LL.B. IV Term

Paper : LB - 4031 - Business Association II (Company Law)

Prescribed Legislation: The Companies Act, 1956 (1 of 1957) 5

Prescribed Readings: 1. Paul L. Davies, Gower and Davies Principles of Modern Company Law (8th ed., 2008) 2. Avtar Singh, Company Law (15th ed., 2007)

With the enforcement of the Limited Liability Partnership Act, 2008 Act (6 of 2009), the comparison of a company with limited and unlimited liability partnership firms become significant. Likewise, the introduction of the Companies Bill, 2009 has necessitated a discussion on the need to replace the existing Companies Act, 1956 with a new legislation. A chart giving comparison between a company and limited and unlimited liability partnership firms has been given in the beginning of this material along with the statement of objects and reasons of the Companies Bill, 2009. The students are required to read them carefully.

Topic 1 : Nature and Kinds of Companies

(a) Company Definition; Illegal associations (section 11); Comparison between Company and Partnership and Company and Limited Liability Partnership; Effects, Advantages and Disadvantages of Incorporation Theory of Corporate Personality/Separate Legal Entity, Limited liability of members/shareholders, Holding and disposal of property, Management divorced from capital, Perpetual succession, Transferable shares, Power to sue and being sued

(b) Theory of Corporate Personality; Company not a citizen of India; Lifting of the Corporate Veil Tax Evasion, Enemy Character, Fraud or Improper conduct, Statutory Exceptions to Limited Liability - Reduction in number of members below minimum (section 45), Mis-description of Companys Name (section 147), Holding and Subsidiary Relationship (sections 4 and 212), Personal liability of promoters, directors, etc. for fraudulent conduct of business (section 542)

1. Salomon v. Salomon & Co., Ltd. (1897) A.C. 22 (H.L.) : (1895-95) All ER Rep. 33

11 2. State Trading Corporation v. CTO, AIR 1963 SC 811 17 3. TELCO v. State of Bihar, AIR 1965 SC 40 23 4. R.C. Cooper v. Union of India (1970) 3 SCR 530 5. Daimler Co., Ltd. v. Continental Tyre and Rubber Co. (Great Britain),

Ltd., 1916 AC 307 : (1916-17) All ER Rep. 191

29

6. Lee v. Lees Air Farming, Ltd. (1960) 3 All E.R. 420 39 7. In re Sir Dinshaw Maneckjee Petit, AIR 1927 Bom. 371 48 8. CIT v. Meenakshi Mills Ltd., AIR 1967 SC 819 : (1967) 1 SCR 934 61 9. Workmen v. Associated Rubber Industries Ltd.

(1985) 4 SCC 114 : (1986) 59 Comp. Cas. 134 (SC)

65 10. Gilford Motor Co., Ltd. v. Horne (1933) 1 Ch. 935 68 11. Subhra Mukherjee v. Bharat Coking Coal Ltd. (2000) 3 SCC 312 75 12. Kapila Hingorani v. State of Bihar (2003) 6 SCC 1

(c) Kinds of Companies Public and Private Companies (sections 3, 43); Holding and Subsidiary Companies (section 4); Limited and Unlimited Companies (sections 12(2)(c), 27, 32); Share-holding and Guarantee Companies (sections 12, 37); Producer Companies (Part IXA, sections 581A 581ZT); Provisions relating to Un-registered Companies (sections 582-590); Foreign Companies (sections 591-608); Application of the Companies Act, 1956 to Companies governed by Special Acts e.g. insurance, banking, electricity supply, etc. (section 616); Government Companies (section 617)

Topic 2 : Companys Constitutional Documents

(a) Memorandum of Association and Articles of Association Importance, Registration and Its Effect; Binding Nature; Clauses in Memorandum of Association: Name, Registered Office, Objects, Liability and Capital; Contents of Articles of Association (sections 12 - 38)

(b) Doctrine of Ultra vires Effect of ultra vires transactions 13. Ashbury Railway Carriage and Iron Co. Ltd. v. Riche

(1875) L.R.7 H.L. : (1874-80) All ER Rep. 2219 (HL)

79 14. Cotman v. Brougham, (1918-19) All ER Rep. 265 (HL) 89 15. In re (Jon) Beuforte (London) Ltd. (1953) Ch. 131 95 16. Bell Houses, Ltd. v. City Wall Properties, Ltd. (1966) 2 All E.R.674 99 17. Re Introductions, Ltd., Introductions, Ltd. v. National Provincial Bank Ltd.

(1969) 1 All ER 887

109 18. Dr. A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India,

AIR 1963 SC 1185

112

(c) Alteration of Memorandum of Association and Articles of Association - Grounds, Procedure and Effect of Alteration (sections 16-31)

19. In Re Mackinnon Mackenzie & Co. Pvt. Ltd., 71 C.W.N. 340 (1966)

118 20. Minerva Mills Ltd. v. Govt. of Maharashtra

(1975) 45 Comp. Cas. 1 (Bom.)

128 21. Bharat Commerce & Ind. Ltd. v. Registrar of Companies

(1973) 43 Comp. Cas. 275 (Cal., DB)

138

(d) Doctrine of Indoor Management; Binding Nature of Articles of Association between members/shareholders inter se and also outsiders; Rule of Constructive Notice; Indoor Management- Exceptions knowledge of irregularity, suspicion of irregularity, forgery, representation through articles

22. Royal British Bank v. Turquand (1856) 119 ER 886 : (1843-60) All ER Rep. 435

142 23. Freeman & Lockyer (A Firm) v. Buckhurst Park Properties (Mangal) Ltd.

(1964) 1 All ER 630

145 24. Kotla Venkataswamy v. Chinta Ramamurthy,

AIR 1934 Mad. 579

156

Topic 3 : Promoters Duties and Liabilities Rights, Powers and Duties as Trustee; Contract with the company; Liability for Negligence and Personal Profits

25. Erlanger v. New Sombrero Phosphate Co. (1878) 3 AC 1218 : (1874-80) All ER Rep. 271

158

Topic 4 : Prospectus Importance; Contents; Statement in lieu of Prospectus; Liability for Mis-representation (sections 55-68B)

Topic 5 : Board of Directors Qualifications, Share qualifications; Minimum number of directors; Subscribers to

memorandum deemed to be directors; Restriction on number of directorships; Vacation of office by directors; Managing Director; Number of companies of which one person may be appointed Managing Director; Powers of Directors/Board; Duties of Directors - Fiduciary Duties as Trustees; Duty of Care and Skill; To whom duty is owed ?; Insider Trading; Enforcement of Duties; Liability for Breach of Duties; Position of Share holders vis--vis Board of Directors (sections 252-323, 388B 388E)

26. Percival v. Wright (1902) 2 Ch. 421 167 27. Burland v. Earle (1902) AC 83 : (1900-03) All ER Rep. 1452 171 28. City Equitable Fire Insurance Co., Re (1925) Ch. 407 29. Regal (Hastings) Ltd. v. Gulliver (1967) 2 A.C. 134 (HL) 178 30. Industrial Development Consultants Ltd. v. Cooley (1972) 1 WLR 443 196 31. Standard Chartered Bank v. Pakistan National Shipping Copn.

(2003) 1 All ER 173 (HL)

206

Topic 6: Prevention of Oppression and Mismanagement

Protection of Minority Shareholders; Powers of Tribunal and Central Government; Prevention of Oppression and Mismanagement; Foss v. Harbottle Rule - Exceptions acts

ultra vires, fraud on minority, acts requiring special majority, wrongdoers in control, etc. (sections 397 409)

32. Foss v. Harbottle (1843) 2 Hare 461 : (1843) 67 ER 189 212 33. H.R. Harmer Ltd., Re (1958) 3 All E.R. 689 34. Scottish Co-operative Wholesale Society, Ltd. v. Meyer

1959 AC 324

35. Shanti Prasad Jain v. Kalinga Tubes Ltd., AIR 1965 SC 1535 233 36. Rajahmundry Electric Supply Corporation Ltd. v. A. Nageshwara Rao,

AIR 1956 SC 213

249 37. Bharat Insurance Co. Ltd. v. Kanhaiya Lal, AIR 1935 Lah. 792 253 38. Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings

Ltd., AIR 1981 SC 1298

39. M.S.D.C. Radharamanan v. M.S.D. Chandrasekara Raqja (2008) 6 SCC 750 : AIR 2008 SC 1738

257

Topic 7 : Winding up of Companies

Modes of Winding up Voluntary/shareholders winding up; Compulsory winding up; Winding up under the supervision of the Tribunal Grounds, Procedure (Part VII - sections 425 - 560)

40. German Date Coffee Co., In Re (1882) 20 Ch. D. 169 268 41. Seth Mohan Lal v. Grain Chambers Ltd., AIR 1968 SC 772 281 42. Aluminum Corporation of India Ltd. v. M/s. Lakshmi Rattan Cotton Mills

Co. Ltd., AIR 1970 All. 452

284 43. Yenidje Tobacco Co. Ltd., Re (1916) 2 Ch. D. 169

Topic 8 : Adjudicatory Bodies

National Company Law Tribunal; National Company Law Appellate Tribunal Constitution, Powers, Jurisdiction, Procedure, Judicial Review (sections10FB 10GF)

IMPORTANT NOTE: 1. The topics and cases given above are not exhaustive. The teachers teaching the course shall be at liberty to add new topics/cases. 2. The students are required to study the legislations as amended up-to-date and consult the latest editions of books.

3. The Question Paper shall include one compulsory question consisting of five parts out of which four parts will be required to be attempted. The question papers set for the examinations held during the academic year 2007-08 are printed below for guidance.

* * * * *

LL.B. IV Term Examinations, April-May, 2008

Note: Attempt five questions including Question No. 1 which is compulsory. All questions carry equal marks. 1. Attempt briefly any four of the following:

(a) Rule of constructive notice (b) Definition of public and private company (c) Definition of foreign company. (d) National Company Law Tribunal (e) Share qualification of directors.

2. Explain the doctrine of ultra vires with reference to Ashbury Railway Carriage and Iron Co. Ltd. v. Riche and other decided cases. Has it outlived its utility and should be abolished?

3. What are the grounds of compulsory winding up of a company? When is it considered just and equitable to wind up a company? Refer to statutory provisions and decided cases in support of your answer.

4. (a) Explain the doctrine of indoor management with reference to facts and principles of law laid down in Royal British Bank v. Turquand.

(b) Discuss the grounds on which a State is entitled to oppose the shifting of the registered office of a company from one State to another within the country.

5. (a) Define prospectus and briefly state the provisions relating to contents of a prospectus and formalities for issue of a prospectus.

(b) A group of persons headed by E purchased an island containing phosphate mines for Rs. 55 crores. A company was then incorporated to take over the island and to work the mines. E named five persons as directors. Two of the directors were abroad. Of the three others, two were persons entirely under Es control. These three directors purchased the island for the company at a price of Rs. 110 crores. A prospectus was then issued. Many persons took shares. The purchase of the island was adopted by the shareholders at their first meeting; but the real circumstances were not told to them. What remedies are available to the company against the promoters?

6. A director of a company stands in a fiduciary relationship towards the company and shall observe utmost good faith towards the company in any transaction with it or on its behalf.

Critically examine the above statement and discuss decided cases in support of your answer.

7. Explain the concept of corporate personality and discuss the circumstances in which courts often pierce the corporate mask and draw aside the veil to see what really lies behind.

8. There must be an unfair abuse of powers and impairment of confidence in the probity with which the companys affair are being conducted as distinguished from mere

resentment on the part of a minority at being outvoted on some issue of domestic policy. Discuss the conditions for seeking relief under section 397 of the Companies Act, 1956.

LL.B. IV Term (Supplementary) Examinations, Aug.-Sept. 2008

Note: Attempt five questions including Question No. 1 which is compulsory. All questions carry equal marks.

1. Attempt briefly any four of the following: (a) Distinguish a company from a partnership. (b) Write a short note on the National Company Law Tribunal. (c) Distinguish between a private and a public company. (d) What are the contents of a prospectus? (e) Write a short note on foreign companies.

2. (a) A company is a legal entity distinct from its members. Comment. (b) What is a corporate veil? When can it be pierced?

3. (a) State the procedure for alternation of the registered office clause in a Memorandum of Association of a company.

(b) X. Ltd., a cotton textile company, enters into a contract with Y. Ltd. an adjacent cotton textile mill, to supply electricity from their power generation plant. After supplies have been made for 3 moths, it is discovered that this activity is beyond the scope of the objects clause of the Memorandum of Association of X. Ltd.

Shareholders of X. Ltd. ratify the contract in their general body meeting. Can Y. Ltd., which refuses to make payment on the ground that the contract is wholly null and void, be legally compelled to make the payment?

4. (a) The doctrine of indoor management is silver lining to strangers dealing with a company. Comment.

(b) P sued on two promissory notes signed by one of the two directors on behalf of a company. Unknown to P, the articles of the company provided that documents requiring the signatures of the company would be sufficiently signed only if they are signed by two directors unless otherwise determined at a meeting of directors. Will P succeed?

5. Majority will have its way but the minority must be allowed to have its say. Discuss this proposition with reference to prevention of oppression and mismanagement in a company.

6. (a) Discuss the powers and duties of directors of a company under the Companies Act, 1956.

(b) The directors of a company brought some of its shares from a shareholder while they were negotiating for a transaction financially advantageous to the company and which, if successful, would have substantially raised the market value of its shares. They did not disclose this information to the shareholder when buying his shares.

This shareholder sued the directors for rescission of sale on the ground of fraud. State, giving reasons, whether he will succeed?

7. What do you understand by the winding up of a company? What are different modes of winding up?

8. (a) Who is a promoter? Discuss his legal position in relation to a company which he promotes.

(b) A certificate of incorporation is conclusive evidence that all the requirements of the Companies Act have been complied with. Discuss.

LL.B. IV Term Examinations, May-June 2009 Note: Attempt five questions including Question No. 1 which is compulsory. All questions carry equal marks. 1. Attempt briefly any four of the following:

(a) Definition of Producer Company. (b) Can a company claim to be a citizen and ask for fundamental rights under Part III of the Constitution? (c) Prospectus (d) Constructive Notice (e) Director Identification Number.

2. A was appointed Managing Director of a private limited company for a period of five years. The company did not prosper and the directors, including A, resolved that it was desirable to wind-up the company voluntarily. A was served with a notice that his agreement was terminated and that his services were no longer required. He claimed damages for wrongful dismissal. Will he succeed? Discuss with reference to the theory of corporate personality and state briefly when can it be ignored?

3. A company manufacturing chemicals by a resolution authorised its directors to distribute Rs. 10 lacs to Universities and Scientific Institutions for the furtherance of scientific research and education. One of the members challenged this act of company on the ground that it was ultra vires. Will he succeed? Discuss and critically examine the doctrine of ultra vires.

4. (a) Explain briefly the position and duties of promoters with reference to Erlanger v. New Sombrero Phosphate Co.

(b) A company proposed to shift its registered office from the State of Kerala to Mumbai on the ground that there was better scope in Mumbai for the expansion of the companys business. The State of Kerala opposed as there would be loss of revenue and employment opportunities to the State. Decide with reference to case law.

5. The Courts have fixed corporate executives with fiduciary duties as they are possessed of immense power which is susceptible to abuse. Examine the above statement and discuss decided cases in support of your answers.

6. (a) An outsider is presumed to know the constitution of a company but not what may or may not have taken place within the doors that are closed to him. Explain with reference to the doctrine of indoor management.

(b) The directors had no power to borrow money more than Rs. 20 lacs without the consent of the general body but they borrowed Rs. 25 lacs from themselves and took debentures without obtaining the sanction of the general body. The company resolved that the debentures only to the extent of Rs. 20 lacs were valid. This was challenged by the directors. Will they succeed?

7. Discuss the power of Tribunal under Sections 397 and 398 with reference to M.S.D.C. Radharamanan v. M.S.D. Chandresekara Raja.

8. A and B who were trading separately in tobacco business, agreed to amalgamate their business by forming a private limited company of which they were the only shareholders and directors. They become so hostile that they were not even on speaking terms with each other. How will you decide? Also discuss with the help of case law and statutory provisions, when can a company be compulsorily would up.

LL.B. IV Term (Supplementary) Examinations, July-August 2009

Note: Attempt five questions including Question No. 1 which is compulsory. All questions carry equal marks. 1. Attempt briefly any four of the following:

(a) Government Companies (b) Producer Company (c) Constructive Notice (d) Statement in lieu of Prospectus (e) Appointment of first directors of a company.

2. The theory of corporate entity is indeed the basic principle on which the whole law of corporation is based. But the theory cannot be pushed to un-natural limits and circumstances do occur which compel the courts to lift the corporate veil on grounds of justice, convenience and revenue. Discuss with reference to decided cases.

3. (a) State the grounds and procedure of alteration of memorandum of association so as to change the place of registered office from one State to another State.

(b) How and to whom disclosure is to be made by the promoters who sell their own property to the company floated by them?

4. Explain the doctrine of ultra vires with reference to decided cases. To what extent may a company lawfully undertake a business and perform acts and contracts not expressly set out in the objects clause?

5. Attempt any two of the following: (a) Distinction between Company and Partnership. (b) Outline the rule laid down in Royal British Bank v. Turquand (1856) 119 E.R.

916. (c) Rule in Foss v. Harbottle (1843) 67 E.R. 189.

6. The rule of equity which insists on those who by use of fiduciary position make a profit, being liable to account for that profit in no way depends on fraud or absence of bonafide.. Explain the above statement with reference to facts and principles of law laid down in Regal (hastings) Ltd. v. Gulliver (1942) 1 All E.R. 378.

7. Discuss the grounds of compulsory winding up of a company with reference to statutory provisions and decided cases.

8. Explain the meaning of the term Oppression with reference to decided cases and discuss the conditions of relief under Section 397 of the Companies Act, 1956.

LL.B. IV Term

Business Association II (Company Law)

Cases Selected and Edited by

S.N. Singh Suresh Minocha

FACULTY OF LAW UNIVERSITY OF DELHI, DELHI-110007

January, 2010