LLM Group 2 Business Law Corporate Law 2015 Question Paper with Solutions

For full marks, cover: the four limbs in the order the paper sets them, each anchored on a section of the Companies Act, 2013; the registration process as it actually works now, through SPICe+ and the declaration under section 10A rather than the abolished certificate of commencement; the advantages of incorporation proved through Salomon, Lee and Bacha F. Guzdar rather than merely listed; the six clauses of the memorandum under section 4 with the alteration each requires under section 13; and constructive notice stated with its counterweight, the rule in Turquand, and with an honest account of why the doctrine is in retreat everywhere except India.

The application itself is made under section 7(1) to the Registrar within whose jurisdiction the registered office is to be situated, and it must carry the memorandum and articles signed by all subscribers; a declaration by an advocate, a chartered accountant, a cost accountant or a company secretary engaged in the formation, and by a person named as a director, that the requirements of the Act have been complied with; a declaration from each subscriber and first director that he is not convicted of any offence in connection with the promotion, formation or management of a company and has not been found guilty of fraud or breach of duty in the preceding five years; the address for correspondence until the registered office is established; the particulars and proof of identity of every subscriber; and the particulars of the first directors with their Director Identification Numbers and their consent to act.

Section 9 states the effect of registration, and it is the provision the rest of company law is built on. From the date of incorporation mentioned in the certificate, the subscribers and every other person who becomes a member become a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under the Act, having perpetual succession, with power to acquire, hold and dispose of property both movable and immovable, tangible and intangible, to contract, and to sue and be sued. The common seal was made optional by the Companies (Amendment) Act, 2015, which is why section 9 no longer speaks of it.

Two further steps complete the process. Section 12(1) requires a company to have a registered office capable of receiving communications within thirty days of incorporation, and section 12(2) requires verification of it to be filed. Section 10A, inserted with effect from 2 November 2018, requires a company incorporated after the Companies (Amendment) Act, 2019 and having a share capital to file, within one hundred and eighty days, a declaration by a director that every subscriber has paid the value of the shares agreed to be taken by him, and prohibits the company from commencing business or exercising borrowing powers until that declaration and the section 12(2) verification are filed.

The Court of Appeal agreed. The House of Lords reversed unanimously and held that once the memorandum is duly signed and registered, the company is at law a different person altogether from the subscribers, and the motive of those who form it is irrelevant provided the Act is complied with. Salomon, as debenture holder, was paid before the unsecured creditors he had once traded with as a sole trader.

The proposition is not a technicality; it produces results that seem wrong until they are thought about. In Lee v. Lee's Air Farming Ltd., [1961] AC 12, Lee formed a company for aerial top-dressing in New Zealand, held all but one of its three thousand shares, was its governing director and was also employed by it as its chief pilot. He was killed while spraying. The Privy Council held that his widow was entitled to compensation as the widow of a "worker", because the company and Lee were distinct legal persons and there was no reason a man could not contract with a company he controlled.

The practical advantages follow from that one idea. Limited liability confines the member's exposure to the amount unpaid on his shares under section 2(22). Perpetual succession means that the death, insolvency or transfer of a member does not touch the company. The shares are movable property transferable in the manner provided by the articles under section 44, which gives the investor an exit the partner does not have.

The company can own property in its own name, so title does not have to be reassigned as members change, a proposition applied in Weavers Mills Ltd. v. Balkis Ammal, AIR 1969 Mad 462, decided by the Madras High Court on 1 September 1967, where two promoters had bought land in their own names by registered sale deeds of June 1945, before the company existed, and the company took possession after incorporation and built on it: the title was upheld although no conveyance was ever executed in the company's favour, because the promoters held the property in trust for the company it was bought for, and the vesting on incorporation required no writing. Capacity to sue and be sued in its own name, professional management separated from ownership, and access to public capital complete the list.

The objects clause under section 4(1)(c) states the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance of them; the Companies (Amendment) Act, 2017 removed the older split into main objects, incidental objects and other objects. The liability clause states whether the liability of the members is limited or unlimited. The capital clause states the amount of authorised capital and its division into shares of a fixed amount, with the number each subscriber agrees to take. The subscription or association clause carries the declaration of the subscribers, and in the case of a One Person Company the name of the nominee under section 4(1)(f).

The memorandum's importance is threefold, and each limb has a section behind it. First, it is the charter of the company's capacity: the objects clause marks the outer boundary of what the company may do, and an act beyond it is void as against the company and cannot be ratified even by the unanimous consent of the shareholders. In Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1875) LR 7 HL 653, a company whose objects were to make and sell railway carriages contracted to finance the construction of a railway in Belgium; the House of Lords held the contract void from the beginning, and that ratification by every shareholder could not cure it, because the company had no capacity to make it.

The doctrine of constructive notice

The doctrine holds that every person dealing with a company is deemed to have read its memorandum and articles and to have understood them properly. The reasoning is that these are public documents, registered with the Registrar and open to inspection under section 399 on payment of a fee, so a person who has not read them is in no better position than one who has.

The classic English statements are Ernest v. Nicholls, (1857) 6 HL Cas 401, and Oakbank Oil Co. v. Crum, (1882) 8 App Cas 65, and the doctrine has real teeth in India. In Kotla Venkataswamy v. Chinta Ramamurthy, AIR 1934 Mad 579, decided by Curgenven J. on 16 January 1934, the articles of the South Indian Agricultural and Industrial Improvement Company required that a deed be signed by the managing director, the secretary and the working director.

The doctrine is unfair to the honest outsider, and the law's answer is the rule in Turquand's case. In Royal British Bank v. Turquand, (1856) 6 E and B 327, the company's deed of settlement allowed it to borrow on bonds authorised by a resolution passed in general meeting. The directors gave a bond without a properly passed resolution. The bank was held entitled to enforce it: a person dealing with a company is bound to read the registered documents and see that the proposed transaction is not inconsistent with them, but he is not bound to do more, and may assume that the internal proceedings, which he cannot inspect, have been regularly carried out. This is the doctrine of indoor management, and it is the exception that makes constructive notice tolerable.

The exceptions to Turquand are where the answer earns marks. The rule does not protect a person with actual knowledge of the irregularity, nor one put on inquiry by suspicious circumstances, nor a forgery, because a forged document is a nullity and there is nothing to ratify: Ruben v. Great Fingall Consolidated, [1906] AC 439, where a share certificate bearing the forged signatures of two directors and the seal affixed by the secretary conferred no title.

Conclusion. Registration under sections 3, 4, 7, 9, 10A and 12 is the act that creates the person; incorporation gives that person a separate existence whose consequences run from Salomon's debentures to Mrs. Lee's compensation and Mrs. Guzdar's tax bill; the memorandum under section 4 defines what the person may do and binds it and its members under section 10; and constructive notice is the price the outsider pays for the memorandum being public, a price that Turquand reduces and that most modern systems have abolished. The four limbs are not four topics but one chain, and the strongest answer states them as one.