LLM Group 2 Business Law Corporate Law 2024-25 Question Paper with Solutions

For full marks, cover: the memorandum as the company's charter, its six clauses under section 4 with the mode of alteration each requires under section 13, and the binding force section 10 gives it; then the doctrine of ultra vires from Ashbury through Lakshmanaswami Mudaliar, with its four consequences set out separately; and then the honest modern assessment, that the doctrine has been eroded by the width of modern objects clauses, by the 2017 amendment to section 4(1)(c) and by its abolition in England, but that it survives in India and is enforced.

The memorandum as the company's charter

The memorandum is the document by which the company is created and in which its constitution towards the outside world is fixed. Lord Cairns in Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1875) LR 7 HL 653, described its purpose in two limbs: it states affirmatively the ambit and extent of vitality and power the company is to have, and it states negatively that nothing shall be done beyond that ambit, so that the shareholder knows the objects to which his money may be applied and the outsider knows the range of the company's capacity.

Section 4(6) requires the memorandum to be in the form of the appropriate Table in Schedule I, Table A for a company limited by shares, B for a company limited by guarantee without share capital, C for one limited by guarantee with share capital, D for an unlimited company without share capital and E for an unlimited company with share capital.

Alteration is deliberately harder than for the articles, and the mode differs clause by clause. The name may be changed by special resolution with the approval of the Central Government, except where the change is only the addition or deletion of the word "Private" on conversion, under section 13(2). The registered office may be moved within the same city by a Board resolution and no alteration at all; from one city to another within the State by special resolution; and from one State to another by special resolution confirmed by the Central Government under section 13(4), which must dispose of the application within sixty days and be satisfied that the alteration has the consent of the creditors, debenture holders and other persons concerned, or that their debt has been discharged or secured.

Section 10(1) states the binding force. The memorandum and articles, when registered, bind the company and its members to the same extent as if they had been signed by the company and by each member, and contain covenants on the part of each member to observe all their provisions. Section 6 makes the Act override anything to the contrary in them. Section 399 makes the memorandum a public document open to inspection, which is the basis of the doctrine of constructive notice: in Kotla Venkataswamy v. Chinta Ramamurthy, AIR 1934 Mad 579, a mortgage deed executed by two officers where the articles required three was held to bind nobody, because the plaintiff was deemed to know the article.

The doctrine of ultra vires

The doctrine is that a company has capacity only for what its memorandum authorises, and an act beyond that is void from the beginning. The words mean beyond the powers. The distinction that must be kept straight is between an act ultra vires the company, which is void and incurable, and an act ultra vires the directors but within the company's powers, which the company in general meeting may ratify.

The leading Indian authority is A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, AIR 1963 SC 1185. The shareholders of an insurance company resolved to pay Rs. 75,000 out of its funds to a charitable trust formed to promote technical and business knowledge, at a time when the insurance business had been nationalised. The memorandum authorised charitable contributions conducive to the objects of the company. The Supreme Court held the payment ultra vires, because after nationalisation the company had no business to which the donation could be conducive, and the directors were held personally liable to refund the money. The case is the best Indian illustration of two propositions at once: that an object clause is read in the context of the business, and that the directors, not the company, bear the loss.

Four consequences follow, and they should be set out separately.

One, the transaction is void and cannot be ratified, however unanimous the shareholders. Neither party can sue on it, and the company cannot be estopped from pleading its own incapacity.

Where the doctrine has been narrowed. The Companies (Amendment) Act, 2017 substituted section 4(1)(c) so that the memorandum states the objects and matters considered necessary in furtherance of them, removing the earlier tripartite division into main objects, objects incidental or ancillary, and other objects, which had itself been a device for widening capacity. Modern objects clauses are drafted so broadly that few transactions fall outside them. In England the doctrine has been abolished in substance: section 39 of the Companies Act, 2006 provides that the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's constitution, and section 31 permits unrestricted objects. India has made no such change, so the doctrine remains law here.

The drafting device that hollowed the doctrine out is worth naming, because it explains why ultra vires is rarely litigated today. In Cotman v. Brougham, [1918] AC 514, a rubber company's memorandum listed some thirty objects and added a clause providing that every sub-clause should be construed as a substantive and independent object and not as subordinate to any other. The company underwrote shares in an oil company, and on its liquidation the transaction was challenged as ultra vires. The House of Lords held the independent objects clause valid, so that the objects could not be read down to what was incidental to the main business. After that decision draftsmen simply listed everything, and the objects clause, which Lord Cairns in Ashbury had treated as a real limit, became a formality.

For full marks, cover: allotment as acceptance in the law of contract, with the four contract rules that decide most problems; the statutory conditions in sections 39, 40, 42 and 62; and then the second and third limbs by asking, defect by defect, what makes an allotment bad and what follows from that particular defect, because the Companies Act, 2013 has no single provision headed "irregular allotment" and the marks lie in knowing which consequence attaches to which breach.

Allotment as acceptance

The prospectus is an invitation to offer; the application is the offer; the allotment is the acceptance. On allotment a binding contract arises, the applicant becomes a shareholder, and his name goes on the register of members under section 2(55).

If the minimum subscription is not received within thirty days of the issue of the prospectus, or such other period as the Board specifies, the money received must be returned, under section 39(3), and the Rules require repayment within fifteen days of the closure of the issue, failing which the company and its directors are jointly and severally liable to repay with interest at fifteen per cent per annum. Section 39(4) requires a return of allotment in Form PAS-3, and section 39(5) imposes a penalty of one thousand rupees a day up to one lakh rupees for default under sub-sections (3) or (4).

Section 40 fixes the fourth. A company making a public offer must, before making the offer, obtain permission from one or more recognised stock exchanges for the securities to be dealt in, and must name the exchange in the prospectus; all application money must be kept in a separate bank account in a scheduled bank and used only for adjustment against allotment where permission is obtained, or for repayment where the company cannot allot; a condition binding an applicant to waive compliance is void; and default attracts a fine of five lakh to fifty lakh rupees on the company.

Two provisions close the sequence. Section 56(4)(b) requires the certificate within two months of allotment, six months for debentures. Section 29 requires the issue to be in dematerialised form for every public offer, for unlisted public companies since 2 October 2018 under Rule 9A, and for private companies other than small companies from 30 June 2025 under Rule 9B.

When is an allotment irregular

The expression belongs to the Companies Act, 1956 and precision here is what earns the marks. Section 69 of that Act imposed the minimum subscription and application money conditions; section 70 required a public company that did not issue a prospectus to file a statement in lieu of prospectus before allotting; and section 71 was headed "Effect of irregular allotment".

An allotment made in contravention of section 69 or section 70 was voidable at the instance of the applicant, within two months after the statutory meeting or, where none was held or the allotment was made after it, within two months of the allotment, and it remained voidable even if the company was in the course of being wound up; and a director who knowingly contravened or permitted the contravention was liable to compensate the company and the allottee for loss, damages and costs, within a two year limitation.

Defect two, stock exchange permission was not obtained. Section 40(1) makes the permission a precondition to the offer, and section 40(3)(b) requires repayment out of the separate account where the company is unable to allot. Under section 73(1A) of the 1956 Act an allotment without permission was expressly void, and the position under section 40 is in substance the same, because an allotment cannot stand where the statute prohibits the offer that preceded it. The company's fine is five lakh to fifty lakh rupees and the officer's fifty thousand to three lakh rupees.

Defect three, the private placement conditions were broken. Section 42(10) provides that where a company makes an offer or accepts money in contravention of the section, the company, its promoters and directors are liable to a penalty which may extend to the amount raised or two crore rupees, whichever is lower, and the company must refund all money to the subscribers with interest within thirty days of the order imposing the penalty.

Defect five, the allotment exceeded the authorised capital or was made without a valid Board resolution. This is not an irregular allotment at all but no allotment: the company has no capacity to issue shares beyond the amount in its capital clause until it has increased it under section 61, and an allotment purportedly made by persons who were not a quorate Board is a nullity. The remedy is rectification of the register under section 59, on the application of the person aggrieved, the member, the company or the depository, with power in the Tribunal to award damages.

Two closing observations that show command of the subject. First, the practical significance of the old doctrine has shrunk because a public issue is now made under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, with money blocked in the applicant's own bank account under the Application Supported by Blocked Amount facility and, for retail applicants, through the Unified Payments Interface, so the company never holds the applicant's money before allotment and the mischief that section 71 of the 1956 Act addressed has largely been engineered out of existence. Second, the shift from avoidance by the individual allottee to penalty and refund ordered by a regulator is a better remedy for a dispersed body of small investors, none of whom would have sued within two months.

For full marks, cover: the classification as a series of decisions a promoter actually makes, which is a better plan than a list because it shows why the categories exist: how many members, how far liability is limited, whether public money will be sought, who will control it, how large it will be, and whether it has a special purpose. Give the defining section for each and, since this paper asks for legislative provisions expressly, the consequence that follows from each classification.

Decision one: how many members, and what follows

Section 3(1) fixes the minimum: seven or more persons for a public company, two or more for a private company, one for a One Person Company. The number is not only a condition of formation but of continued existence: section 3A provides that if the number falls below seven or two respectively and the company carries on business for more than six months while it is so reduced, every member during that time who is cognisant of the fact is severally liable for the whole debts contracted during that period.

Decision two: how far liability is limited

Section 3(2) offers three forms. A company limited by shares, where the member's liability is limited to the amount unpaid on his shares. A company limited by guarantee, where it is limited to the amount he undertakes by the memorandum to contribute in the event of winding up, a form used by clubs, trade bodies and professional associations, which may or may not have a share capital; section 4(1)(d)(ii) requires the memorandum to state the amount of the guarantee.

An unlimited company, defined by section 2(92) as one not having any limit on the liability of its members, which is rare but useful where the members want no publicity of capital and are content to stand behind the debts; section 65 allows an unlimited company having a share capital, on converting to a limited company, to provide that a portion of its uncalled capital shall be reserve capital, callable only on winding up.

Section 2(71) defines a public company as one that is not a private company and has such minimum paid-up capital as may be prescribed, and provides that a private company which is a subsidiary of a public company is deemed a public company even where its articles retain the private company restrictions. A public company may make a public offer under section 23(1); its securities are declared freely transferable by section 58(2); it needs three directors under section 149(1) and at least one third independent directors if listed under section 149(4); and its quorum under section 103 is five, fifteen or thirty members according to the size of its membership.

Listing adds a further layer, because a listed company is subject to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 and, by section 24, to the administration of the Board in respect of the issue and transfer of securities and the non-payment of dividend.

Section 2(45) defines a Government company as one in which not less than fifty one per cent of the paid-up share capital is held by the Central Government, by a State Government, or partly by each, and includes a subsidiary of such a company. Its auditor is appointed by the Comptroller and Auditor General under section 139(5), who may direct the manner of audit and conduct a supplementary audit under section 143(6), and the annual report is laid before Parliament or the State Legislature under section 394.

Decision six: is there a special purpose

Section 8 provides for a company with charitable objects, formed to promote commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment or any such object, which intends to apply its profits in promoting its objects and to prohibit the payment of any dividend. It is licensed by the Central Government and may be registered as a limited company without the words "Limited" or "Private Limited" in its name. Section 8(6) empowers the Central Government to revoke the licence on breach, and section 8(9) allows the Tribunal, on the Central Government's direction, to wind it up or to amalgamate it with another section 8 company having similar objects. A firm may be a member of such a company, which it may not be of an ordinary company.

Section 406 provides for a Nidhi, a company incorporated with the object of cultivating the habit of thrift and savings among its members, receiving deposits from and lending to its members only, governed by the Nidhi Rules, 2014.

Salomon v. A. Salomon and Co. Ltd., [1897] AC 22, is why the class of company matters at all. Aron Salomon sold his solvent leather business to a company in which he, his wife, daughter and four sons held one share each and he held the remaining twenty thousand and one, taking part of the price in debentures secured by a floating charge. When the company failed within a year the unsecured trade creditors argued that it was a sham and his agent, and that he should indemnify them.

The House of Lords held unanimously that once the memorandum is duly signed and registered, the company is at law a different person altogether from the subscribers, that the motives of those who form it are irrelevant provided the Act is complied with, and that his secured debentures ranked ahead of the creditors of the business he had just transferred. Every classification in this answer, from the One Person Company to the foreign company, is a variation on the person Salomon created.

Conclusion. The Companies Act, 2013 offers a graded menu rather than a single form, and each classification exists because it switches a definite set of provisions on or off. The number of members decides whether section 3A can ever operate and whether the concessions in sections 96, 122 and 137 apply; the choice of liability decides what a member owes on a winding up and whether section 65 reserve capital is available; the intention to seek public money decides whether section 23 permits a prospectus and whether section 58(2) makes the shares freely transferable; control decides consolidation under section 129(3) and the deeming provision in section 2(71); size decides the small company concessions in sections 92, 139, 173 and 446B; and a special purpose brings in sections 8, 406, 378A and Chapter XXII. A candidate who states the section and the consequence for each has answered the question the paper actually asked.

The Supreme Court rejected the claim, holding that a shareholder has no interest, legal or equitable, in the property of the company, that the company is the owner of its assets and the shareholder merely has a right to participate in the profits when a dividend is declared, and that the income changes its character in his hands. Macaura v. Northern Assurance Co. Ltd., [1925] AC 619, is the English counterpart: the owner of timber who had transferred it to his company and insured it in his own name recovered nothing when it burned, because he had no insurable interest in property that belonged to the company.

What a share therefore is, is a bundle of rights and obligations measured by a sum of money. It carries the right to vote, to dividend when declared, to a proportionate share in the surplus on winding up, to transfer, and to the statutory protections; and it carries the obligation to pay the amount unpaid on it. Section 44 states its legal character: the shares or debentures or other interest of any member in a company are movable property, transferable in the manner provided by the articles. Section 45 requires each share to be distinguished by its distinctive number, except where it is held with a depository, and section 9 of the Depositories Act, 1996 makes securities held in a depository fungible, which is why a dematerialised holding has no distinctive numbers.

Issued capital is that part of the authorised capital which the company has actually offered for subscription.

Subscribed capital is that part of the issued capital which has been taken up by subscribers.

Called-up capital is that part of the subscribed capital which the company has called upon the shareholders to pay. Section 49 requires calls to be made on a uniform basis on all shares of the same class.

Paid-up capital is defined by section 2(64) as the aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued, including any amount credited as paid-up in respect of shares, but not any other amount received in respect of shares by whatever name called. It is the figure on which most statutory thresholds turn.

Uncalled capital is the balance, and reserve capital is that part of the uncalled capital which, under section 65, an unlimited company converting into a limited company may by resolution determine shall not be capable of being called up except in the event and for the purposes of winding up.

Section 68 governs buy-back, permitted out of free reserves, the securities premium account or the proceeds of a fresh issue of shares of a different kind, up to ten per cent of paid-up equity capital and free reserves by a Board resolution and up to twenty five per cent by a special resolution, with a debt to capital and free reserves ratio not exceeding two to one after the buy-back, a one year gap between two buy-backs, a declaration of solvency, extinguishment of the securities within seven days and a bar on further issue of the same kind of shares for six months. Section 69 requires the nominal value of the shares bought back out of free reserves to be transferred to the Capital Redemption Reserve.

Section 123 governs dividend, which may be declared only out of the profits of the year after providing for depreciation, or out of accumulated profits transferred to reserves, or out of money provided by the Government for that purpose, and must be deposited in a separate bank account within five days and paid within thirty days of declaration; and section 127 makes failure to pay within thirty days punishable.

Individual rights belong to the member personally and cannot be taken from him by a majority. The right to vote, guaranteed by section 47, under which every member of a company limited by shares and holding equity capital has a right to vote on every resolution in proportion to his share of the paid-up capital, and a preference shareholder has a right to vote on resolutions directly affecting his rights, on a resolution for winding up, or for the repayment or reduction of capital, and acquires a right to vote on every resolution if the dividend on his shares has not been paid for two years or more.

The right to have a transfer registered and to appeal against refusal under section 58, and to rectification of the register under section 59. The right to a share certificate within the periods in section 56(4). The right to dividend once declared, payable within thirty days under section 123(5). The right to a pre-emptive offer of a further issue under section 62(1)(a).

Protective rights. Relief against oppression and mismanagement under sections 241 and 242, subject to the threshold in section 244 and the Tribunal's power to waive it; a class action under section 245 against the company, its directors, its auditors including the audit firm and its experts and advisers, with the legal expenses recoverable from the Investor Education and Protection Fund under section 125(3)(d); an application for investigation under section 213; and the right to apply for winding up as a contributory under section 272(2), which may be presented even though he holds fully paid shares and even though the company has no assets at all.

Two limits, stated because a complete answer states them. Bacha F. Guzdar means that the rights are against the company and not in its property. And Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., (2021) 9 SCC 449, means that a member has no right to be or to remain a director, that the removal of a person from an office is not oppression of him as a member, and that the Tribunal cannot reinstate him; the shareholder's rights are those the Act and the articles give him, and dissatisfaction with the company's business decisions is not among them.

For full marks, cover: the modes, of which there are now two under the Act and one under the Insolvency and Bankruptcy Code, plus strike-off which is not winding up at all; then, at length, the effects, because the second limb is worth half the marks and is where most answers are thin, taking them in the order in which they operate, on the company, on the members, on the officers, on the creditors, on pending proceedings and on past transactions; and the distinction between winding up and dissolution, which is what the word "dissolution" in the question is testing.

The modes

Mode one, winding up by the Tribunal, sections 271 and 272. Section 271 gives five grounds: a special resolution that the company be wound up by the Tribunal; that 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; that on an application by the Registrar or a person authorised by the Central Government the Tribunal is of opinion that the affairs have been conducted in a fraudulent manner, or that the company was formed for a fraudulent and unlawful purpose, or that the persons concerned in its formation or management have been guilty of fraud, misfeasance or misconduct; default in filing financial statements or annual returns for the immediately preceding five consecutive financial years; and that it is just and equitable to wind up.

Inability to pay debts is no longer a ground. It was removed when the Insolvency and Bankruptcy Code, 2016, by section 255 read with the Eleventh Schedule, substituted section 271 with effect from 15 November 2016. A creditor of an insolvent company now applies under section 7 or section 9 of the Code.

Mode three, which is not winding up at all, strike-off under sections 248 to 252. A company with no business and nothing to distribute has its name removed by the Registrar under section 248(1), or on its own application under section 248(2) after extinguishing its liabilities, with the liability of directors, officers and members continuing under section 250 and restoration available under section 252 on appeal within three years or on application within twenty years.

And the route that most failing companies actually take, the corporate insolvency resolution process under sections 7, 9 and 10 of the Code, which is aimed at resolution and reaches liquidation under section 33 only if no plan is approved.

The effects of a winding up order

On the company's status. The company does not cease to exist. It retains its corporate personality until dissolution, and its property remains vested in it unless the Tribunal orders otherwise. What changes is who exercises its powers: the Company Liquidator appointed under section 275 takes custody of its property, books and papers under section 283, and the powers of the Board cease.

On legal proceedings. Section 279 provides that when a winding up order has been made, or a provisional liquidator appointed, no suit or other legal proceeding shall be commenced, and no pending suit or proceeding shall be proceeded with, except with the leave of the Tribunal and subject to such terms as it may impose; and any suit or proceeding pending in any court is transferred to the Tribunal. Section 280 gives the Tribunal jurisdiction to entertain and dispose of any suit or proceeding by or against the company, any claim made by or against it, any application under section 233 or 237, and any question of priorities or of law or fact arising in the winding up, notwithstanding anything in any other law.

On the members. The members become contributories. Section 2(26) defines a contributory as a person liable to contribute towards the assets of the company in the event of its being wound up, and includes the holder of fully paid shares. Section 285 requires the Tribunal to settle a list of contributories in two classes, the A list of present members and the B list of persons who were members within the year before the commencement of the winding up, the B list being liable only for debts contracted before they ceased to be members and only if the present members cannot satisfy the contributions required. Section 295 provides for the payment of debts by a contributory and the extent of set-off.

On past transactions. Section 328 allows the Tribunal to set aside a fraudulent preference made within six months before the commencement of the winding up. Section 329 avoids a transfer of property, other than in the ordinary course of business or in favour of a purchaser in good faith for valuable consideration, made within a year before the presentation of the petition. Section 330 avoids a transfer or assignment of all the company's property to trustees for the benefit of creditors. Section 331 deals with liabilities and rights of persons who have received a fraudulent preference.

On the persons responsible. Section 336 makes offences by officers of a company in liquidation punishable, including concealment of property, falsification of books and fraudulent removal of property.

Two contrasts worth drawing at the close

Winding up under the Act and liquidation under the Code are different in aim and in distribution. The Act's winding up is a court-supervised realisation for the benefit of the creditors in the statutory order of sections 326 and 327. The Code's liquidation follows a failed attempt at resolution and distributes under section 53, in which the insolvency resolution process costs come first, then workmen's dues for twenty four months and secured creditors who have relinquished their security together, then employees' wages for twelve months, then unsecured financial creditors, then Government dues and unpaid secured creditors, and only then the remaining debts, preference shareholders and equity shareholders.

The ground is made out only where the shareholding is more or less equal, there is a complete deadlock, there is a want of probity in the management, and there is no hope of the company continuing smoothly and efficiently. The Court also treated winding up as a remedy of last resort, to be refused where some other remedy is available, which section 273(2) now enacts in terms.

In re Yenidje Tobacco Co. Ltd., [1916] 2 Ch 426, supplies the clearest example of what does satisfy the test. Two men who had been competing tobacco manufacturers formed a company in which each was a director and each held half the shares. They quarrelled so completely that they would communicate only through the company secretary, and arbitration proceedings between them were pending. The Court of Appeal ordered winding up although the company was profitable, holding that where a company is in substance a partnership and the mutual confidence on which it rests has gone, it is just and equitable to dissolve it exactly as a partnership would be dissolved.

For full marks, cover: the notion in section 2(70) with the two elements and the deeming provision in section 25; then the golden rule, which is a named doctrine from a named case and must be attributed, with the modern statutory expression of it in section 26; then the remedies, which divide into remedies against the company and remedies against the persons responsible, and within each into common law and statutory, because that four-way division is the structure the examiner is marking.

The notion of a prospectus

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

The purpose of the whole apparatus is disclosure, because the investor in a public issue has no other source of information. Section 26 prescribes what must be disclosed and requires the document to be registered with the Registrar before publication; section 26(6) makes a prospectus invalid if issued more than ninety days after the copy was delivered; and sections 31, 32 and 33 provide the shelf, red herring and abridged variants.

The golden rule

The golden rule of framing a prospectus is that everything in it must be stated with strict and scrupulous accuracy, and nothing that would affect the mind of a reasonable investor may be concealed. It was stated by Kindersley V.C. in New Brunswick and Canada Railway and Land Co. v. Muggeridge, (1860) 1 Drew and Sm 363, and Indian textbooks have long called it the golden legacy: those who issue a prospectus hold out to the public great advantages which will accrue to persons who take shares, and public announcements are made holding out the prospect of great advantages; and the public who are invited to take shares ought to have the same opportunity of judging of everything which has a material bearing on the true character of the adventure as those who issue the prospectus.

The statutory expression of the rule is section 26 read with sections 34, 35 and 36. Section 26(1) requires the prospectus to state the information and set out the reports specified, including the objects of the issue, the utilisation of the proceeds, the management perception of risk factors, details of litigation and default, and the reports of auditors on profits, losses and assets. Section 26(3) permits a prospectus to be issued only when accompanied by the consent of experts named in it. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 carry the rule further for public issues, by requiring a due diligence certificate from the merchant banker and by making the risk factors, the basis of the issue price and the objects of the issue mandatory disclosures.

Remedies for a misstatement

The first question in any problem is always: is the claim against the company, or against the persons who made the statement. They are different remedies with different measures and different defences.

Remedies against the company.

Section 35, the statutory civil liability, is the primary remedy and the one to lead with. Where a person has subscribed for securities acting on any statement in the prospectus, or on an inclusion or omission of any matter, which is misleading and has sustained any loss or damage as a consequence, the company and every person who is a director at the time of issue, every person who has authorised himself to be named as a director, every promoter, every person who has authorised the issue of the prospectus, and every expert referred to in section 26(5), shall be liable to pay compensation to every person who has sustained the loss.

Section 35(2) gives three defences: that the person had withdrawn his consent before the issue of the prospectus and that it was issued without his authority or consent; that the prospectus was issued without his knowledge or consent and that on becoming aware of its issue he forthwith gave reasonable public notice that it was issued without his knowledge or consent; or that, as regards every misleading statement purported to be made by an expert or contained in an official document, he had reasonable ground to believe and did up to the time of the issue believe that the person making the statement was competent and had given the consent required, and that it fairly represented the statement.

Section 36 punishes the wider fraud of knowingly or recklessly making any statement, promise or forecast which is false, deceptive or misleading, or any dishonest concealment of material facts, in order to induce another person to enter into an agreement for acquiring, disposing of, subscribing for or underwriting securities, or to obtain credit facilities; it too is punishable under section 447.

Common law deceit and negligent misstatement remain available against the makers of the statement. The bar in deceit is high: Derry v. Peek, (1889) 14 App Cas 337, held that fraud requires proof that a false statement was made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false, and that an honest belief, however unreasonable, is a defence. It was that decision which produced the Directors Liability Act, 1890 in England and, in due course, section 35 in India, and knowing why section 35 exists is worth a mark in itself.

The regulatory remedy, which in practice matters most. The Securities and Exchange Board may act under sections 11(4), 11B and 15HA of its Act of 1992: it may restrain the persons responsible from accessing the securities market, impound the proceeds, direct refund, and impose a penalty of not less than five lakh rupees and up to twenty five crore rupees or three times the profit made, whichever is higher. In Sahara India Real Estate Corporation Ltd. v. Securities and Exchange Board of India, (2013) 1 SCC 1, refund of about twenty four thousand crore rupees with fifteen per cent interest was ordered against two unlisted companies which had raised money from about three crore investors while describing the exercise as a private placement.

Conclusion. A prospectus is any document, by whatever name, that invites the public to subscribe for or purchase securities, and section 25 catches the document that tries to avoid the description. The golden rule, from New Brunswick and Canada Railway v. Muggeridge, is that everything must be stated with strict and scrupulous accuracy and nothing material may be concealed, and Rex v. Kylsant shows that an omission can falsify a literally true statement.

For full marks, cover: two of the four at about twelve and a half marks each. All four are written below. Each opens with the governing rule, works the cases or the sections that decide it, and closes on the limit of the doctrine.

(a) The doctrine of lifting the corporate veil

The veil is the consequence of Salomon v. A. Salomon and Co. Ltd., [1897] AC 22. Aron Salomon incorporated his leather business, took twenty thousand and one of the twenty thousand and seven shares and secured debentures over the assets; when the company failed within a year the unsecured trade creditors argued that it was a sham and a mere agent for him. The House of Lords held unanimously that once the memorandum is duly signed and registered the company is at law a different person altogether from the subscribers, and that the motives of the incorporators are irrelevant. Lifting the veil means disregarding that separateness and looking at the persons behind it.

Judicial lifting has recognised categories, and each needs a case. Fraud or improper conduct: Gilford Motor Co. Ltd. v. Horne, [1933] Ch 935, where an employee bound by a covenant not to solicit his former employer's customers formed a company to do it and the injunction went against both; and Jones v. Lipman, [1962] 1 WLR 832, where a vendor transferred land to a company he controlled to defeat specific performance and the decree was made against the company too.

Evasion of legal obligation: Delhi Development Authority v. Skipper Construction Co. (P) Ltd., (1996) 4 SCC 622, where money was collected from purchasers for space the company did not own and the Supreme Court held that the corporate character may be disregarded where it is used to evade legal obligations or perpetrate fraud, directing that the personal properties of the directors and their family members be available.

The honest limit. Modern courts treat piercing as a remedy of last resort. The tendency, illustrated by Balwant Rai Saluja and by Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613, is to apply the ordinary law of agency, trust, tort or statute to reach the person behind the company, and to disregard the entity only where there is no other route. The doctrine is real, but a candidate who suggests that a court will lift the veil whenever the result seems unfair is overstating it.

(b) The legal position of directors

The Act does not state their position; it assumes it. Section 2(34) says only that a director means a director appointed to the Board of a company, and section 2(10) defines the Board as the collective body of the directors. The legal position has therefore been described by the courts in four ways, and the correct answer is that a director is all four at once, and none of them completely.

Managing partners or organs. They manage the business and are usually shareholders, so the description of them as managing partners captures their commercial role; and the organic theory, from Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd., [1915] AC 705, treats the Board as the directing mind and will of the company, whose state of mind is the company's state of mind, which is how a company acquires knowledge and intention for the purposes of the criminal law.

Employees, only sometimes. A director as such is not an employee; a whole-time or managing director under a contract of service is both, and the distinction matters for remuneration under section 197, for terminal benefits and for the labour statutes.

What the Act now supplies, in place of a definition, is a code of duties. Section 166: to act in accordance with the articles; to act in good faith 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; to exercise duties with due and reasonable care, skill and diligence and to exercise independent judgment; not to involve himself in a situation of conflict; not to achieve any undue gain, and if he does, to pay the amount of it to the company; and not to assign his office, any assignment being void.

The limit, and it is the one the Supreme Court drew in 2021. In Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., (2021) 9 SCC 449, the Court held that a person removed from the office of executive chairman has no remedy under section 241 merely for the removal, and that the Tribunal has no power to reinstate him. A director holds office at the pleasure of those who appoint him, and his protection lies in the procedure of section 169 and in the record of his dissent, not in a right to remain.

(c) Debentures: nature, issue and class

Section 2(30) defines a debenture as including debenture stock, bonds and any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not, and, since the Companies (Amendment) Act, 2017, excluding instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934 and such other instruments as may be prescribed in consultation with the Reserve Bank.

The floating charge deserves its own sentence, because it is the characteristic corporate security: it hovers over a class of assets that changes in the ordinary course of business, leaving the company free to deal with them, and crystallises into a fixed charge on default, on the commencement of winding up, on the appointment of a receiver or on the cessation of business.

Issue, under section 71. Section 71(1) permits an issue with an option to convert, wholly or partly, into shares at the time of redemption, only if approved by a special resolution in general meeting. Section 71(3) subjects secured debentures to prescribed terms and conditions, and Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 requires redemption within ten years, extended to thirty for infrastructure and certain classes, a charge on specific properties, the appointment of a debenture trustee before the issue and the execution of a trust deed within sixty days.

(d) Meetings under the Companies Act, 2013

There are two systems, and they must not be run together: meetings of the members and meetings of the Board.

The annual general meeting, section 96. Every company other than a One Person Company must hold one in each year; the first within nine months of the close of the first financial year and every subsequent one within six months of the close of the financial year, with not more than fifteen months between one and the next; the Registrar may extend by up to three months for special reason, except the first. It must be held between 9 a.m. and 6 p.m., not on a National Holiday, and at the registered office or some other place within the city, town or village where it is situated, though an unlisted company may meet anywhere in India with the written consent of all members in advance.

The extraordinary general meeting, section 100, is called by the Board on its own or on the requisition of members holding one tenth of the paid-up capital carrying voting rights, and section 100(4) allows the requisitionists to call it themselves within three months if the Board does not proceed within twenty one days. Section 98 allows the Tribunal to order a meeting where it is impracticable to call one, and to direct that one member present shall be a quorum.

Section 106 permits restriction of voting rights where calls are unpaid. Section 107 provides for a show of hands and section 109 for a poll, which must be ordered on a demand by members holding one tenth of the voting power or paid-up capital of five lakh rupees. Section 108 requires electronic voting for prescribed classes and section 110 requires postal ballot for prescribed items. Section 114 defines the ordinary resolution and the special resolution, which requires the votes in favour to be not less than three times the votes against. Section 117 requires prescribed resolutions to be filed, section 118 requires minutes within thirty days and makes them evidence, and section 119 gives members a right to inspect them.

Board meetings, sections 173 to 175. The first within thirty days of incorporation, and thereafter a minimum of four in a year with not more than one hundred and twenty days between two consecutive meetings; a small company, a One Person Company and a dormant company need hold only two a year under section 173(5). Not less than seven days' notice is required, and a meeting at shorter notice for urgent business is valid if at least one independent director is present or ratifies it.

One current development. The Ministry of Corporate Affairs permitted general meetings by video conferencing through a series of general circulars from April 2020, extended repeatedly, and the Corporate Laws (Amendment) Bill, 2026 would put that on a statutory footing by allowing an annual general meeting by video conferencing subject to a physical meeting at least once every three years, and by reducing the notice for a fully virtual extraordinary general meeting from twenty one days to seven. It was introduced on 23 March 2026 and referred to a Joint Parliamentary Committee, and is not law.

Conclusion. The four notes describe the four points at which company law meets its own foundations. The veil is what incorporation creates and sections 3A, 7(7)(b), 35(3), 75, 251 and 339, with cases from Gilford Motor to Skipper Construction, are the occasions on which it is lifted. The director is agent, trustee, organ and sometimes employee, and section 166 has replaced the argument about which he is with a list of what he must do. The debenture is debt with a trustee, a reserve and section 71(10) in place of a vote. And meetings are the machinery through which the members exercise the powers the Act reserves to them, with the numbers in sections 96, 101, 103, 105, 109, 114, 173 and 174 being what an examiner can actually mark.