BLS LLB 5 Years Sem 7 Company Law 2024-25 Question Paper with Solutions

Under section 76 of the Companies Act, 2013, only a public company having a net worth of not less than one hundred crore rupees or a turnover of not less than five hundred crore rupees may accept deposits from persons other than its members, and only after passing a special resolution in general meeting and filing it with the Registrar. Such a company is called an eligible company.

Section 73 permits any other company to accept deposits from its members only, by ordinary resolution and subject to the prescribed conditions.

A fixed charge, also called a specific charge, is a charge created on specific, identified and ascertained property of the company, such as land, a building or a particular machine.

It attaches to that property from the moment it is created, and the company cannot deal with, sell or dispose of the property free of the charge without the consent of the charge-holder.

Section 2(1) of the Companies Act, 2013 defines an abridged prospectus as a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board of India by making regulations in this behalf.

Under section 33(1), no form of application for the purchase of any of the securities of a company may be issued unless it is accompanied by an abridged prospectus.

E.S.G. stands for Environmental, Social and Governance. It is the framework by which a company's performance is assessed not only on its financial results but on its environmental impact, its treatment of employees, customers and the communities it operates in, and the quality of its governance, meaning board composition, transparency, ethics and shareholder rights.

In India it is given effect chiefly through the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, under which specified listed entities file a Business Responsibility and Sustainability Report (BRSR) with their annual report, and through the corporate social responsibility provisions of section 135 of the Companies Act, 2013.

For full marks, cover: the meaning, the section 135 thresholds, the CSR Committee, the two per cent obligation, Schedule VII activities, and what happens to unspent amounts.

Corporate social responsibility is the obligation of a company to conduct its business so as to contribute to the welfare of society, and in Indian law it is a statutory obligation under section 135 of the Companies Act, 2013. India was the first country to make CSR spending mandatory by statute.

Which companies are covered. Every company having, in the immediately preceding financial year:

1. A net worth of five hundred crore rupees or more; or
2. A turnover of one thousand crore rupees or more; or
3. A net profit of five crore rupees or more.

The tests are in the alternative. The section applies to every company, including a foreign company having a branch or project office in India.

Permitted activities, Schedule VII. The spending must fall within Schedule VII, which includes: eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation, and contributions to the Swachh Bharat Kosh; promoting education, including special education and employment-enhancing vocational skills; promoting gender equality, empowering women, homes and hostels for women and orphans, old age homes and measures for reducing inequalities faced by socially and economically backward groups; ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry and conservation of natural resources; protection of national heritage, art and culture; measures for the benefit of armed forces veterans, war widows and their dependants; training to promote rural, nationally recognised, Paralympic or Olympic sports; contribution to the Prime Minister's National Relief Fund or the PM CARES Fund; contribution to incubators and to specified research and development bodies; and rural development and slum area development projects.

Unspent amounts. The Companies (Amendment) Act, 2019 and 2020 made the two per cent enforceable:

Conclusion. Section 135 turns corporate social responsibility from a matter of goodwill into a statutory obligation for companies above the thresholds of net worth, turnover or net profit, requiring a committee, a policy and the spending of at least two per cent of the average net profits of the three preceding financial years on the activities in Schedule VII. The obligation is to spend rather than merely to report, and the amendments have given it teeth: unspent amounts must be transferred to a separate account or to a Schedule VII fund, excess spending may be set off over three years, and default attracts a penalty on the company and on every officer in default.

Who may be appointed, section 141. Only a chartered accountant within the meaning of the Chartered Accountants Act, 1949, or a firm where the majority of partners practising in India are so qualified. Disqualified are: a body corporate other than an LLP; an officer or employee of the company; a person who is a partner or employee of an officer or employee; a person or his relative or partner who holds any security in the company (a relative may hold securities of face value not exceeding one thousand rupees), or who is indebted to the company for more than five lakh rupees, or who has given a guarantee for more than one lakh rupees; a person having a business relationship with the company; a person whose relative is a director or is in the employment of the company as a director or key managerial person; a person convicted of an offence involving fraud in the last ten years; and a person in full-time employment elsewhere or already holding appointment as auditor of more than twenty companies.

Powers and rights, section 143(1).

1. Right of access at all times to the books of account and vouchers of the company, whether kept at the registered office or elsewhere, and to the records of its subsidiaries for consolidation;
2. Right to require from officers such information and explanation as he considers necessary;

3. To state in the report the matters required by section 143(3), including whether he has sought and obtained all information and explanations, whether proper books of account have been kept, whether the accounts are in agreement with the books, whether the company has adequate internal financial controls, and the observations or comments on financial transactions which have an adverse effect on the functioning of the company;
4. To comply with the auditing standards;
5. Section 143(12): if in the course of the audit he has reason to believe that an offence of fraud involving an amount of one crore rupees or more is being or has been committed against the company by its officers or employees, to report it to the Central Government within the prescribed time, and below that threshold to the Audit Committee or the Board. This is a mandatory reporting duty and cannot be waived; and
6. To assist and comply in the case of a branch audit, and to sign the report.

For full marks, cover: what corporate personality is, section 9, Salomon, the five consequences each with a case, and the lifting of the veil as the limit.

Corporate personality is the attribute by which a company, on incorporation, becomes in law a person separate and distinct from the persons who compose it. It is often called an artificial legal person, since it is created by law rather than by nature, and its personality is a fiction in the sense that it exists only because the law says so.

Section 9 of the Companies Act, 2013 gives it statutory form: from the date of incorporation mentioned in the certificate, the subscribers to the memorandum and all other persons who may from time to time become members shall be a body corporate capable of exercising all the functions of an incorporated company, having perpetual succession and the power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract, and to sue and be sued by the said name.

2. Capacity to contract with its own members. Lee v. Lee's Air Farming Ltd. [1961] AC 12: Lee formed a company of which he was governing director and held all but one share, and was also employed by it as its chief pilot. He was killed flying. The Privy Council held his widow entitled to workmen's compensation, because Lee and the company were two distinct legal persons capable of entering into a contract of employment.
3. Perpetual succession. The company continues until wound up or struck off, irrespective of the death, insolvency or retirement of members. Members may come and go; the company goes on.
4. Limited liability. The member's liability is limited to the amount unpaid on his shares, or to the amount of the guarantee.
5. Capacity to sue and be sued in its own name, and to hold property in its own name.

For full marks, cover: the classification, the AGM with its timing and quorum, the EGM and who may call it, class and creditors' meetings, Board and committee meetings, and the requisites of a valid meeting.

Meetings under the Companies Act, 2013 fall into three classes.

A. Meetings of members

1. Annual General Meeting, section 96. Every company other than a One Person Company must hold an AGM every year.

• First AGM: within nine months from the close of the first financial year. No extension.
• Subsequent AGMs: within six months from the close of the financial year, and not more than fifteen months between two AGMs. The Registrar may extend by up to three months for special reasons.
• Time and place: during business hours, between 9 a.m. and 6 p.m., on a day that is not a national holiday, at the registered office or at some other place within the city, town or village in which the registered office is situate.

2. By the Board on the requisition of members holding, on the date of the requisition, not less than one-tenth of the paid-up share capital carrying voting rights, or, in a company without share capital, not less than one-tenth of the total voting power. The Board must proceed to call it within twenty-one days for a day not later than forty-five days from the receipt of the requisition;
3. By the requisitionists themselves if the Board does not, within three months from the date of the requisition; or
4. By the Tribunal under section 98, where it is impracticable to call a meeting in the ordinary way.

3. Class meetings. Meetings of a particular class of shareholders, held where the rights attached to that class are to be varied under section 48, or where a scheme of arrangement under section 230 affects a class. Only members of that class attend and vote.

Requisites of a valid meeting

Whatever the class, a meeting is valid only if: it is properly convened by the proper authority; proper notice is given to every person entitled to it, stating the day, time, place and business; the quorum is present; a chairman presides; the business is conducted according to the rules for voting and resolutions; and minutes are recorded under section 118 within thirty days.

Conclusion. A company's meetings are classified by who is entitled to attend and what they are competent to decide: members meet in the annual general meeting, the extraordinary general meeting and the class meeting; creditors meet under a scheme of compromise or arrangement or in a liquidation; and directors meet in Board and committee meetings. Whatever the kind, the requisites are the same, because a resolution binds absent and dissenting members: proper authority, proper notice, a quorum, a chairman, business conducted according to the rules on motions and voting, and minutes under section 118 within thirty days.

For full marks, cover: the 10% Board limit against the 25% special resolution limit, the conclusion that the resolution is invalid, what the company must do instead, and the three permitted sources of funds.

(a) Is the Board's resolution valid?

No. The resolution is invalid, because the Board alone cannot authorise a buy-back of this size.

Section 68(2)(b) of the Companies Act, 2013 draws the line by reference to who authorises the buy-back:

4. File with the Registrar, before the buy-back, a declaration of solvency signed by at least two directors, one of whom shall be the managing director if any, verified by affidavit, to the effect that the Board has made a full inquiry into the affairs of the company and formed the opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from that date; and
5. Complete the buy-back within one year of the date of the special resolution.

The other conditions of section 68(2) must equally be satisfied: the shares must be fully paid up, the ratio of the aggregate of secured and unsecured debts to paid-up capital and free reserves after the buy-back must not exceed 2:1, and no offer of buy-back may be made within one year from the closure of a previous one.

Note the wording of the question. It says 15% of "total Paid up Equity Share Capital plus Reserves". The statutory measure is paid-up capital and free reserves, and not every reserve is free: a revaluation reserve is not, and neither is the capital redemption reserve. If the company's reserves include such amounts, the base itself is smaller than the Board has assumed, so the proposal may breach the limit by more than it appears.

Section 70 adds the prohibitions. A company must not buy back its securities through a subsidiary, including its own subsidiaries; through investment companies or a group of investment companies; or if it is in default in the repayment of deposits, redemption of debentures or preference shares, payment of dividend, or repayment of a term loan or interest to a financial institution or bank. The bar lifts once the default is remedied and three years have elapsed.

Conclusion. On these facts the Board's resolution is not valid. Section 68(2)(b) allows a buy back of up to ten per cent of the total paid up equity capital and free reserves on the authority of a Board resolution alone; anything beyond that, up to the ceiling of twenty five per cent, requires a special resolution of the members at a general meeting. A buy back of fifteen per cent therefore exceeds the Board's competence and needs the members' sanction. As to (b), the funds may come only from free reserves, from the securities premium account or from the proceeds of a fresh issue of shares or other specified securities, and never from the proceeds of an earlier issue of the same kind of shares.

The steps for the present case:

1. Board meeting to approve the proposal and to call a general meeting.
2. Special resolution of the members altering the registered office clause of the memorandum. File Form MGT-14 with the Registrar within thirty days.
3. Application to the Central Government, whose power is delegated to the Regional Director, in Form INC-23, with the prescribed fee. It must be accompanied by the altered memorandum, a copy of the minutes and the special resolution, a list of creditors and debenture-holders, and an affidavit verifying it.

The objection of creditors is the substance of the procedure, not a formality. The reason the Central Government is involved at all is that a creditor who deals with a Mumbai company may find his debtor's records, officers and assets moved to another State, and the courts and the Registrar with jurisdiction changed with them. The company cannot move until their position is protected.

Note that a change of registered office does not affect the identity of the company. It remains the same legal person with the same corporate identity number; only the memorandum clause, the jurisdiction of the Registrar and the address change.

(b) What the registered office clause must state

Section 4(1)(b) of the Companies Act, 2013 requires the memorandum to state the State in which the registered office of the company is to be situated.

That is all it states. The memorandum does not contain the full postal address. The reasons follow from what a memorandum is for:

1. The memorandum is the charter and is altered only by the elaborate process above. If it carried the street address, a company moving one floor within its own building would have to alter its memorandum;

Conclusion. On these facts the move from Mumbai to Chennai is a change from one State to another, so the answer to (a) is that the company must pass a special resolution, alter the registered office clause of its memorandum, file Form MGT-14, and apply to the Regional Director in Form INC-23 for approval under section 13(4), after giving notice to every creditor, debenture holder and other person whose interest is affected and to the Registrar and the Chief Secretary of the State; the alteration takes effect only on registration with the Registrar of each State. As to (b), the registered office clause states only the State in which the office is situated, the full address being notified separately in Form INC-22 within thirty days.

First, the contract is void for being ultra vires the company. A company's capacity is limited by the objects clause of its memorandum, section 4(1)(c). An act outside those objects, and outside what is reasonably incidental to them, is beyond the company's powers altogether. It is therefore void from the beginning, and being void it:

1. Cannot be enforced by either party, so Champak cannot sue on it and neither could the company;
2. Cannot be ratified, even by the unanimous assent of every shareholder, because there is nothing in a nullity to ratify; and
3. Can be restrained by injunction at the instance of any member.

Second, Champak is fixed with constructive notice of the memorandum. The memorandum and articles are public documents registered with the Registrar and open to public inspection under section 399. Every person dealing with the company is therefore deemed to have read them and to have understood their contents properly, whether or not he actually did. Champak did not verify them; the law treats him as though he had, and as though he had known that the contract was outside the objects clause.

2. Subrogation. If his money has been used to pay off the company's lawful debts, he steps into the shoes of those creditors to that extent, because the company is no worse off; and
3. Action against the directors personally, for breach of warranty of authority, the directors having held out that the company could make the contract when it could not.

(b) The doctrine involved

The principal doctrine is the doctrine of ultra vires. The supporting doctrine, which is what actually defeats Champak's plea of good faith, is the doctrine of constructive notice. The doctrine he would have wished to rely on, and cannot, is the doctrine of indoor management.

Keeping the three straight is the point of the question:

Supporting authorities: Re Jon Beauforte (London) Ltd. [1953] Ch 131, where a company authorised to make ladies' dresses went into veneered panel manufacture and the suppliers, who had received letters on the company's headed paper describing it as veneer panel manufacturers, were held to have constructive notice and could not prove in the liquidation; and Lakshmanaswami Mudaliar v. Life Insurance Corporation of India AIR 1963 SC 1185, where a donation by an insurance company to a charitable trust for the promotion of technical and business knowledge was held ultra vires, the company's business having been taken over by the LIC, and the directors were ordered to refund the amount.

On constructive notice, the classic illustration is Kotla Venkataswamy v. Chinta Ramamurthy AIR 1934 Mad 579, where the articles required a deed to be signed by the managing director, the working director and the secretary, and a mortgage deed signed by only two of them was held invalid, the plaintiff being deemed to have read the articles.

For full marks, cover: section 2(41) to fix the first financial year, the nine-month rule applied to a date, the six-month and fifteen-month rules for later years, and then section 97, section 99 and the wider consequences.

(a) The time limits, worked out on these facts

The first financial year. Section 2(41) provides that where a company is incorporated on or after the 1st day of January of a year, its financial year ends on the 31st day of March of the following year. L.M.N. was incorporated on 10 January 2022, which is on or after 1 January 2022, so its first financial year runs from 10 January 2022 to 31 March 2023, a period of about fourteen and a half months.

Where and when. The meeting must be held during business hours, between 9 a.m. and 6 p.m., on a day that is not a national holiday, and at the registered office or some other place within the city, town or village in which the registered office is situate. Notice is twenty-one clear days under section 101.

(b) Consequences of not holding an AGM

1. Application to the Tribunal, section 97. If any default is made in holding an annual general meeting, any member of the company may apply to the Tribunal, which may call, or direct the calling of, an annual general meeting and give such ancillary or consequential directions as it thinks expedient. The Tribunal may direct that one member present in person or by proxy shall be deemed to constitute a meeting, which is how a deadlock over quorum is broken. A meeting so held is deemed to be an annual general meeting of the company.

2. Penalty, section 99. If default is made in holding a meeting in accordance with section 96, 97 or 98, or in complying with any direction of the Tribunal, the company and every officer of the company who is in default are punishable with a fine which may extend to one lakh rupees, and in the case of a continuing default, with a further fine which may extend to five thousand rupees for every day during which the default continues.

4. Disqualification of directors, section 164(2). This is the most serious consequence and the one worth flagging. If the company fails to file financial statements or annual returns for any continuous period of three financial years, then every person who is or has been a director of that company becomes ineligible for re-appointment as a director of that company, or for appointment in any other company, for five years. A run of missed AGMs leads directly to this.

5. Striking off. Persistent default in filing is a ground on which the Registrar may remove the name of the company from the register under section 248, and continued default in filing for five consecutive financial years is itself a ground for winding up by the Tribunal under section 271(d).

2. The rule of majority: Foss v. Harbottle

Foss v. Harbottle (1843) 2 Hare 461 is the starting point. Two shareholders sued the directors alleging that they had sold their own land to the company at an inflated price. The suit was dismissed. Two propositions were laid down:

1. The proper plaintiff rule. Where a wrong is done to the company, the company alone is the proper plaintiff to sue for it; and
2. The majority rule, or the rule of internal management. Where the alleged wrong is a transaction which the majority is competent to confirm or ratify, no individual member may sue, because the ultimate decision rests with the majority.

The rule is a direct consequence of separate legal personality: if the company is a person distinct from its members, a loss to the company is not the members' loss to sue for. Its practical justifications are equally strong: it prevents a multiplicity of suits, it respects the internal management of the company, and it avoids futility, since a court order could be undone the next day by a ratifying resolution.

3. The exceptions, which is where minority protection begins

4. Fraud on the minority. Where those in control use their voting power to benefit themselves at the company's or the minority's expense, and the wrongdoers are themselves in control so that the company will never sue, a member may bring a derivative action on behalf of the company. Menier v. Hooper's Telegraph Works (1874) LR 9 Ch App 350, where the majority shareholder in the plaintiff company used its votes to wind it up so that a benefit would pass to another company it controlled; the majority was made to account. Cook v. Deeks [1916] 1 AC 554, where directors took a construction contract for themselves and then used their votes as majority shareholders to ratify their own breach; the ratification was held ineffective, the contract belonging in equity to the company.
5. Oppression and mismanagement, now the statutory remedy below.
6. Some writers add wrongdoer control as an independent head, and breach of a duty owed to a member under the articles.

4. The statutory remedy: sections 241 and 242

Section 241 allows a member to apply to the Tribunal where:

Section 242: the Tribunal's powers are deliberately wide. It may make such order as it thinks fit, including an order for:

1. The regulation of the conduct of the company's affairs in future;
2. The purchase of the shares of any members by other members or by the company, and a consequent reduction of capital;
3. Restrictions on the transfer or allotment of shares;
4. The termination, setting aside or modification of any agreement between the company and its managing director, manager or director;
5. The setting aside of any fraudulent preference made within three months before the application;
6. The removal of the managing director, manager or directors;
7. The recovery of undue gains;
8. The appointment of directors or of such number as the Tribunal may direct; and
9. The imposition of costs.

5. Class action, section 245

A genuinely new remedy. Members or depositors, or any class of them, may apply to the Tribunal if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, and may seek to restrain the company from acting ultra vires, from committing a breach of the memorandum or articles, or from acting on a resolution obtained by suppression of material facts, and may claim damages or compensation against the company, its directors, its auditors including the audit firm, and any expert or adviser for any misleading statement or improper act. The requisite number is one hundred members or such percentage as prescribed, whichever is less.

This is the Indian answer to the Satyam scandal, and its most striking feature is that it makes the audit firm jointly and severally liable.

6. The other minority protections

1. Section 47: one vote per equity share, so voting power tracks capital;

The balance the Act strikes can be stated in one paragraph, and a discussion question expects it. Majority rule remains the principle: Foss v. Harbottle has never been displaced, and the courts still refuse to interfere with decisions the majority may lawfully take, because a company in which every decision is litigable cannot be run. What has changed is the remedy against abuse. The old requirement of proving "oppression" has been softened to conduct "prejudicial or oppressive"; the numerical threshold in section 244 can now be waived by the Tribunal; the class action in section 245 reaches auditors and advisers as well as directors; and the Tribunal's powers under section 242 extend to rewriting the company's management. The modern position is therefore that the majority governs, but governs subject to a standard of fair dealing that the Tribunal will enforce.

For full marks, cover: who a director is, qualifications, the full section 164 disqualifications, section 167 vacation of office, the legal position, the statutory duties in section 166, and the powers in sections 179 and 180.

1. Who is a director

Section 2(34): a director means a director appointed to the Board of a company. Section 2(10): the Board means the collective body of the directors. Section 149(3) requires that only an individual may be a director, so no body corporate, association or firm can hold the office. Every director must have a Director Identification Number under section 152(3), and must give his consent in Form DIR-2.

Minimum numbers under section 149(1) are three for a public company, two for a private company and one for a One Person Company, with a maximum of fifteen, exceedable by special resolution. At least one director must have stayed in India for 182 days or more in the financial year.

3. Disqualifications, section 164

Section 164(1). A person is not eligible to be appointed a director if he:

1. Is of unsound mind and stands so declared by a competent court;
2. Is an undischarged insolvent;
3. Has applied to be adjudicated an insolvent and his application is pending;
4. Has been convicted of any offence, whether involving moral turpitude or otherwise, and sentenced to imprisonment for not less than six months, and five years have not elapsed from the expiry of the sentence. If the sentence is seven years or more, he is permanently disqualified;
5. Has been disqualified by an order of a court or Tribunal and the order is in force;
6. Has not paid any calls in respect of shares held by him, and six months have elapsed from the last day fixed for payment;

4. Vacation of office, section 167

The office of a director is vacated automatically if he:

1. Incurs any of the disqualifications in section 164;
2. Absents himself from all the meetings of the Board held during a period of twelve months, with or without leave of absence;
3. Acts in contravention of section 184 on disclosure of interest, or fails to disclose his interest;
4. Becomes disqualified by an order of a court or Tribunal;
5. Is convicted of any offence and sentenced to imprisonment for not less than six months, though the office is not vacated for thirty days from the conviction and the vacation is suspended while an appeal is pending;
6. Is removed in pursuance of the Act; or
7. Having been appointed by virtue of his holding an office or other employment in the holding, subsidiary or associate company, ceases to hold that office.

5. The legal position of a director

A director is not any one thing, and the marks lie in saying so.

The classic summary is Bowen LJ's in Imperial Hydropathic Hotel Co. v. Hampson: directors are "described sometimes as agents, sometimes as trustees, sometimes as managing partners; but each of these expressions is used not as exhaustive of their powers and responsibilities, but as indicating useful points of view".

6. Duties, section 166

Codified for the first time by the 2013 Act. A director:

1. Shall act in accordance with the articles of the company;
2. Shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment;
3. Shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment;
4. Shall not involve himself in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company;

7. Powers, sections 179 and 180

Section 179(1) is the general grant: the Board is entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do, subject to the Act, the memorandum and the articles. So the Board's power is residual and general, and the statute works by carving out of it.

Section 179(3): powers exercisable only by resolution passed at a Board meeting, and not delegable except as provided. These include the power to make calls; to authorise buy-back under section 68; to issue securities, including debentures; to borrow monies; to invest the funds of the company; to grant loans or give guarantee or provide security in respect of loans; to approve financial statements and the Board's report; to diversify the business; to approve amalgamation, merger or reconstruction; and to take over a company or acquire a controlling or substantial stake in another company. Borrowing, investment and lending powers may be delegated to a committee, the managing director or the manager by resolution passed at a Board meeting.

Section 180: powers exercisable only with the consent of the company by special resolution.

Conclusion. The Act says almost nothing about what a director must be and a great deal about what he must not be and what he must do, and that asymmetry is deliberate: the members choose whom they trust, and the law controls the office afterwards. Section 164 supplies the disqualifications, section 167 the automatic vacation of office, section 166 the codified duties and section 179 the powers, which the Board exercises collectively and, for the matters in section 179(3), only by resolution at a meeting. The powers in sections 180, 182, 185 and 186 are reserved to the members, marking the line between managing the company and disposing of it.

Those who issue a prospectus holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking, and inviting them to take shares on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy, and not only to abstain from stating as fact that which is not so, but to omit no one fact within their knowledge the existence of which might in any degree affect the nature, or extent, or quality of the privileges and advantages which the prospectus holds out as inducement to take shares.

The rule was called the "golden legacy" in Henderson v. Lacon (1867) LR 5 Eq 249. Its substance is threefold:

1. Strict and scrupulous accuracy in every statement of fact;
2. No material omission: the duty is one of full disclosure, so that a prospectus may be false by what it leaves out; and
3. No half-truth: a statement literally true which conveys a false impression is a misstatement.

2. Remedies for misrepresentation

Keep them in two groups by defendant, because the remedies are different.

A. Against the company

1. Rescission of the contract of allotment. An allottee who was induced to subscribe by a material misrepresentation of fact may rescind and recover his money with interest, and have his name struck off the register. The requirements are that the statement was of fact and not of law or opinion, that it was material, that he relied on it, and that he acted promptly.

The right is lost in four ways, and they are frequently examined:

1. By affirmation, express or implied, as by attending meetings, accepting dividends or attempting to sell the shares;
2. By unreasonable delay, Re Christineville Rubber Estates Ltd., where a delay of about a year was fatal;
3. By commencement of winding up, since the rights of creditors intervene, Oakes v. Turquand (1867) LR 2 HL 325; and
4. Where restitutio in integrum is impossible.

Where the prospectus was issued with intent to defraud the applicants or for any fraudulent purpose, every such person is personally responsible, without any limitation of liability, for all losses incurred by any person who subscribed on the faith of it.

The defences, section 35(2). A person is not liable if he proves:

1. That having consented to become a director he withdrew his consent before the issue and it was issued without his authority or consent;
2. That the prospectus was issued without his knowledge or consent, and that on becoming aware of it he gave reasonable public notice to that effect; or
3. That as regards a statement purporting to be made by an expert or contained in an official document, it was a correct and fair representation or copy, and he had reasonable ground to believe and did believe up to the time of issue that the expert was competent and had given and not withdrawn his consent.

4. Criminal liability, section 34. Where a prospectus includes any statement which is untrue or misleading in form or context, or where any inclusion or omission is likely to mislead, every person who authorises the issue is punishable for fraud under section 447, unless he proves that the statement or omission was immaterial or that he had reasonable grounds to believe and did believe the statement to be true or the inclusion or omission necessary. Section 447 provides imprisonment of not less than six months and up to ten years and a fine of not less than the amount involved, up to three times that amount, with a minimum of three years where the fraud involves public interest.

5. Section 36 punishes any person who fraudulently induces persons to invest money, again under section 447.

6. Contribution. A director held liable under section 35 may recover contribution from any other person who, if sued separately, would have been liable to make the same payment, unless that person was guilty of fraudulent misrepresentation and the claimant was not.

Conclusion. The golden rule in New Brunswick and Canada Railway Co. v. Muggeridge requires that everything material be stated with scrupulous accuracy and that nothing be omitted whose omission makes what is stated misleading, and section 26 gives the rule statutory form. The remedies for its breach are cumulative rather than alternative: rescission and damages for deceit against the company, compensation under section 35 from the directors, promoters and experts, criminal liability under section 34, and liability for fraudulently inducing investment under section 36. Sections 39(3) and 40(5) add consequences of their own where minimum subscription is not received or the securities are not listed.

2. Statutory companies, created by a special Act of Parliament or a State legislature, such as the Reserve Bank of India, the Life Insurance Corporation and the State Bank of India. They are governed primarily by their own Act, and the Companies Act applies only so far as it is not inconsistent.
3. Registered companies, formed by registration under the Companies Act. This is the only route now available and covers all the classes below.

2. On the basis of liability, section 3(2)

1. Company limited by shares, section 2(22): the liability of members is limited by the memorandum to the amount, if any, unpaid on the shares held by them. This is by far the commonest form. The liability can be enforced during the life of the company by a call, and in winding up by the liquidator.

3. Limits the number of its members to two hundred, not counting present or former employees who are members; and
4. Prohibits any invitation to the public to subscribe for any securities of the company.

Joint holders are counted as a single member. The minimum number of members is two and of directors two. The exemptions it enjoys are substantial: it need not issue a prospectus, need not hold a general meeting to allot, may commence business on incorporation subject to section 10A, is exempt from the rotation of directors requirement, may pay any remuneration to its directors free of the Schedule V ceiling, and enjoys relaxations in sections 43, 47, 62, 73, 101 to 107, 141, 160, 162, 180, 184, 185, 188 and 196 under the exemption notification, provided it has not defaulted in filing.

1. Public company, section 2(71). A company which is not a private company and has a minimum paid-up share capital as may be prescribed. A subsidiary of a public company is deemed to be a public company even where it continues to be a private company in its articles. Minimum members seven, minimum directors three.

1. Small company, section 2(85). A company, other than a public company, having a paid-up share capital not exceeding four crore rupees and a turnover not exceeding forty crore rupees as per the profit and loss account for the immediately preceding financial year, as prescribed. It cannot be a holding or subsidiary company, a section 8 company, or a company governed by a special Act. Its concessions mirror the OPC's: two Board meetings a year, an abridged annual return, a signature by the company secretary or one director, no requirement of rotation of auditors, and no cash flow statement.

4. On the basis of control

1. Holding company, section 2(46): a company of which the other companies are subsidiaries.

1. Government company, section 2(45): a company in which not less than fifty one per cent of the paid-up share capital is held by the Central Government, by any State Government or Governments, or partly by the Central and partly by one or more State Governments, and includes a subsidiary of a Government company. Its auditor is appointed by the Comptroller and Auditor-General, whose supplementary audit and comments are placed before the annual general meeting and before Parliament or the legislature.
2. Foreign company, section 2(42): any company or body corporate incorporated outside India which has a place of business in India, whether by itself or through an agent, physically or through electronic mode, and conducts any business activity in India in any other manner. Chapter XXII, sections 379 to 393, regulates it: it must within thirty days of establishing a place of business deliver to the Registrar its charter documents, the address of its principal place of business, particulars of directors and of persons resident in India authorised to accept service, file annual accounts, and display its name and country of incorporation.

6. Producer company, under Chapter XXIA, sections 378A to 378ZU, reintroduced by the Companies (Amendment) Act, 2020: a body corporate having objects relating to production, harvesting, procurement, grading, pooling, handling, marketing, selling or export of the primary produce of the members, whose members are primary producers. It combines the features of a private limited company with the mutual-benefit principles of a co-operative society.
7. Public financial institution, section 2(72), such as the Life Insurance Corporation and the Infrastructure Development Finance Company.

Conclusion. The Act classifies companies along five different axes, by incorporation, by liability, by the number of members, by control and by special status, and the classifications overlap rather than exclude one another, so a single company may at once be a private company, a limited company, a subsidiary and a small company. What matters in an examination is to name the axis before naming the type, because the consequences that follow, from the liability of members on winding up to the exemptions a company may claim, depend on which axis is being discussed.