenty-four

2. Workmen's Dues
months preceding the liquidation commencement date. Prioritizing dues to
and Secured Creditors
workmen highlights the IBC’s intent to protect the most vulnerable

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stakeholders. Secured Creditors: Debts owed to secured creditors who have

relinquished their security interests in the assets of the corporate debtor.

3. Wages and Unpaid Wages and unpaid dues owed to employees other than workmen for the
Dues of Employees period of twelve months preceding the liquidation commencement date.

Financial debts owed to unsecured creditors. After settling higher-priority

4. Unsecured Creditors claims, the proceeds are distributed to unsecured creditors, reflecting their
lower priority in the repayment hierarchy.

Government Dues: Any amount due to the Central Government and the
State Government, including those to be received on account of the
5. Government Dues
Consolidated Fund of India and the Consolidated Fund of a State for the
and Remaining
period of two years preceding the liquidation commencement date.
Secured Creditors
Remaining Secured Creditors: Secured creditors for any amount unpaid
following the enforcement of their security interests.

6. Remaining Debts
Any other remaining debts and dues.
and Dues

7. Preference
Payments to preference shareholders, if any.
Shareholders

Payments to equity shareholders or partners, as the case may be.

8. Equity Shareholders
Shareholders are last in line, receiving any residual value only after all other
or Partners
claims have been satisfied, reflecting their position as residual claimants.

Conclusion
The "waterfall" mechanism under the IBC is crucial for ensuring a fair and orderly distribution of a
corporate debtor's assets during liquidation. By clearly defining the order of priority, the IBC aims to
protect various stakeholders’ interests, maintain transparency, and uphold the legal rights of creditors.
This structured approach helps in achieving an equitable resolution while preserving the integrity and
efficacy of the insolvency process.

⁠Write a note on Cartelization

Definition and Concept

Cartelization refers to the practice where competing firms within an industry collude to control prices,
limit production, allocate markets, or manipulate other competitive parameters. The primary goal of
cartelization is to enhance the market power of cartel members at the expense of free competition,
leading to higher prices, reduced output, or other anti-competitive outcomes.
Legal Definition:
●​ According to Section 2(c) of the Competition Act, 2002, a cartel includes an association of
producers, sellers, distributors, traders, or service providers who, by agreement amongst

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themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or
trade in goods or provision of services.

Characteristics of Cartels
1.​ Price Fixing: Cartel members agree on the prices of goods or services to avoid competitive
pricing, leading to artificially high prices.
2.​ Market Sharing: Members divide markets among themselves, agreeing not to compete in each
other's designated territories or sectors.
3.​ Output Restriction: Firms may agree to limit the production of goods or services to create
scarcity, driving up prices.
4.​ Bid Rigging: Firms collude to influence the outcome of bidding processes, ensuring that a
pre-determined member wins the bid at an agreed price.
5.​ Customer Allocation: Members agree to allocate specific customers among themselves,
reducing competition for those customers.

Conditions Conducive to Cartelization

1.​ High Concentration: A few firms dominate the market, making it easier to form and maintain a
cartel.
2.​ High Entry and Exit Barriers: Difficulties in entering or exiting the market discourage new
competitors, allowing cartels to sustain control.
3.​ Homogeneous Products: Similar products across firms make it easier to standardize prices and
production quotas.
4.​ Excess Capacity: Firms have more production capacity than needed, which they can use
strategically to manipulate supply.
5.​ Dependence on Product: High consumer dependence on a product makes it easier for cartels to
manipulate market conditions.
6.​ History of Collusion: Previous collusive behavior can set a precedent for future cartelization.
7.​ Active Trade Associations: These can facilitate communication and coordination among firms.

Examples of Cartel Cases

1.​ Soda Ash Cartel: The American Natural Soda Ash Corporation (ANSAC) was found to have
attempted to cartelize the price of soda ash for export to India.
2.​ Trucking Cartel: The Bharatpur Truck Operators Union and the Goods Truck Operators Union,
Faridabad, were found to have colluded to fix freight rates.
3.​ LPG Cartel: In 2009, several LPG cylinder manufacturers were found to have colluded on bids
submitted to Indian Oil Corporation, indicating cartel behavior.

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Legal Framework and Enforcement in India

●​ Competition Act, 2002: The primary legislation governing cartelization in India. Section 3 of the
Act specifically prohibits anti-competitive agreements, including cartels.
●​ Penalties: The Act provides for severe penalties, including fines up to three times the amount of
profit made out of cartelization or 10% of the turnover of each participating enterprise,
whichever is higher.
●​ Competition Commission of India (CCI): The regulatory body responsible for enforcing the Act,
investigating cartel behavior, and imposing penalties.

Investigative and Enforcement Mechanisms

1.​ Dawn Raids: Surprise inspections by the CCI to gather evidence of cartel activity.
2.​ Leniency Programme: Allows members of a cartel to come forward and provide information
about the cartel in exchange for reduced penalties. This encourages whistleblowing and helps
the CCI uncover and dismantle cartels.
3.​ Circumstantial Evidence: Cartels often operate covertly, so the CCI relies on indirect evidence
such as parallel pricing, restricted supply, or communication patterns among competitors to
establish the existence of a cartel.

Key Case Laws

1.​ LPG Cylinder Manufacturers Case: The CCI imposed penalties on several manufacturers for
cartelization in bids submitted to Indian Oil Corporation.
2.​ Cement Cartel Case: The CCI found that cement manufacturers were engaged in cartelization by
fixing prices and limiting production. The Commission used the "parallelism-plus" approach,
where parallel behavior in prices and production, coupled with other supporting evidence, was
used to establish cartelization.
3.​ Tyres Cartel Case: The CCI noted that parallel behavior in pricing and other factors could indicate
a cartel, though direct evidence of an agreement might not always be available.

Economic Impact of Cartels

●​ Consumer Harm: Higher prices, reduced choices, and lower quality of goods and services.
●​ Market Inefficiency: Distorted market dynamics leading to allocative inefficiency, where
resources are not used optimally.
●​ Innovation Stagnation: Reduced incentive for innovation as firms rely on collusion rather than
competitive strategies to succeed.
●​ Reduced Economic Welfare: Overall negative impact on economic welfare due to higher prices
and reduced output.

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Conclusion
Cartelization undermines the principles of free competition, leading to significant economic and
consumer harm. The Competition Act, 2002, along with the vigilant enforcement by the CCI, plays a
crucial role in detecting, investigating, and penalizing cartels to maintain a competitive market
environment in India. Effective measures, including the leniency program and reliance on circumstantial
evidence, enhance the CCI's ability to combat cartelization and promote healthy market competition.

•⁠ ⁠Explain the concept of Horizontal and Vertical Agreements

Horizontal Agreements
Definition:

●​ Horizontal agreements are agreements between enterprises that operate at the same level of the
production or supply chain. These enterprises are usually competitors in the same industry and
market.
Characteristics:
1.​ Same Level of Supply Chain: These agreements are between companies that are direct
competitors.
2.​ Anti-Competitive Nature: Horizontal agreements are often scrutinized because they tend to have
a high potential to restrict competition and harm consumers.
3.​ Common Forms:
●​ Price Fixing: Competitors agree to sell a product at a set price, removing price
competition.
●​ Market Allocation: Competitors divide markets among themselves, agreeing not to
compete in each other’s designated areas.
●​ Output Restriction: Competitors agree to limit the production of goods or services to
maintain higher prices.
●​ Bid Rigging: Competitors collude to influence the outcome of a bidding process,
ensuring a predetermined winner.
Legal Framework and Prohibition:

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●​ Competition Act, 2002 (India): Section 3(3) of the Act specifically prohibits horizontal
agreements that:
●​ Directly or indirectly determine purchase or sale prices.
●​ Limit or control production, supply, markets, technical development, investment, or
provision of services.
●​ Share the market or source of production or provision of services by way of allocation
of geographical area of market, type of goods or services, or number of customers in
the market or any other similar way.
●​ Directly or indirectly result in bid-rigging or collusive bidding.
Presumption of Adverse Effect:

●​ Horizontal agreements are presumed to have an appreciable adverse effect on competition

(AAEC) and are generally considered void. The burden of proof lies on the parties to
demonstrate that their agreement does not harm competition.
Examples of Horizontal Agreements:
1.​ Price Fixing: In the LPG Cylinder Manufacturers Case, the Competition Commission of India (CCI)
found several manufacturers guilty of fixing the prices of LPG cylinders.
2.​ Market Allocation: The Cement Cartel Case demonstrated market allocation among cement
manufacturers who controlled their production and pricing strategies to maintain higher prices.
3.​ Bid Rigging: The Soda Ash Cartel Case involved American soda ash producers who colluded to
fix prices for exports to India.

Vertical Agreements
Definition:

●​ Vertical agreements are agreements between enterprises that operate at different levels of the
production or supply chain. These agreements typically involve a manufacturer and a distributor
or a supplier and a retailer.
Characteristics:
1.​ Different Levels of Supply Chain: These agreements are between entities that are not direct
competitors but are part of the same supply chain.
2.​ Potential for Efficiency: Unlike horizontal agreements, vertical agreements can often lead to
efficiencies and benefits in the supply chain.
3.​ Common Forms:
●​ Tie-in Arrangements: A seller requires the buyer to purchase an additional product as a
condition for buying the desired product.
●​ Exclusive Supply Agreements: A supplier agrees to supply products only to a particular
distributor.
●​ Exclusive Distribution Agreements: A distributor agrees to sell products only within a
certain territory or to certain customers.

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●​ Resale Price Maintenance: A manufacturer sets the price at which a distributor or

retailer must resell the product.
●​ Refusal to Deal: An agreement where one party refuses to do business with certain
parties unless they comply with specific conditions.

Legal Framework and Evaluation:

●​ Competition Act, 2002 (India): Section 3(4) of the Act addresses vertical agreements, which are
not presumed to have an AAEC but are evaluated on a case-by-case basis using the "rule of
reason" approach. This involves assessing whether the agreement promotes or suppresses
competition by considering factors such as:
●​ The nature of the agreement.
●​ The potential harm or benefits to competition.
●​ The market structure and the positions of the parties involved.

Examples of Vertical Agreements:

1.​ Tie-in Arrangement: A software company may require buyers of its operating system to also
purchase its office suite.
2.​ Exclusive Supply Agreement: A beverage company might agree with a retailer to supply
beverages exclusively to that retailer.
3.​ Resale Price Maintenance: A manufacturer sets a minimum resale price for its products that
retailers must adhere to.

Key Differences between Horizontal and Vertical Agreements

Aspect Horizontal Agreements Vertical Agreements

Competitors at the same level of

Participants Entities at different levels of the supply chain
the supply chain

Typically anti-competitive with a Can lead to efficiencies but also has potential
Nature
high potential to harm competition for anti-competitive effects

Legal Presumed to have an AAEC and

Evaluated using the "rule of reason" approach
Presumption are generally void

Tie-in arrangements, exclusive

Common Price fixing, market allocation,
supply/distribution, resale price maintenance,
Practices output restriction, bid rigging
refusal to deal

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Conclusion
Horizontal and vertical agreements play significant roles in shaping competitive dynamics within
markets. Horizontal agreements, involving direct competitors, are closely scrutinised and often
prohibited due to their potential to severely restrict competition. Vertical agreements, on the other hand,
involve different levels of the supply chain and can be beneficial or harmful depending on their impact
on competition. The Competition Act, 2002, provides a robust framework for regulating both types of
agreements to ensure a fair and competitive market environment in India.

•⁠ ⁠Write a note on the width of the term "Agreement" under Competition law

Definition and Scope of "Agreement" under the Competition Act, 2002

Statutory Definition:

●​ Section 2(b) of the Competition Act, 2002, defines "agreement" to include any arrangement or
understanding or action in concert:
●​ Whether or not such arrangement, understanding, or action is formal or in writing.
●​ Whether or not such arrangement, understanding, or action is intended to be
enforceable by legal proceedings.
Inclusive Nature:

●​ The definition is inclusive, not exhaustive, meaning it covers not only traditional contracts but
also informal arrangements and understandings.
Broad Interpretation:

●​ The term "agreement" is interpreted broadly to encompass various forms of collusive behavior,
even those not documented or legally enforceable.
Anti-Competitive Agreements (Section 3)
Prohibition of Anti-Competitive Agreements:

●​ Section 3(1): No enterprise or association of enterprises or person or association of persons shall

enter into any agreement in respect of production, supply, distribution, storage, acquisition, or
control of goods or provision of services, which causes or is likely to cause an appreciable
adverse effect on competition (AAEC) within India.
Void Agreements:

●​ Section 3(2): Any agreement entered into in contravention of the provisions contained in
sub-section (1) shall be void.
Types of Anti-Competitive Agreements:
Horizontal Agreements (Section 3(3))

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●​ Definition: Agreements between enterprises or associations operating at the same level of the
production or supply chain.
●​ Prohibited Practices:
●​ Directly or indirectly determining purchase or sale prices.
●​ Limiting or controlling production, supply, markets, technical development, investment,
or provision of services.
●​ Sharing the market or sources of production or provision of services by way of
allocation of geographical areas, types of goods or services, or number of customers.
●​ Directly or indirectly resulting in bid rigging or collusive bidding.
●​ Presumption of AAEC: These agreements are presumed to have an appreciable adverse effect on
competition and are void ab initio.
Examples of Horizontal Agreements:
1.​ Price Fixing: Competitors agree to sell products at a set price, removing price competition.
2.​ Market Allocation: Competitors divide markets among themselves, agreeing not to compete in
each other’s designated areas.
3.​ Bid Rigging: Competitors collude to influence the outcome of a bidding process, ensuring a
predetermined winner.
Vertical Agreements (Section 3(4))
●​ Definition: Agreements between enterprises operating at different levels of the production or
supply chain.
●​ Types of Vertical Agreements:
●​ Tie-in Arrangements: Agreement requiring a purchaser of goods to purchase some
other goods as a condition of the purchase.
●​ Exclusive Supply Agreements: Agreement restricting the purchaser from acquiring or
dealing in goods other than those of the seller.
●​ Exclusive Distribution Agreements: Agreement to limit, restrict, or withhold the output
or supply of goods or allocate any area or market for disposal or sale of the goods.
●​ Refusal to Deal: Agreement restricting, or likely to restrict, persons to whom goods are
sold or from whom goods are bought.
●​ Resale Price Maintenance: Agreement to sell goods on condition that the resale prices
shall be the prices stipulated by the seller.
●​ Evaluation Based on Rule of Reason: These agreements are not per se void but are evaluated
based on their actual impact on competition.
Examples of Vertical Agreements:
1.​ Tie-in Arrangement: A software company requires buyers of its operating system to also
purchase its office suite.
2.​ Exclusive Supply Agreement: A beverage company restricts a retailer to only sell its beverages.

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3.​ Resale Price Maintenance: A manufacturer sets a minimum resale price for its products that
retailers must adhere to.
Appreciable Adverse Effect on Competition (AAEC)
Factors for Determining AAEC (Section 19(3)):

●​ Percentage of Business Controlled: The extent of market share held by the parties involved.
●​ Strength of Remaining Competition: The competitive dynamics and presence of other
competitors in the market.
●​ Business Requirements or Monopolistic Intent: Whether the agreement stems from legitimate
business needs or an intent to monopolize the market.
●​ Market Characteristics: Consumer demands, industry development, and other relevant market
features.
Key Cases Illustrating Broad Interpretation
1.​ Excel Crop Care Ltd. v. CCI: Emphasized the need for a broad interpretation of "agreement" to
capture various forms of anti-competitive behavior.
2.​ RRTA v. WH Smith and Sons Ltd: Lord Denning highlighted that conspirators keep agreements
secret, and even informal agreements like nods or winks can be significant.
3.​ LPG Cylinder Manufacturers Case: The CCI found evidence of cartelization in the form of
identical bids submitted by various manufacturers, indicating concerted action.
4.​ Cement Cartel Case: The CCI used circumstantial evidence of parallel behavior in pricing and
production to establish a cartel without direct evidence of a formal agreement.
5.​ Varca Druggist & Chemist v. Chemist & Druggists Association, Goa (CDAG): The CCI imposed a
penalty on CDAG for anti-competitive guidelines that fixed margins and discounts,
demonstrating the impact of informal agreements on market competition.

Conclusion
The term "agreement" under the Competition Act, 2002, is defined broadly to encompass various forms
of collusion and coordinated behavior that may not be formalized in written contracts or intended to be
legally enforceable. This broad interpretation is essential for capturing and addressing anti-competitive
practices that harm market competition and consumer welfare. By recognizing informal arrangements
and concerted actions as agreements, the Competition Commission of India can effectively regulate and
prevent anti-competitive behavior, ensuring a fair and competitive market environment.

•⁠ ⁠Write a note on abuse of dominant position

Definition and Legal Framework

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Section 4 of the Competition Act, 2002 addresses the issue of abuse of dominant position by
enterprises. The Act differentiates between holding a dominant position and abusing it. Merely having
dominance is not illegal; it is the abuse of this position that is prohibited.
Dominant Position:
●​ Definition: A position of strength enjoyed by an enterprise in the relevant market in India,
which enables it to:
●​ Operate independently of competitive forces prevailing in the relevant market; or
●​ Affect its competitors or consumers or the relevant market in its favor.
Determination of Dominance
The Competition Commission of India (CCI) assesses whether an enterprise holds a dominant
position by considering several factors, as enumerated in Section 19(4) of the Act:
1.​ Market Share: The share of the enterprise in the relevant market.
2.​ Size and Resources: The size and financial strength of the enterprise.
3.​ Competitors' Size and Importance: The relative size and importance of competitors.
4.​ Economic Power: The economic power of the enterprise, including commercial advantages.
5.​ Vertical Integration: The extent of vertical integration and its commercial advantages.
6.​ Consumer Dependence: The degree of consumer dependence on the enterprise.
7.​ Monopoly or Statutory Position: Dominance acquired through statute or as a government or
public sector undertaking.
8.​ Entry Barriers: Factors such as regulatory barriers, financial risk, high capital costs, marketing
barriers, technical barriers, economies of scale, and high costs of substitutable goods.
9.​ Countervailing Buying Power: The ability of buyers to counter the enterprise's market power.
10.​ Market Structure and Size: The overall structure and size of the market.
11.​ Social Obligations and Costs: The enterprise’s social responsibilities and costs.
12.​ Relative Advantage in Economic Development: Contributions to economic development by the
dominant enterprise.
13.​ Any Other Relevant Factor: Any other factors the CCI considers relevant.

Abuse of Dominant Position

The Act prohibits certain practices by enterprises holding a dominant position if these practices harm
competition or consumer welfare. These practices include:
1.​ Unfair or Discriminatory Conditions or Pricing:
●​ Predatory Pricing: Selling goods or services at below-cost prices to eliminate
competitors.
2.​ Limiting Production or Supply:
●​ Restricting the production or supply of goods or services to create artificial scarcity.
3.​ Restricting Technical or Scientific Development:

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●​ Hindering technical or scientific advancements to maintain market control.

4.​ Denying Market Access:
●​ Preventing other businesses from accessing the market or essential facilities.
5.​ Imposing Supplementary Obligations:
●​ Making the conclusion of contracts subject to acceptance of supplementary
obligations unrelated to the contract’s subject.
6.​ Using Dominance in One Market to Enter Another:
●​ Leveraging dominance in one market to enter or protect a position in another market.

Examples and Case Studies

1.​ Google:
●​ The CCI found Google guilty of abusing its dominant position in the market for online
search services and online search advertising. Google was penalized for favoring its
own services over those of competitors in search results.
2.​ Flipkart:
●​ Flipkart faced allegations of abusing its dominant position by offering deep discounts
on its platform, which was claimed to be predatory pricing. However, high market
share alone was not deemed sufficient to establish abuse without clear evidence of
intent to eliminate competition.
3.​ Whatsapp:
●​ Whatsapp has been scrutinized for potential abuse of dominance, particularly in
terms of its data-sharing practices with Facebook and how it impacts competition in
the digital communication market.

Legal Provisions and Enforcement

Enforcement by the Competition Commission of India (CCI):
●​ The CCI can initiate an inquiry into abuse of dominant position:
●​ On its own motion.
●​ Based on information received from any person, consumer, or trade association.
●​ On a reference from the central or state government or a statutory authority.
Criteria for Investigation:
●​ The CCI evaluates the enterprise's market power and its conduct to determine if there has
been an abuse of dominance. This involves a detailed analysis of the relevant market
conditions and the enterprise's behavior.
Case Analysis:

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●​ In Ghanshyam Dass Vij v. Bajaj Corp Ltd, the CCI applied the de minimis principle, finding that
Bajaj Corp’s market share in the hair oil segment did not imply a dominant position, given the
competitive nature of the FMCG sector.

Conclusion
The Competition Act, 2002, aims to prevent enterprises from abusing their dominant positions to the
detriment of competition and consumer welfare. By focusing on both the presence of dominance and
the abuse thereof, the Act provides a balanced approach to maintaining competitive markets. The CCI
plays a crucial role in investigating and addressing such abuses, ensuring that market dynamics are
fair and beneficial to consumers and other market participants.

When is a merger or acquisition to be reported to the CCI?

Under the Competition Act, 2002, mergers and acquisitions, referred to as combinations, must be
reported to the Competition Commission of India (CCI) if they meet certain thresholds and are likely to
have an appreciable adverse effect on competition within the relevant market in India. The relevant
sections governing these provisions are Section 5 and Section 6 of the Act.

Thresholds for Reporting Combinations (Section 5)

Combinations that require notification to the CCI are defined based on the value of the assets or turnover
of the enterprises involved. The key thresholds are as follows:
1.​ Acquisition:
●​ Individual Enterprise:
●​ Assets in India: More than INR 1,000 crores.
●​ Turnover in India: More than INR 3,000 crores.
●​ Worldwide Assets with India Leg: More than USD 500 million, including at least
INR 500 crores in India.
●​ Worldwide Turnover with India Leg: More than USD 1,500 million, including at
least INR 1,500 crores in India.
●​ Group:
●​ Assets in India: More than INR 4,000 crores.
●​ Turnover in India: More than INR 12,000 crores.
●​ Worldwide Assets with India Leg: More than USD 2 billion, including at least
INR 500 crores in India.
●​ Worldwide Turnover with India Leg: More than USD 6 billion, including at least
INR 1,500 crores in India.
2.​ Control Acquisition:

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 These notes, intended for the MBL 1 course, constitute the private property of Mahendra Rathod. The opinions expressed herein
are solely those of the author. Readers are advised to peruse at their own discretion. To know about Mahendra Rathod, please
visit: https://www.linkedin.com/in/mahendra-rathod/

●​ Similar thresholds apply as in acquisitions, considering the assets or turnover of the

enterprises over which control is being acquired, along with those already under control
of the acquirer.
3.​ Merger or Amalgamation:
●​ Remaining Enterprise:
●​ Assets in India: More than INR 1,000 crores.
●​ Turnover in India: More than INR 3,000 crores.
●​ Worldwide Assets with India Leg: More than USD 500 million, including at least
INR 500 crores in India.
●​ Worldwide Turnover with India Leg: More than USD 1,500 million, including at
least INR 1,500 crores in India.
●​ Group:
●​ Assets in India: More than INR 4,000 crores.
●​ Turnover in India: More than INR 12,000 crores.
●​ Worldwide Assets with India Leg: More than USD 2 billion, including at least
INR 500 crores in India.
●​ Worldwide Turnover with India Leg: More than USD 6 billion, including at least
INR 1,500 crores in India.
De Minimis Exemption
●​ S.O. 674(E) dated 4 March 2016: Exemptions are provided for combinations where the value of
the assets or turnover of the enterprise being acquired is below specified thresholds:
●​ Assets in India: Not more than INR 350 crores.
●​ Turnover in India: Not more than INR 1,000 crores.
●​ These exemptions apply for five years from the date of the notification.
Process for Notification (Section 6)
1.​ No Combination Shall Cause AAEC:
●​ No person or enterprise shall enter into a combination that causes or is likely to cause
an appreciable adverse effect on competition within the relevant market in India.
2.​ Notice to the Commission:
●​ Enterprises proposing to enter into a combination must notify the CCI in a specified
form and manner within 30 days of:
●​ Approval of the proposal by the Board of Directors for mergers or
amalgamations.
●​ Execution of any agreement or document for acquisition or control.
3.​ CCI's Review Period:
●​ The combination cannot come into effect until 210 days have passed from the notice
date or the CCI has passed orders, whichever is earlier.
4.​ Public Financial Institutions Exemption:

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 These notes, intended for the MBL 1 course, constitute the private property of Mahendra Rathod. The opinions expressed herein
are solely those of the author. Readers are advised to peruse at their own discretion. To know about Mahendra Rathod, please
visit: https://www.linkedin.com/in/mahendra-rathod/

●​ Share subscriptions or financing facility acquisitions by public financial institutions,

foreign institutional investors, banks, or venture capital funds are exempt, provided they
report the acquisition details within seven days.
Types of Mergers and Their Impact on Competition
1.​ Horizontal Merger:
●​ Impact: Adverse impact on competition is scrutinized.
●​ Factors: Position of both parties and the resultant position after the merger.
2.​ Vertical Merger:
●​ Impact: Typically do not impact competition adversely.
●​ Benefit: Drives efficiency.
3.​ Conglomerate Merger:
●​ Impact: Generally, no impact on competition but may result in concentration.
Conclusion
Mergers and acquisitions must be reported to the CCI if they meet specific asset or turnover thresholds.
The reporting process is designed to ensure that combinations do not adversely affect competition in the
market. The CCI reviews these combinations to maintain market fairness and prevent the formation of
monopolies or oligopolies. Enterprises must be diligent in assessing their combinations against these
thresholds and complying with the notification requirements to avoid penalties and ensure smooth
regulatory clearance.

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