📋 Previous Year Questions — Chapter 1
2022–24
Define Corporate Personality. Discuss lifting of corporate veil with cases. HOT
What is Memorandum of Association? Explain Doctrine of Ultra Vires and its effects.
2019–21
What is a Prospectus? Discuss civil and criminal liabilities for misstatements. HOT
Explain the Doctrine of Indoor Management (Turquand Rule) and its exceptions.
2018
Describe the legal status and fiduciary duties of a Promoter. What are pre-incorporation contracts?
1.1 History of Company Legislation in India
Key Fact: Indian company law evolved from English law. The Companies Act, 2013 (J.J. Irani Committee) replaced the Companies Act, 1956 (Bhabha Committee). It has 29 Chapters, 470 Sections, and 7 Schedules.
Chronological Evolution of Company Law in India
1850 — Joint Stock Companies Act
First codified law. Enabled company registration. No limited liability.
1857 — Act of 1857
Introduced limited liability for the first time (excluding banking/insurance).
1913 — Indian Companies Act
Consolidated previous laws. Modelled on English Companies Act, 1908.
1956 — Companies Act
Bhabha Committee. Highly regulated, socialist model. Governed India for 57 years.
2013 — Companies Act
CURRENTJ.J. Irani Committee. Introduced NCLT, OPC, CSR, enhanced minority protection.
1.2 Meaning, Nature & Attributes of a Company
Section 2(20) Definition: "A company means a company incorporated under this Act or under any previous company law." It is an artificial judicial person with a distinct legal identity, separate from its members.
Core Attributes of a Company
Separate Legal Entity
Can sue and be sued, hold property, enter contracts in its own name. Basis: Salomon v. Salomon (1897).
Perpetual Succession
Exists independently of its members. Death/insolvency of shareholders does not dissolve the company.
Limited Liability
Members' liability limited to unpaid share value or guarantee amount. Protects personal assets.
Separate Property
Corporate property belongs to the company, NOT to shareholders. Shareholders have no insurable interest.
Transferability of Shares
Shares in a public company are freely transferable moveable property (Section 44).
Common Seal (Optional)
Optional since 2015 Amendment. Previously mandatory symbol of corporate identity.
| Basis | Company | Partnership Firm | Sole Proprietorship |
|---|
| Governing Act | Companies Act, 2013 | Indian Partnership Act, 1932 | No specific Act |
| Legal Identity | Separate legal person | No separate identity | No separate identity |
| Member Liability | Limited to unpaid share value | Joint, several & unlimited | Absolute & unlimited |
| Perpetual Succession | Yes | No — dissolved by death | No |
| Transfer of Interest | Freely transferable shares | Requires unanimous consent | Absolute right to sell |
| Statutory Audit | Mandatory (S.139) | Only if turnover limit met | Only if turnover limit met |
| Key Case | Salomon v. Salomon (1897) | Malabar Fisheries v. CIT (1979) | — |
1.3 Kinds / Classification of Companies
Classification by Liability
Limited by Shares
S.2(22)Liability capped at unpaid amount on shares. Most common type.
Limited by Guarantee
S.2(21)Members guarantee a fixed sum payable on winding up. Clubs, NGOs.
Unlimited Company
S.2(92)No limit on liability. Members fully liable for all company debts.
Classification by Public Accountability
Private Company
S.2(68)Max 200 members. Restricts share transfer. No public invitation. Min 2 directors.
Public Company
S.2(71)No cap on members. Free share transfer. Can invite public. Min 3 directors.
One Person Company
S.2(62)Single member. Incorporated as private company. Nominee mandatory.
Section 8 (Charitable)
S.8Promotes science, art, education. No dividend. Profits reinvested in objects.
Government Company
S.2(45)≥51% paid-up capital held by Central/State Govt. E.g., ONGC, BHEL.
Foreign Company
S.2(42)Incorporated outside India but has a place of business in India.
1.4 Corporate Personality & Lifting the Corporate Veil
The Salomon Principle: Once incorporated, the company is a distinct legal person. The "corporate veil" shields shareholders from personal liability. However, courts pierce this veil when the corporate form is abused.
Salomon v. A. Salomon & Co. Ltd. [1897] AC 22 — House of Lords HOT
Facts: Aron Salomon transferred his boot business to a company, holding 20,000 shares and £10,000 secured debentures. Company went insolvent. Unsecured creditors claimed Salomon and company were identical. Held: Company is a distinct legal person. Salomon's secured debentures had priority over unsecured creditors. Established the Separate Legal Entity principle permanently.
Lee v. Lee's Air Farming Ltd. [1960] AC 12 — Privy Council
Facts: Lee held 2,999/3,000 shares, was MD and chief pilot. Died in plane crash. Insurer denied widow's claim saying a man cannot employ himself. Held: Lee and company were two separate entities. He could be both employer and employee. Widow entitled to compensation.
Exceptions — When Corporate Veil is Lifted
Prevention of Fraud
Jones v. Lipman [1962]: Company formed to avoid land sale obligation — veil lifted, specific performance ordered.
Enemy Character
Daimler v. Continental Tyre [1916]: English company controlled by Germans — veil lifted, declared enemy entity in WWI.
Tax Evasion
Dinshaw Maneckjee Petit [1927]: Companies formed solely to receive income as loans to evade super-tax — veil lifted.
Statutory Exceptions
S.7(7): False incorporation. S.339: Fraudulent trading in winding up. S.34/35: Prospectus misstatements.
Public Policy / Fundamental Rights
TELCO v. State of Bihar [1964] SC: Company cannot claim fundamental rights of citizens (Art.19).
Alter Ego — company = mere extension of owner
Sham/Cloak — corporate form used to commit fraud
Enemy Alien — controllers are enemies
1.5 Promotion of Companies & Pre-Incorporation Contracts
Section 2(69): Promoter = person named in prospectus, or who exercises control, or identified in annual return. Not an agent or trustee — stands in fiduciary relationship to the company. Must make full disclosure and cannot make secret profits.
Duties of Promoter
- Full disclosure of all material facts
- No secret profits from promotional transactions
- Disclose interest in contracts with company
- Act in good faith and for company's benefit
Pre-Incorporation Contracts
- Entered before company exists — nullity at common law
- Company cannot ratify after incorporation (Kelner v. Baxter)
- India exception: Specific Relief Act S.15(h) & 19(e) — enforceable if company accepts & communicates acceptance
Kelner v. Baxter [1866] LR 2 CP 174 — Court of Common Pleas
Facts: Promoters bought wine for an unformed hotel company. Company failed before paying. Vendor sued promoters. Held: Company cannot ratify pre-incorporation contracts. Promoters held personally liable.
Erlanger v. New Sombrero Phosphate Co. [1878] — House of Lords
Facts: Promoter bought an island and sold it to company at double the price without disclosing profit. Held: Promoters in fiduciary position must disclose secret profits. Company entitled to rescind the transaction.
1.6 Memorandum of Association (MOA)
Section 4: MOA is the charter/constitution of the company. Defines its objects and external powers. Determines the boundary beyond which the company cannot legally act.
Five Mandatory Clauses of MOA
1. Name Clause
Company name ending with "Limited" (Public) or "Private Limited" (Private).
2. Registered Office Clause
State where registered office is situated. Determines domicile & jurisdiction.
3. Objects Clause
HOTPrincipal purposes of the company. Basis of Ultra Vires doctrine.
4. Liability Clause
States whether liability is limited by shares, guarantee, or unlimited.
5. Capital Clause
Authorized share capital with fixed nominal value of shares.
Doctrine of Ultra Vires: Any act beyond the Objects Clause is void ab initio — cannot be ratified even by unanimous consent of all shareholders. Effects: Injunction available; Directors personally liable; No contractual recovery.
Ashbury Railway Carriage & Iron Co. v. Riche [1875] LR 7 HL 653 — House of Lords HOT
Facts: Company authorized to make/sell railway carriages. Directors contracted to finance a Belgian railway line. Company repudiated; Riche sued. Held: Contract was ultra vires the MOA — void and incapable of ratification even by unanimous shareholder vote. Established the Ultra Vires doctrine.
1.7 Articles of Association (AOA) & Indoor Management
Nature of AOA
- Internal regulations of the company (S.2(5))
- Binding on company & all members (S.10)
- Alterable by Special Resolution (S.14)
- Subordinate to MOA — AOA cannot override MOA
Doctrine of Indoor Management (Turquand Rule)
- Outsiders dealing bona fide need not enquire into internal procedures
- They can assume internal formalities were complied with
- Royal British Bank v. Turquand (1856)
Exceptions to Indoor Management (Turquand Rule)
Knowledge of Irregularity
Outsider who had actual notice of internal irregularity cannot claim protection. Howard v. Patent Ivory (1888).
Suspicion of Irregularity
If circumstances put outsider on enquiry and they did not enquire, no protection.
Forgery
Forged documents have no legal effect. Company not bound by forged instruments.
Acts of Non-Officers
Acts done by persons with no authority (actual or apparent) — company not bound.
1.8 Prospectus
Section 2(70): "Any document described or issued as a prospectus" inviting public to subscribe to shares or debentures. Must comply with S.26 (mandatory disclosures).
Shelf Prospectus
S.31Allows multiple offerings over a period (≤1 year) without filing a fresh prospectus each time.
Red Herring Prospectus
S.32Filed before final price determination. Price/quantum of securities not stated. Used in book-building.
Abridged Prospectus
Summary issued along with application form containing memorandum of material information.
Civil Liability (S.35)
- Any person who subscribed for shares based on false prospectus
- Can claim compensation against directors, promoters, experts
- Rescission of contract available
- Defense: Withdrew consent before issue; Reasonably believed statements true
Criminal Liability (S.34)
- Fine: ₹50,000 to ₹3,00,000
- Imprisonment up to 3 years, or both
- Applies to every person authorizing issue of false prospectus
- Derry v. Peek (1889): Must prove fraud/intentional misrepresentation for deceit
