BLS LLB 5 Years Sem 7 Company Law 2025-26 - ATKT 60/40 Question Paper with Solutions

Under the first proviso to section 96(1) of the Companies Act, 2013, a company must hold its first annual general meeting within nine months from the closing of its first financial year.

If it does so, it need not hold any annual general meeting in the year of its incorporation, and the Registrar has no power to extend the time for a first AGM.

Section 2(30) of the Companies Act, 2013 provides that "debenture" 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.

Chitty J's description in Levy v. Abercorris Slate and Slab Co. (1887) 37 Ch D 260 is the classic one: a debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of those conditions is a debenture.

Section 32 read with its explanation defines a red herring prospectus as a prospectus which does not include complete particulars of the quantum or price of the securities included therein.

A company proposing to make an offer of securities may issue one prior to the issue of a prospectus, and it must be filed with the Registrar at least three days before the opening of the subscription list and the offer.

Corporate Social Responsibility is the obligation of a company to conduct its business so as to contribute to the welfare of society, and in India it is a statutory obligation under section 135 of the Companies Act, 2013.

Every company having, in the immediately preceding financial year, a net worth of five hundred crore rupees or more, or a turnover of one thousand crore rupees or more, or a net profit of five crore rupees or more, must spend at least two per cent of the average net profits of the three immediately preceding financial years on the activities specified in Schedule VII.

Section 114(2) provides that a resolution shall be a special resolution when:

1. The intention to propose it as a special resolution has been duly specified in the notice calling the general meeting;
2. The notice required under the Act has been duly given; and
3. The votes cast in favour, whether on a show of hands, electronically or on a poll, by members entitled and present in person or by proxy, are not less than three times the number of votes cast against it.

For full marks, cover: the facts, the two limbs, the justifications, the exceptions with cases, and the statutory remedies.

Foss v. Harbottle (1843) 2 Hare 461. Two shareholders of the Victoria Park Company sued five directors and a solicitor, alleging that they had sold their own land to the company at an inflated price and had otherwise misapplied its property. The suit was dismissed: the company was still in existence and able to sue in its own name, and the acts complained of were capable of confirmation by a majority of the members.

The two limbs:

1. The proper plaintiff rule. Where a wrong is alleged to have been done to a company, the company is prima facie the only proper plaintiff; and
2. The majority rule, or the rule of internal management. Where the alleged wrong is a transaction which the majority is competent to make binding on the company by ratification, no individual member may sue.

4. Fraud on the minority, where those in control use their voting power to benefit themselves at the expense of the company or the minority and are themselves the wrongdoers, so that the company will never sue. Menier v. Hooper's Telegraph Works (1874) LR 9 Ch App 350; Cook v. Deeks [1916] 1 AC 554, where three of four directors took a railway contract for themselves and used their majority shareholding to resolve that the company had no interest in it, and the Privy Council held they could not ratify their own wrong; and
5. Oppression and mismanagement, now statutory.

Contrast Pavlides v. Jensen [1956] Ch 565, where an asset was sold at a gross undervalue but no fraud was alleged and the action failed, with Daniels v. Daniels [1978] Ch 406, where directors who sold company land to one of themselves and profited were answerable although fraud was not pleaded.

Conclusion. The rule in Foss v. Harbottle is the procedural side of corporate personality: the company is the proper plaintiff for a wrong done to it, and the court will not entertain a member's complaint of an irregularity the majority could ratify. Its exceptions, ultra vires or illegal acts, acts requiring a special majority, invasion of individual membership rights and fraud on the minority, are the situations in which those reasons fail. In India its practical work is now done by statute, sections 241 and 242 giving a direct remedy with powers extending to a buy out and the removal of directors, section 245 the class action reaching auditors as well, and sections 210 and 213 investigation.

Section 2(41) fixes the financial year: for a company incorporated on or after 1 January, it ends on 31 March of the following year.

2. Time, day and place, section 96(2)

Every annual general meeting shall be called during business hours, that is, between 9 a.m. and 6 p.m., on a day that is not a National Holiday, and shall be held either at the registered office of the company or at some other place within the city, town or village in which the registered office is situate.

The Central Government may exempt any company from these provisions, subject to conditions, and an unlisted company may hold its AGM at any place in India if consent is given in writing or by electronic mode by all the members in advance.

4. Quorum, section 103

Unless the articles provide a larger number: a private company, two members personally present; a public company, five if the members are not more than one thousand, fifteen if between one thousand and five thousand, and thirty if more than five thousand.

A proxy is not counted for the quorum. If a quorum is not present within half an hour, the meeting stands adjourned to the same day in the next week at the same time and place, and at the adjourned meeting the members present shall be the quorum, with three days' notice of the adjourned meeting.

5. Business

Ordinary business, section 102(2), is confined to four items:

1. Consideration of the financial statements and the reports of the Board of Directors and auditors;
2. Declaration of any dividend;
3. Appointment of directors in place of those retiring; and
4. The appointment of, and the fixing of the remuneration of, the auditors.

2. Section 99: the company and every officer 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 the default continues; and
3. Consequential defaults: the financial statements cannot be adopted or filed under section 137; the annual return must still be filed within sixty days of the date on which the AGM should have been held, section 92(4); no dividend can be declared; rotational directors cannot retire and be re-appointed; and auditors cannot be appointed. A run of missed AGMs leads to disqualification of every director under section 164(2) and, after five consecutive financial years, to winding up under section 271(d).

For full marks, cover: the doctrine and its basis, the cases, the criticism, and its relationship with indoor management.

The doctrine of constructive notice is that the memorandum and articles of a company, on registration, become public documents open to inspection by any person, and every person dealing with the company is therefore deemed to have read them and to have understood their contents properly, whether or not he in fact did.

Section 399 of the Companies Act, 2013 is the statutory basis: any person may inspect, make a record of or get a copy or extract of any document kept by the Registrar on payment of the prescribed fee.

The consequence. A person dealing with a company deals at his peril with a transaction which the registered documents forbid, or which they permit only on conditions apparent on their face. He cannot plead ignorance of what is on the public file.

The cases:

1. It is a fiction. Nobody in ordinary commercial life searches the file at the Registrar before every transaction, and the doctrine treats a person as knowing something he almost certainly does not;
2. It operates against the outsider and in favour of the company, which is the party better able to look after itself; and
3. English law has effectively abolished it by statute for third parties dealing in good faith. In India it survives, and it survives alongside the objects clause in section 4(1)(c), which is why the doctrine of ultra vires also survives here while it has withered in England.

Its relationship with indoor management

This is the paragraph that earns the marks, because the two doctrines are complementary and the second exists because of the first.

Note that the doctrine of indoor management does not apply where the outsider knows of the irregularity, where the circumstances are suspicious, where there is forgery (Ruben v. Great Fingall Consolidated [1906] AC 439), where he has not read the articles at all (Rama Corporation v. Proved Tin and General Investment Co. [1952] 2 QB 147), where the act is ultra vires the company, or where he has been negligent.

Conclusion. Constructive notice deems every person dealing with a company to have read and understood its memorandum and articles, because they are registered under section 399 and open to public inspection. The doctrine has always been artificial, since no commercial person searches the register before every transaction, and its practical importance today is small, because the rule in Turquand protects the outsider as to everything internal. What it still does is defeat a person who deals in a manner the public documents plainly forbid, and its exceptions map exactly onto the exceptions to indoor management.

Section 213: by the Tribunal, on the application of:

1. Not less than one hundred members or members holding not less than one-tenth of the total voting power, supported by evidence that there are good reasons for an investigation; or
2. Any other person, satisfying the Tribunal that there are circumstances suggesting that the business is being conducted with intent to defraud its creditors, members or any other person, or for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose, or that the persons concerned in its formation or management have been guilty of fraud, misfeasance or other misconduct, or that the members have not been given all the information with respect to its affairs which they might reasonably expect.

The Tribunal must give the parties a reasonable opportunity of being heard before ordering an investigation.

Section 216: investigation of ownership. The Central Government may appoint inspectors to determine the true persons who are or have been financially interested in the company or able to control or materially influence its policy.

Section 217(1): the duty of officers and employees. It is the duty of all officers and other employees and agents of the company, and of any other body corporate whose affairs are investigated:

1. To preserve and produce to the inspector all books and papers of, or relating to, the company or the other body corporate which are in their custody or power; and
2. To give the inspector all assistance in connection with the investigation which they are reasonably able to give.

Section 217(3): the inspector may examine on oath any officer, employee or agent, and any other person with the prior approval of the Central Government, and may administer an oath and record notes of the examination, which shall be read over to and signed by the person examined and may thereafter be used in evidence against him.

Section 217(6): if any person fails without reasonable cause to produce books and papers, to appear before the inspector personally, or to answer any question, he is punishable with imprisonment up to six months and a fine of not less than twenty-five thousand rupees extending to one lakh rupees, and a further fine for a continuing default.

Section 212(8): power of arrest. Where the Director, Additional Director or Assistant Director of the SFIO has, on the basis of material in his possession, reason to believe that any person has been guilty of any offence punishable under the sections referred to in section 212(6), he may arrest that person, recording the reasons in writing and informing him of the grounds. The person arrested must be taken to a Judicial Magistrate or Metropolitan Magistrate within twenty-four hours, excluding journey time.

The offences covered by section 212(6), principally fraud under section 447, are cognizable and a person accused of them shall not be released on bail unless the Public Prosecutor has been given an opportunity to oppose and, where he opposes, the court is satisfied that there are reasonable grounds for believing that he is not guilty and is not likely to commit an offence on bail.

2. Section 224(5): recovery of property or damages. If the Central Government is of the opinion that proceedings ought to be brought by the company in the public interest for the recovery of damages for fraud, misfeasance or other misconduct, or for the recovery of property misapplied or wrongfully retained, it may itself bring proceedings in the name of the company;
3. Section 221: freezing of assets on inquiry and investigation, and section 222: imposition of restrictions on securities, by order of the Tribunal;
4. Section 226: an investigation may be commenced or continued notwithstanding that the company has passed a resolution for voluntary winding up, or that an order for winding up has been made; and
5. Section 227: nothing in sections 206 to 229 requires the disclosure to the Central Government, the Registrar, an inspector or the Tribunal of any privileged communication made to a legal adviser in that capacity, except as regards the name and address of his client, or of information as to the affairs of any of a bank's customers other than the company under investigation.

What it was. The statutory meeting was section 165 of the Companies Act, 1956. Every public company limited by shares, and every public company limited by guarantee and having a share capital, had to hold, not less than one month and not more than six months from the date on which it became entitled to commence business, a general meeting of its members, called the statutory meeting. Had this company been incorporated under the 1956 Act, having become entitled to commence business on 1 February 2025, it would have had to hold that meeting between 1 March and 1 August 2025.

At least twenty-one days before the meeting the Board had to send every member a statutory report, certified by not less than two directors, one of them the managing director where there was one, and, as to the share and cash figures, by the auditors. It stated the shares allotted, the cash received in respect of them, an abstract of receipts and payments, the names and addresses of the directors, auditors, manager and secretary, the particulars of any contract to be modified, the extent to which underwriting contracts had not been carried out, and the arrears on calls from directors and the manager. A copy was filed with the Registrar. Failure to hold the meeting or deliver the report was a ground on which the Court could wind the company up under section 433(b) of that Act.

What has replaced the statutory meeting. Nothing directly. The same mischief, giving shareholders an early compulsory account of what was done with their money, is now met by section 10A, by the prospectus and allotment provisions in sections 26 to 42, which regulate disclosure at the point of issue, and by the first annual general meeting under section 96.

(b) When must it hold its annual general meetings?

First AGM: by 31 December 2026. Second AGM: by 30 September 2027.

The working:

1. Section 2(41) provides that where a company is incorporated on or after the 1st day of January of a year, its first financial year ends on the 31st day of March of the following year. This company was incorporated on 23 January 2025, so its first financial year runs from 23 January 2025 to 31 March 2026;
2. The first proviso to section 96(1) requires the first annual general meeting to be held within nine months from the closing of the first financial year. Nine months from 31 March 2026 is 31 December 2026;

Time, day, place and notice. 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, at the registered office or another place within the same city, town or village, on twenty-one clear days' notice, or shorter notice with the consent of ninety-five per cent of the members entitled to vote.

Consequences of default: any member may apply to the Tribunal under section 97, which may call the meeting and may direct that one member present shall constitute a meeting; and under section 99 the company and every officer in default are liable to a fine up to one lakh rupees and five thousand rupees a day for continuing default.

For full marks, cover: the rule that quorum is required at the commencement, the contrary view and the role of the articles, and then the definition and the full section 103 ladder with the consequences of no quorum.

(a) Does the departure invalidate the meeting?

No, on the generally accepted view. The meeting remains valid and the business transacted after the departure is good.

The contrary view must be acknowledged, because a question asking for reasons expects it. Some writers, and some authorities, take the view that a quorum should continue throughout, on the footing that a meeting is a coming together of the requisite number and that a decision taken by fewer is not a decision of the company. The point is ultimately one of construction of the articles:

1. If the articles say nothing, the Hartley Baird rule applies and the meeting remains valid;
2. If the articles expressly require a quorum to be present throughout, or provide that business shall be suspended if the quorum ceases to be present, then the departure does invalidate the subsequent business; and
3. The articles may also, under section 103(1), fix a larger quorum than the Act.

Two practical points to add:

1. If a poll is demanded, it may be taken after the meeting, within forty-eight hours under section 109, and its validity does not depend on how many remained in the room; and

Three points on the counting:

1. The words are "personally present". A member represented by proxy is not counted for the quorum, although a proxy may vote on a poll;
2. A representative of a body corporate appointed under section 113, and a representative of the President or a Governor under section 112, are counted as personally present; and
3. The rung of the ladder is fixed by the number of members of the company, taken from the register, and not by the number who attend.

If a quorum is not present, section 103(2). Unless the articles otherwise provide, if the quorum is not present within half an hour from the time appointed:

1. The meeting shall stand adjourned to the same day in the next week at the same time and place, or to such other date, time and place as the Board may determine; or

Conclusion. On these facts the business transacted after the members left is valid. Section 103 requires the quorum to be present at the commencement of the meeting, and once the meeting has been validly constituted the later departure of members does not affect what follows, unless the articles expressly require a quorum to be present throughout. The reason for fixing the requirement at the commencement is that any other rule would let a dissenting group destroy a meeting simply by walking out of it. The prescribed numbers are two members personally present in a private company, and in a public company five, fifteen or thirty according as the members are up to one thousand, up to five thousand, or more.

The reason is want of locus standi. A claim for a misstatement in a prospectus lies only at the suit of a person who subscribed for securities on the faith of it and thereby sustained loss.

Section 35(1) is expressly worded: 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 persons named in the section shall be liable to pay compensation to every person who sustained such loss or damage. The claimant must therefore show two things: that he subscribed, and that he suffered loss by doing so.

A press reporter did neither. He is a stranger to the issue. He has no contract with the company, he parted with no money, and he has suffered no loss capable of being compensated. He cannot sue in deceit either, because deceit requires that the representation was made to him or to a class of which he is one, and that he acted on it to his detriment.

2. The reporter is not without any remedy at all: it is simply not a civil claim of his own. The offences under section 34, a statement untrue or misleading in a prospectus, and section 36, fraudulently inducing persons to invest money, are public wrongs punishable under section 447, and anybody may bring the matter to the notice of the Registrar or the Central Government, who may order an inspection under section 206 or an investigation under section 210. A journalist's proper course is to report the matter, not to sue on it.

Who could sue. The persons who actually subscribed believing the prospectus, and who lost, may claim compensation under section 35, may rescind their allotments against the company, and may sue the directors in deceit if fraud can be proved. They may also proceed by class action under section 245.

(b) Are the directors personally liable for misrepresentation?

On these facts, not merely because the machinery was never bought. Liability depends on what the directors intended when the prospectus was issued.

This is the heart of the question and the answer has two steps.

Step 1: an unfulfilled expectation is not, by itself, a misrepresentation.

There must be a misstatement of an existing fact: but the state of a man's mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man's mind at a particular time is, but if it can be ascertained it is as much a fact as anything else. A misrepresentation as to the state of a man's mind is, therefore, a misstatement of fact.

So the directors are personally liable if, and only if, it is shown that:

1. They never in fact intended to buy the machinery when the prospectus was issued, so that the statement of intention was false when made; or

2. Damages for deceit, if fraud within Derry v. Peek (1889) 14 App Cas 337 is proved, that is, a false statement made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false; and
3. Criminal liability under section 34 and section 447, and under section 36 for fraudulently inducing investment.

Their defences under section 35(2): that having consented to be a director, he withdrew his consent before the issue; that the prospectus was issued without his knowledge or consent and he gave reasonable public notice on learning of it; or that a statement purporting to be made by an expert was a correct and fair representation and he reasonably believed the expert competent and consenting.

For full marks, cover: what a floating charge is with Romer LJ's three indicia, the four events of crystallisation and their effect, and then the debenture-holder's remedies, statutory and contractual.

(a) When a floating charge becomes fixed: crystallisation

What a floating charge is. A charge on a class of assets, present and future, which in the ordinary course of the company's business changes from time to time, such as stock in trade, book debts or raw materials, and under which the company remains free to deal with those assets in the ordinary course until some event fixes the charge.

2. On the appointment of a receiver, whether by the debenture-holders under the powers in the deed or by the court;
3. On the company ceasing to carry on business or ceasing to be a going concern, since the very premise of a floating charge is that the company is trading; and
4. On the happening of any event specified in the debenture deed as causing crystallisation. Modern deeds contain automatic crystallisation clauses, typically operating on default in payment of principal or interest, on the creation of a further charge over the same assets, on the levy of execution or distress, or on the service of a notice of crystallisation by the debenture-holder.

The effect of crystallisation:

1. The charge attaches to the assets then comprised in the class, and to nothing acquired afterwards;
2. The company can no longer deal with those assets in the ordinary course, and any dealing thereafter is subject to the charge;

1. Statutory remedy: application to the Tribunal, section 71(10). This is the provision to lead with. Where a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the debentures when it is due, the Tribunal may, on the application of any or all of the debenture-holders, or of the debenture trustee, and after hearing the parties concerned, direct, by order, the company to redeem the debentures forthwith on payment of principal and interest due thereon. Section 71(11): if any default is made in complying with the order, every officer of the company who is in default is punishable with imprisonment up to three years or a fine of not less than two lakh rupees extending to five lakh rupees, or both.

3. Foreclosure, where the debenture is by way of mortgage, in a suit to which all the debenture-holders are parties; and
4. Taking possession of the charged assets, where the deed so provides.

4. Ordinary civil remedies:

1. A suit for the recovery of the principal and interest as a debt. A debenture-holder is a creditor, and his interest is payable whether or not the company has profits, so the debt is not conditional on profitability;
2. A suit for sale of the charged property, or to enforce the security; and
3. A debenture-holder's action on behalf of himself and all other holders of the same class, in which the court may appoint a receiver and order a sale.

One condition governs the whole of the security: registration. Under section 77 every charge must be registered with the Registrar within thirty days of creation, extendable on additional fees. Section 77(3): an unregistered charge shall not be taken into account by the liquidator or by any other creditor, that is, it is void against them, although section 77(4) preserves the debt, which becomes immediately payable. An unregistered floating charge therefore leaves the holder an unsecured creditor, which is the single most important practical point in the answer.

Conclusion. On these facts the answer to (a) is that the floating charge created by Godavari Transport Co. crystallises and becomes a fixed charge on the winding up of the company, on the appointment of a receiver, on the company ceasing to carry on business, or on the happening of any event specified for that purpose in the debenture deed. The answer to (b) is that on default the debenture holder may sue for the principal and interest, petition for winding up, appoint a receiver, or enforce the security by sale or foreclosure. The practical warning is that an unregistered charge is void against the liquidator and every other creditor under section 77(3), so the holder ranks merely as an unsecured creditor.

For full marks, cover: the meaning and the distinction from dissolution, the modes, the five grounds of section 271 with the just and equitable ground illustrated, who may petition, the Tribunal and its constitution and appeal route, and the procedure in outline.

1. What winding up is

Winding up, or liquidation, is the process by which the life of a company is brought to an end and its property administered for the benefit of its creditors and members. A liquidator is appointed, takes control of the assets, realises them, pays the debts in the statutory order and distributes any surplus among the members.

Winding up is not dissolution. Winding up is the process; dissolution is the event at the end of it, when the company ceases to exist as a legal person and its name is struck off. During winding up the company continues to exist, retains its corporate personality and its property, and may carry on business so far as necessary for a beneficial winding up.

(b) Acts against the State. The company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality. Only the Central or State Government may petition on this ground.

(c) Fraud, misfeasance or misconduct. On an application by the Registrar or any other person authorised by the Central Government, the Tribunal is of opinion that the affairs of the company have been conducted in a fraudulent manner, or that the company was formed for a fraudulent or unlawful purpose, or that the persons concerned in its formation or management have been guilty of fraud, misfeasance or misconduct in relation to it, and that it is proper that the company be wound up.

(d) Default in filing. The company has made a default in filing with the Registrar its financial statements or annual returns for the immediately preceding five consecutive financial years.

(e) Just and equitable. The Tribunal is of the opinion that it is just and equitable that the company should be wound up.

Two grounds that are no longer there and are the commonest wrong answers:

4. Oppression of the minority, or a fraudulent or illegal purpose; and
5. Breakdown of a quasi-partnership, where the company was in substance a partnership founded on mutual confidence which has been destroyed. Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360.

Section 273(2) contains an important limitation on the just and equitable ground: the Tribunal shall not refuse to make a winding up order merely because the assets have been mortgaged for an amount equal to or in excess of those assets, or because the company has no assets. But where a petition is presented on the just and equitable ground, the Tribunal may refuse to make the order if it is of the opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. In practice that other remedy is usually sections 241 and 242.

4. Who may petition, section 272

1. The company itself;
2. Any contributory or contributories, notwithstanding that he is the holder of fully paid-up shares or that the company may have no assets at all or no surplus for distribution among the shareholders;

1. Jurisdiction, section 280: the Tribunal shall have jurisdiction to entertain, or dispose of, any suit or proceeding by or against the company, any claim made by or against it including claims by or against any of its branches in India, any application under section 233, any scheme submitted under section 262, or any question of priorities or any other question whatsoever, whether of law or facts, including those relating to assets, business, actions, rights, entitlements, privileges, benefits, duties, responsibilities, obligations or in any matter arising out of or in relation to the winding up of the company, whether such suit or proceeding has been instituted or is instituted, or such claim or question has arisen or arises or such application has been made or is made or such scheme has been submitted, or is submitted, before or after the order for the winding up of the company is made;
2. The bench with territorial jurisdiction is the one within whose jurisdiction the registered office of the company is situate, which is why the registered office clause of the memorandum names the State, section 4(1)(b);

6. The procedure in outline

Section 273: within ninety days of presentation the Tribunal may dismiss the petition, make an interim order, appoint a provisional liquidator after notice to the company, order winding up, or make any other order. Section 275: it appoints a Company Liquidator from a panel of insolvency professionals. Sections 277 to 279: the order operates in favour of all creditors and contributories, a copy goes to the Registrar within thirty days, and no suit or proceeding shall be commenced or continued except with the leave of the Tribunal. Section 281: the liquidator reports within sixty days. Sections 283 and 290: he takes custody of the property and, with the Tribunal's sanction, realises it. Sections 285 and 295: the Tribunal settles the list of contributories and makes calls. Distribution follows section 53 of the Code. Section 302: when the affairs are completely wound up, the Tribunal orders that the company be dissolved from the date of the order, and a copy goes to the Registrar within thirty days.

For full marks, cover: both documents with definitions, clauses and contents, the comparison, the section 10 contract, then ultra vires with Ashbury and the reliefs, then constructive notice and indoor management with Turquand and the exceptions, and finally how the three doctrines fit together.

1. Memorandum of Association

Section 2(56): the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.

It is the company's charter. It defines the company's constitution, its objects and the extent of its powers, and it regulates the company's relations with the outside world.

The six compulsory clauses, section 4(1):

1. Name clause, with "Limited" as the last word for a public limited company and "Private Limited" for a private limited company, a section 8 company being exempt;

The articles are the company's internal regulations. Section 5(1) provides that they shall contain the regulations for management of the company, and section 5(3) allows entrenchment provisions, under which specified provisions may be altered only on conditions more restrictive than a special resolution, made on formation or by an amendment agreed to by all the members of a private company or by special resolution in a public company, with notice to the Registrar.

Model forms are Tables F to J of Schedule I; Table F applies to a company limited by shares which registers no articles of its own. Alteration is by special resolution under section 14, filed within fifteen days, and takes effect as if originally contained in the articles.

Limits on alteration: it must not be inconsistent with the Act or the memorandum, must not be illegal or against public policy, must be bona fide for the benefit of the company as a whole (Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch 656), must not be a fraud on the minority, and must not increase a member's liability without his written consent. A company cannot contract out of its power to alter, but may be liable in damages if the alteration breaks a contract (Southern Foundries (1926) Ltd. v. Shirlaw [1940] AC 701).

3. The comparison

Section 10: the statutory contract. The memorandum and articles, when registered, bind the company and the members to the same extent as if they respectively had been signed by the company and by each member, and all money payable by a member under them is a debt due from him to the company. The contract has four limbs: company to member (Wood v. Odessa Waterworks Co.), member to company (Borland's Trustee v. Steel Bros.), member to member (Rayfield v. Hands), and not company to outsider (Eley v. Positive Government Security Life Assurance Co.).

4. Doctrine of Ultra Vires

Ultra vires means beyond the powers. A company may do only what its memorandum, and in particular its objects clause, authorises, together with what is reasonably incidental to it. An act outside that is ultra vires the company and void.

1. Tracing. If the money or property is still identifiable in the company's hands, the lender may trace and recover it in equity;
2. Subrogation. If the money has been used to pay off the company's lawful debts, the lender steps into the shoes of the creditors so paid, the company being no worse off;
3. Incidental acts are intra vires, section 4(1)(c) itself covering "matters considered necessary in furtherance thereof"; and
4. Ultra vires the directors, not the company, is not void: the company may ratify, and the outsider is protected by indoor management.

The doctrine's practical force has weakened. Companies drafted objects clauses of great length; courts developed the main objects rule and accepted "independent objects" clauses (Cotman v. Brougham); and the Companies (Amendment) Act, 2017 removed the requirement to divide the objects into main, ancillary and other objects. In India the doctrine nevertheless survives, because section 4(1)(c) keeps the objects clause compulsory, unlike England where it has effectively been abolished.

1. Knowledge of the irregularity. Howard v. Patent Ivory Manufacturing Co. (1888) 38 Ch D 156;
2. Suspicion of irregularity or unusual circumstances. Anand Bihari Lal v. Dinshaw & Co. AIR 1946 PC 54; Underwood v. Bank of Liverpool [1924] 1 KB 775;
3. Forgery, a forged document being a nullity. Ruben v. Great Fingall Consolidated [1906] AC 439;
4. No knowledge of the articles, so no reliance. Rama Corporation v. Proved Tin and General Investment Co. [1952] 2 QB 147;
5. Acts void or ultra vires the company; and
6. Negligence of the outsider.

6. How the three fit together

This is the paragraph that earns the top marks, because the question puts the four topics in one line and expects them to be connected.

1. The memorandum fixes what the company may do. An act outside it is ultra vires the company and void, and no ratification and no doctrine can save it;
2. The articles fix how it does it and what powers its officers have. An act within the memorandum but beyond the articles is ultra vires the directors only, and is therefore irregular and ratifiable;

Conclusion. The four topics in this question are one chain of reasoning rather than four separate ones. The memorandum fixes the company's capacity and the articles its internal management; an act beyond the memorandum is ultra vires the company, void and unratifiable, while an act merely beyond the articles or the directors' authority is irregular and may be ratified. Because both documents are public, constructive notice binds the outsider to what they say, and because everything else is private, indoor management entitles him to assume it was regularly done. Keeping the two kinds of defect apart is what the examiner is testing.

3. Rotational directors, section 152(6). In a public company, not less than two-thirds of the total number of directors must be liable to retire by rotation, and one-third of those retire at every annual general meeting, those longest in office going first;
4. Additional director, section 161(1). Appointed by the Board if the articles so authorise, of any person other than one who has failed to get appointed in a general meeting; holds office only up to the next annual general meeting or the last date on which it should have been held, whichever is earlier;
5. Alternate director, section 161(2). Appointed by the Board for a director absent from India for not less than three months; vacates on the original director's return;
6. Nominee director, section 161(3). Appointed on the nomination of an institution under any law or agreement, or by the Government in a Government company. He is excluded from the definition of an independent director;
7. Casual vacancy, section 161(4). Where the office of a director appointed in general meeting is vacated before the expiry of his term, the Board may fill it, subject to approval by members at the next general meeting, and the appointee holds office only for the unexpired term;

2. Whole-time director, section 2(94). A director in the whole-time employment of the company;
3. Independent director, section 149(6). A director other than a managing, whole-time or nominee director, satisfying the tests of independence. Required in one-third proportion for every listed public company and two for prescribed unlisted public companies, appointed for up to five years, for not more than two consecutive terms, with a three-year cooling off, no stock options, and no retirement by rotation. Section 149(12) limits his liability to acts occurring with his knowledge, attributable through Board processes, and with his consent or connivance, or where he had not acted diligently;
4. Woman director, second proviso to section 149(1), required in every listed company and every other public company with paid-up capital of one hundred crore rupees or more or turnover of three hundred crore rupees or more;
5. Resident director, section 149(3), at least one director having stayed in India for not less than 182 days in the financial year; and
6. Executive and non-executive directors, a description rather than a statutory category, according as the director is or is not in the day to day management.

2. Qualifications

The Act prescribes no academic, professional or share qualification for directors generally, and that must be said first.

1. Share qualification. None under the Act; the articles may prescribe one, and it cannot exceed the nominal value of the shares as prescribed;
2. Age. No general minimum, but a director must be competent to contract. A managing director, whole-time director or manager must have attained twenty-one and not attained seventy, appointment beyond seventy requiring a special resolution with justification, Part I of Schedule V;
3. DIN, section 152(3), and written consent in Form DIR-2, section 152(5); and
4. Nationality. None required, but see the resident director rule.

5. Has been disqualified by an order of a court or Tribunal which is in force;
6. Has not paid any calls on his shares and six months have elapsed from the last day fixed for payment;
7. Has been convicted of an offence under section 188 on related party transactions in the preceding five years; or
8. Has not complied with section 152(3), having no DIN.

A private company may by its articles add further disqualifications. The disqualifications in clauses (d), (e) and (g) do not take effect for thirty days from the conviction or order, and where an appeal is filed within thirty days, until seven days after its disposal.

4. Disqualification of directors of defaulting companies, section 164(2)

No person who is or has been a director of a company which:

1. Has not filed financial statements or annual returns for any continuous period of three financial years; or
2. Has failed to repay deposits or pay interest thereon, or to redeem debentures on the due date or pay interest due thereon, or to pay any dividend declared, and the failure continues for one year or more,

Conclusion. The Act's treatment of directors is deliberately light on qualifications and heavy on disqualifications, because the members are trusted to choose whom they will and the law concerns itself with how the office is then held. The types of director, executive and non-executive, independent, nominee, woman, small shareholders', additional, alternate and casual vacancy, describe how a person comes to the Board and what he is there to do. Section 164 supplies the disqualifications, personal in subsection (1) and consequential on a company's default in subsection (2), and section 167 provides for automatic vacation, with the promoter or the Central Government stepping in where every director has vacated.

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.

It was called the "golden legacy" in Henderson v. Lacon (1867) LR 5 Eq 249.

Its three limbs:

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

The rule is now given statutory effect by section 26, which requires the prospectus to be dated and signed and to state, among much else, the names and addresses of the registered office, company secretary, chief financial officer, auditors, legal advisers, bankers, trustees and underwriters; the dates of opening and closing of the issue; details of underwriting; the consents of directors, auditors and experts; the authority for the issue; the capital structure; the main objects of the public offer and the objects of the business; the management perception of risk factors, the gestation period, and any pending litigation or default; the minimum subscription; particulars of the directors and of any litigation against the promoters in the last five years; the sources of promoter's contribution; and the auditors' reports on profits and losses for the five preceding financial years and on the assets and liabilities as at a date not more than 180 days before the issue.

A copy must be delivered to the Registrar for registration on or before the date of publication, and a prospectus is valid for ninety days from that delivery.

2. Remedies for misrepresentation

Keep them in two groups by defendant, because they differ in kind.

2. Damages for deceit against the company, where the misrepresentation was fraudulent and made by agents within the scope of their authority. Historically an allottee could not sue the company for damages while remaining a member, the principle in Houldsworth v. City of Glasgow Bank (1880) 5 App Cas 317, so he had to rescind first.

3. Section 39(3): where the minimum subscription stated has not been received, the whole application money must be repaid within the prescribed period, with interest.

B. Against directors, promoters and experts

1. Compensation under section 35, the statutory civil liability. Where a person has subscribed for securities acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading, and has sustained loss or damage, the following are liable to pay compensation:

1. Every person who is a director at the time of the issue;
2. Every person who has authorised himself to be named and is named as a director or as having agreed to become one;
3. Every promoter;

2. Damages for deceit at common law, where fraud within Derry v. Peek (1889) 14 App Cas 337 is proved, that is a false representation made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false.

3. Damages for negligent misrepresentation, following Hedley Byrne & Co. v. Heller & Partners [1964] AC 465, where a special relationship exists.

4. Criminal liability, section 34. Where a prospectus includes any statement 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 the statement or omission was immaterial or that he had reasonable grounds to believe, and did believe, it to be true or 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 and up to three times it, with a minimum of three years where the fraud involves public interest.

5. Section 36: punishment for fraudulently inducing persons to invest money, again under section 447.

Conclusion. The golden rule laid down in New Brunswick and Canada Railway Co. v. Muggeridge is that a prospectus must state everything material with scrupulous accuracy and must not omit anything whose omission makes what is stated misleading, and section 26 gives that rule statutory form. The remedies are cumulative: against the company, rescission of the allotment and damages for deceit; against the directors, promoters and experts, compensation under section 35, criminal liability under section 34, and liability under section 36 for fraudulently inducing investment. The right belongs only to a person who subscribed on the faith of the prospectus, because its office is exhausted on allotment, Peek v. Gurney.