Friday, 24 March 2017
Monday, 20 March 2017
Friday, 17 March 2017
Incorporation of Section (8) Company
INTRODUCTION
The concept of non-profit making company is quite old in India. In erstwhile Companies Act, 1956 it was regulated by Section 25 and that is why it was popular as Section 25 Company. However in Companies Act 2013 provisions related to non-profit making company are given in Section 8 read with Rule 19 and 20 of Companies (Incorporation) Rules, 2014.
Under Indian law, 3 legal forms exist for NGO or Non-Profit Organizations:
1. => Trusts
2. => Societies
3. => Section 8 Companies
Due to better laws, Section 8 Companies have the most reliable strongest organizational structure
1. => Indian Trusts have no central law.
2. => Indian Societies have different legal and institutional frameworks from state to state.
3. => Indian Companies (incl. Sec 8 companies), have one uniform law across the country – Companies Act, 2013.
It is this robust Act that regulates the formation, management and accountability of a Section 25 company, thus making it more closely regulated and monitored than trusts and societies, and recognized all over the world.
Through this article we shall discuss the basic provisions and procedure for incorporation of a non-profit making company as given in Section 8 read with Rule 19 and 20 of Companies (Incorporation) Rules, 2014.
Section 8 Company or a Non-Profit organization (NPO) is a Company established for promoting commerce, art, science, religion, charity or any other useful object, provided the profits, if any, or other income is applied for promoting only the objects of the company and no dividend is paid to its members.
An NPO/NGO can be formed for promotion of any useful object like sports, education, research activities etc. The term No Profit does not mean that the Company cannot generate profit or income, but it essentially means applying the income for further promotion of the object and not for distributing it to the promoters. It means that the Company can earn profits but the promoters cannot be benefited out of those profits.
Corresponding provisions of the Companies Act, 1956: Section 25
Corresponding provisions of the English Companies Act, 2006: Sections 42, 181 and 226
A COMPANY INCORPORATED UNDER SECTION 8 OF THE COMPANIES ACT 2013 IS:
As per Section 8 (1): A Non-profit making Company is a Company which:
(a) Has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
(b) Intends to apply its profits, if any, or other income in promoting its objects; and
(c) Intends to prohibit the payment of any dividend to its members.
IMPORTANT PROVISIONS:
IMPORTANT PROVISIONS RELATING TO SECTION- 8 COMPANIES:
• These companies incorporated only for promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object.
• Non- Small Company: As per Section 2 (85) Proviso(B) – Section-8 Company will not treated as Small Company.
• Status of Limited Company: As per Section 8(2) – Section 8 Company shall enjoy all the privileges and be subject to all the obligations of Limited Company.
• It is duty of Company to prove to Central Government that it will incorporate for above mentioned purpose only.
• License by Central Government: The Central Government may issue license with such conditions as it deems fit and allow the registration of such person or association of persons as a limited company without the addition to its name of the word “Limited”, or as the case may be, the words “Private Limited”.
• Power of ROC: The power of the Central government is delegated to the Registrar of Companies (‘ROC’) having Jurisdiction over the area where the Registered office of the company is proposed to be situated.2 Hence, the application for registering such company is to be made to the ROC.
• Firm as a member of Non-Profit making Company: As per section 8(3) a partnership firm may become a member of the non-profit making company registered under section 8. Membership of such firm shall cease upon dissolution of the firm. However, partners of the dissolved firm may continue to be the members of such company in their individual capacity
• Key Benefits:
· Many privileges and exemptions under Company Law.
· Exemption of Stamp duty for registration.
· Registered partnership firm can be a member in its own capacity.
· Tax deductions to the donors of the Company u/s. 80G of the Income Tax Act.
• Without Share Capital: These companies can be formed with or without share capital, in case they are formed without capital, the necessary funds for carrying the business are brought in form of donations , subscriptions from members and general public.
• Not Required To Add The Suffix: Section 8 Companies are not required to add the suffix Limited or Private Limited at the end of their name. All companies having limited liability are required to use the term ‘limited’ or ‘private limited’ as the case may be in their names as required by section 13. But section 25 companies are allowed to dispense with the use of term ‘limited’ or ‘private limited’ from their names [sub-sec. (6)]. This helps the company to enjoy limited liability without disclosing to the public the nature of liability of its members
• Easy Transferable Ownership: The shares and other interest of any member in the Company shall be a movable property and can be transferable in the manner provided by the Articles, which is otherwise not easily possible in other business forms. Therefore, it is easier to become or leave the membership of the Company or otherwise it is easier to transfer the ownership.
DISADVANDATE:-
The DISADVANTAGES of section 8 companies over other companies registered under companies act are discussed below:
Though a Section 8 Company has many advantages and enjoys many privileges yet there are some statutory obligations which are required to be complied with and taken care of by such companies.
• Key Conditions:
· Profit or Income of the Company shall be applied for the promotion of the main object
· Declaration of dividend or distribution of profit to the promoters is not allowed
· No member shall be appointed as a remunerated officer
· No remuneration / benefit shall be paid to a member being a servant / officer of the Company (except reimbursement of out of pocket expenses, reasonable interest on money lent or reasonable rent on the premises)
• Utilization of Profit: A Section 8 Company has to ensure that its profits and all other incomes are utilized only for the purpose of promoting its objects and not for any other purpose.
• It should also ensure that its profits are not distributed as dividend among its members.
• No Change in AOA and MOA: A company registered under this section shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government.
• Condition by Central Government: If the Central Government has imposed some conditions and regulations upon the company for granting a license under section 8 then such a company is bound by such conditions and has to ensure adequate compliance with them. Where such conditions and regulations have been imposed then such conditions and regulations are required to be included in the Articles or/and memorandum of the company as may be directed by the government.
• Tax Liability: Section 25 Company is regarded as a ‘company’ within the meaning of the Income Tax Act, 1961 and as such its income is taxable according to the applicable rates similar to those applying to other companies.
PROCEDURE:
THE PROCEDURE FOR INCORPORATION OF IS AS FOLLOWS:-
WHAT DOES THE ACT SAY REGARDING PRE INCORPORATION AND POST INCORPORATION?
PREINCORPORATION:
1. NORMAL CONDITIONS:
· At Least 2 Promoters: Promoters who will promote/ incorporate the company. Promoters may be individual or body corporate.
· At Least 2 Directors: Directors should be individual only. No Body corporate/ HUF or Partnership Firm can be appointed as Directors.
· Generally, in most of the cases, Promoters and Directors are the same in Private Limited Companies.
2. OBTAIN DIGITAL SIGNATURE- The Subscriber applying for availability of name and the proposed Directors need to have DSC. AS per Ministry of Corporate Affairs Class-II DSC is required for e-Filings under MCA21. Subscriber an apply with any of DSC Vender i.e. E Mudra/ Siffy/ TCS etc
3. OBTAIN DIN- As envisaged under section 153 an individual intending to become Director needs to obtain DIN. For obtaining DIN e-form DIR-3 has to be filed which has to be certified by a practicing professional.
4. APPLY FOR NAME:-
a. As per section 4(4) read with rule 9 application is to be made in e-form INC-1 for reserving the name agreed to by the Promoters (Six proposed names can be given). It has to also be ensured that the name being sought for is available and it is lawful. No need to add the suffix Limited or Private Limited at the end of their name.
b. The promoters should apply for the name of the company to be approved with the concerned ROC of the State where the company has to be formed in E Form- INC- 1 by payment of Rs. 1000 through Credit Card or Net Banking.
c. One of the Promoters should fill up e-form INC-1, digitally sign by Promoter and Professional and then upload the e-Form on the MCA21 Portal. Before doing so, the following three points have to be complied with:
i. All the Promoters should have their DIN No. ii. At least one Promoter should have the DSC. (Class 2 Digital Signature) iii. The proposed names selected should fall in guidelines prescribed.
d. Info. Require to give in form INC-1 (Describing the Capital of Company, Main Objects, State in Which the Company is to be Incorporated and to Affix the Digital of Applicant).
e. The reservation by the Registrar of name applied for is valid for 60 days from the date of application. Hence if a company is proposed to be registered with the said name referred to above, the promoters shall produce the documents to the Registrar for registration with in a period of 60 days from the date of application for name. If Promoters fail to file all the relevant form for incorporation within 60 days, then name will not be Available for you, Promoter have to file form INC-1 again for approval of Name.
After Name Approval Process:
Once Name is approved by ROC, following are the Pre-Incorporation Steps:
5. DRAFTING OF MEMORANDUM OF ASSOCIATION (MOA) AND ARTICLE OF ASSOCIATION (AOA):
Drafting of Memorandum of Association (MOA) and Article of Association (AOA) is generally a step subsequent to the availability of name made by the registrar It should be noted that the main objects should match with the objects shown in e-Form INC-1 and must reflect in the name of company (Name should be like that a lay man can estimate the objects of company by Name of Company).
These two documents are basically the charter and internal rules and regulations of the company. Therefore, it must be drafted with utmost care and with the advice of the professional. The Directors/ promoters with the help of professional draft MOA and AOA.
Article of Association contains the internal regulations of the Company so care should be taken while drafting it. The model articles are given under table F of Schedule I. Now under Companies Act, 2013 requirement for making alteration to certain clauses of AOA can be made more stringent by way of inserting entrenchment provision.
Also ensure that the MOA & AOA are not ultra-vires the law (Section 6)
The formats of MOA are given in Form INC-13.
Format of MOA and AOA revised from time to time because of change in Companies Act and recently Companies Act 2013 laid down another form of MOA which has total twelve clause. MOA of Section 8 company registration (previously called section 25 company) has been prescribed in form INC-13 by the companies act 2013 followed by rule 19 sub rule 2 of companies incorporation rule 2014. Procedure for drafting MOA of section 8 company start from 1st clause which contain name of the section 25 or 8 company example XYZ Foundation or XYZ association etc. Second clause state to mention state in which registered office of the proposed section 8 company will be situated example NCT of Delhi for Delhi or State of Haryana for Haryana etc.
Third clause of INC-13 i.e. MOA contains charitable object of section 8 company i.e. to establish industrial training center or college or social service center etc. i.e. only object having charitable purpose and restricted company to support with its fund which will make trade union or other company which are observed by its member.
Clause four of moa clearly mention that object of the company extend whole of India except J & K.
Fifth clause of the MOA restricted diversion of section 8 company income or property to any of its member or its related party in any form. It has also been clarified that profit of such company can only be utilized for its charitable object. Prudent Remuneration allowed to its member only when he actually provides services to the company.
Clause 6 provides that memorandum of association cannot be altered unless alteration has been previously approved by the registrar of company. Clause seven state liability of the member is limited clause eight contain information about share capital of the company. Clause 9 required to maintain certain record and books for expenditure income assets etc. and once in an every year accounts shall be examined by auditor about correctness of balance sheet and income & expenditure. Clause ten mentioned about dissolution of section 8 company and whereas clause eleven states section 8 company can be amalgamated only with section eight company having similar object and clause 12 contains detail of subscriber of MOA. Format of AOA of section eight company is same as for private limited company registration.
Model Question Paper for Revised second Semester CRA
B. COM DEGREE (CBCSS) Examination
Second Semester Core Course 6
CORPORATE RUGULATIONS AND ADMINISTRATION
Time: Three Hours Max. Marks: 80
Section – A
Answer all questions.
Each question carries one mark.
1. What is NCLT?
2. Define sweat equity.
3. What is annual return?
4. Define Small company as per section 2(85)
5. What is private placement?
6. What is red-herring prospectus?
7. What is CRR?
8. Define GDR?
9. What is doctrine of ultravires?
10. What do you mean by bonus share?
(10 x 1 = 10 Marks)
Section – B
Answer any eight questions.
Each question carries two marks.
11. What do you mean by Section 8 Company?
12. What is buy back of shares?
13. What do you mean by foreign register?
14. Who is an ‘independent director’?
15. What is doctrine of constructive notice?
16. What do you mean by differential voting right?
17. Distinguish between a private company and a public company.
18. Differentiate between ordinary resolution and special resolution
19. Differentiate between company limited by guarantee and company limited by shares.
20. Name the documents to be submitted with the Registrar for registration.
21. Explain quorum for meeting of members u/s 103?
22. Differentiate between transfer and transmission of shares
(8x2 = 16 Marks)
Section – C
Answer any six questions. Each question carries four marks.
23. Who is an officer in default as per section 2(60) of the Companies Act 2013?
24. What is meant by corporate veil? Which are the situations in which corporate veil shall be lifted?
25. What are the liabilities for mis-statement in prospectus?
26. ‘Alteration of Memorandum is subject to certain condtions’ Point out major legal conditions for the
alteration of clauses.
27. What is doctrine of Indoor Management? What are the exceptions to the doctrine?
ONE PERSON COMPANY UNDER COMPANIES ACT, 2013
ONE PERSON COMPANY UNDER COMPANIES ACT, 2013
Definition of One Person Company (“OPC”)
Section 2(62) of the Companies Act, 2013 (“Act”) defines OPC as a company which has only one person as a member.
Legal Nature of OPC
OPC can be registered only as a private company which means that all the provisions applicable to private company will be applicable to an OPC, unless otherwise expressly excluded in the Act or rules made thereunder.
How OPC is different from a ‘Sole Proprietorship’
1
Naming the OPC
Section 3(1)(c) of the Act provides that the words ‘One Person Company’ must be mentioned below the name of the company in bracket wherever it appears.[1]
Who can incorporate an OPC?
Any naturally born Indian who is also a resident of India (i.e. have stayed in India for at least 182 days during the immediately preceding FY).[2] However, one of such person cannot form more than one OPC.[3]
Restriction on Incorporation of an OPC
OPC cannot be incorporated or converted into Section 8 Company (i.e. company with charitable objects, etc.) or carry out non-banking financial activities, including investment in securities of any body corporate.
How many types of OPCs can be incorporated under the Act?
There can be five types of OPCs that can be incorporated under the new Act, viz.
OPC Limited by Shares;
OPC Limited by Guarantee with Share Capital;
OPC Limited by Guarantee without Share Capital;
Unlimited OPC with Share Capital, and
Unlimited OPC with Share Capital.
2
OPC Limited by Shares
Just like a private company limited by shares, an OPC must have a minimum paid-up capital of Rs. 1 Lakh and cannot make invitation to public to subscribe for its securities. The restriction on right to transfer shares as applicable to a private company shall also apply to an OPC.
Members and Directors in an OPC
The minimum and maximum number of members in an OPC can be only one. As per Section 152(1) of the Act, an individual being member of OPC is deemed as First Director of the OPC until the director(s) are duly appointed by the member. The minimum and maximum number of directors in an OPC can be one (1)[4] and fifteen (15) respectively. In order to increase the number of directors beyond 15 directors, a special resolution must be passed by the OPC to that effect.
Nominee in an OPC
An OPC must mention one person as ‘Nominee’ in the event of death, incapacity, etc. who will- (a) become a member of OPC[5]; (b) be entitled to all shares of the OPC, and (c) bear all liabilities of OPC. However, written consent of such Nominee to act as nominee must be obtained and filed with the RoC at the time of incorporation along with MoA and AoA.[6]
A Nominee may, withdraw his consent by giving a notice in writing to the sole member and to the OPC. The sole member then nominates another person as nominee within 15 days of the receipt of the notice of withdrawal. Further, the OPC is required to file with RoC: (a) notice of such withdrawal of consent; (b) name of the new person nominated by it (in Form No INC-4 along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014), and (c) written consent of the new person so nominated (in Form No. INC.3).The above filing requirement has to be fulfilled within 30 days of receipt of the notice of withdrawal of consent from the earlier nominee. Also, a Nominee can be changed at any time by providing a notice to the RoC.
Ordinary and Special Resolutions by an OPC
Section 114 of the new Act is talks about ordinary and special resolutions. As per S. 122(3), it will be sufficient for an OPC, if the resolution is communicated by the member to the Company in the minutes book (as required under section 118) and signed and dated by the member. Such date will be then considered as date of meeting. Where there is only one director on the Board of an OPC, a resolution by such director has to be entered into the minutes book and signed and dated by such director.[7]
Board Meetings and AGM
OPC (also Small Cos. and Dormant Cos.) is deemed to have complied with S. 173, if at least one meeting of the BoD is has been conducted in each half of a calendar year and the gap between two meeting is not less than 90 days.[8] Section 173 and 174 (Quorum of Meeting of BoD) will not apply to an OPC in which there is only one director on its Board. Further, an OPC is not required to hold an AGM.[9]
Financial Statements of an OPC
Financial Statement of an OPC has to be approved by the Board and needs to be signed by only one director for submission to the auditor. It is to be noted that an OPC need not prepare Cash Flow Statement as part of its financial statement.[10] The copy of such financial statement along with other documents etc. must be filed with the RoC within 180 days from the closure of the financial year.[11] Report of the Board to be attached to the financial statement shall mean, in case of an OPC, a report containing explanations or comments by the Board on every qualifications, reservations or adverse remarks or disclaimer made by the auditor in his report.
Annual Returns & Auditor’s Report of an OPC
Annual Returns of an OPC must be signed by a company secretary and the director. In case there is no company secretary, the signature is required only from the Director.[12] Mandatory rotation of auditor after expiry of maximum term is not applicable to an OPC.
Contract between OPC and Member
Where an OPC enters into a contract with its sole member (who is also the director), unless the contract is in writing, the OPC should shall ensure that the terms of the contract/ offer are incorporated in the memorandum of the OPC or recorded in the first meeting of the Board held next after entering into such contract.[13] The above provision is, however, not applicable if the contracts are entered into by the company in the ordinary course of business. The other requirement is that the OPC must intimate the RoC about every such contract recorded in the minute book of its Board under section 193(1) within 15 days of the date of approval by thye Board.
Penalty of non-compliance with the provision of the Act
If an OPC or any officer of such company contravenes the provisions of Co. Incorporation Rules, 2014, such contravening party will be punishable with fine which may extend to Rs. 10,000/- and with a further fine which may extend to Rs. 1000 for every day after the first during which such contravention continues.[14]
List of Exemptions Available to OPCs under the Act
Following sections are not applicable to OPCs-
98 (Power of Tribunal to call meetings of members, etc.)
100 (Calling of EGM)
101 & 102 (Notice of Meeting & Statements to be annexed to Notice)
103 (Quorum of Meetings)
104 (Chairman of Meetings)
105 (Proxies)
106 (Restriction on Voting Rights)
107 & 108 (Voting by show of Hands & by Electronic Mode)
109 & 110 (Demand for Poll & Postal Ballot)
111 (Circulation of Member’s Resolutions)
Thursday, 9 March 2017
Corporate Accounting PQP 1
Tuesday, 7 March 2017
Advantages and disadvantages of using email
Advantages and disadvantages of using email
Advantages
Emails are delivered extremely fast when compared to traditional post.
Emails can be sent 24 hours a day, 365 days a year.
Webmail means emails can be sent and received from any computer, anywhere in the world, that has an Internet connection.
Cheap - when using broadband, each email sent is effectively free. Dial-up users are charged at local call rates but it only takes a few seconds (for conventional email, eg text only) to send an email.
Emails can be sent to one person or several people.
Disadvantages
The recipient needs access to the Internet to receive email.
Viruses are easily spread via email attachments (most email providers scan emails for viruses on your behalf).
Phishing - sending an email to a user falsely claiming to be a legitimate company to scam the user into providing information, such as personal information and bank account numbers on a bogus website. The details will then be used for identity theft.
No guarantee the mail will be read until the user logs on and checks their email.
Spam - unsolicited email, ie junk mail.
Friday, 17 February 2017
Components of Business Letter
The Heading (The Retern Address) or Letterhead - Companies usually use printed paper where heading or letterhead is specially designed at the top of the sheet. It bears all the necessary information about the organisation’s identity.
Date - Date of writing. The month should be fully spelled out and the year written with all four digits October 12, 2005
(12 October 2005 - UK style). The date is aligned with the return address. The number of the date is pronounced as an ordinal figure, though the endings st, nd, rd, th, are often omitted in writing. The article before the number of the day is pronounced but not written. In the body of the letter, however, the article is written when the name of the month is not mentioned with the day.
The Inside Address - In a business or formal letter you should give the address of the recipient after your own address. Include the recipient's name, company, address and postal code. Add job title if appropriate. Separate the recipient's name and title with a comma. Double check that you have the correct spelling of the recipient 's name.
The Inside Address is always on the left margin. If an 8 1/2" x 11" paper is folded in thirds to fit in a standard 9" business envelope, the inside address can appear through the window in the envelope.
The Greeting - Also called the salutation. The type of salutation depends on your relationship with the recipient. It normally begins with the word "Dear" and always includes the person's last name. Use every resource possible to address your letter to an actual person. If you do not know the name or the sex of of your reciever address it to Dear Madam/Sir (or Dear Sales Manager or Dear Human Resources Director). As a general rule the greeting in a business letter ends in a colon (US style). It is also acceptable to use a comma (UK style).
The Subject Line (optional) - Its inclusion can help the recipient in dealing successfully with the aims of your letter. Normally the subject sentence is preceded with the word Subject: or Re: Subject line may be emphasized by underlining, using bold font, or all captial letters. It is usually placed one line below the greeting but alternatively can be located directly after the "inside address," before the "greeting."
The Body Paragraphs - The body is where you explain why you’re writing. It’s the main part of the business letter. Make sure the receiver knows who you are and why you are writing but try to avoid starting with "I". Use a new paragraph when you wish to introduce a new idea or element into your letter. Depending on the letter style you choose, paragraphs may be indented. Regardless of format, skip a line between paragraphs.
The Complimentary Close - This short, polite closing ends always with a comma. It is either at the left margin or its left edge is in the center, depending on the Business Letter Style that you use. It begins at the same column the heading does. The traditional rule of etiquette in Britain is that a formal letter starting "Dear Sir or Madam" must end "Yours faithfully", while a letter starting "Dear " must end "Yours sincerely". (Note: the second word of the closing is NOT capitalized)
Signature and Writer’s identification - The signature is the last part of the letter. You should sign your first and last names. The signature line may include a second line for a title, if appropriate. The signature should start directly above the first letter of the signature line in the space between the close and the signature line. Use blue or black ink.
Initials, Enclosures, Copies - Initials are to be included if someone other than the writer types the letter. If you include other material in the letter, put 'Enclosure', 'Enc.', or ' Encs. ', as appropriate, two lines below the last entry. cc means a copy or copies are sent to someone else.
Thursday, 16 February 2017
Soft skills
Soft skills are a combination of interpersonal people skills, social skills, communication skills, character traits, attitudes, career attributes and emotional intelligence quotient (EQ) among others that enable people to effectively navigate their environment, work well with others, perform well, and achieve their goals with complementing hard skills.
Saturday, 11 February 2017
Wednesday, 8 February 2017
Wednesday, 1 February 2017
Doctrine Of Constructive Notice
INTRODUCTION
Section 610 of the Companies Act, 1956 provides the inspection, production and evidence of documents kept by Registrar. It provides that the memorandum and articles when registered with Registrar of Companies becomes public document and then they can be inspected by anyone on payment of a nominal fee. Therefore, any person who contemplates entering into a contract with the company has the means of ascertaining and is thus presumed to know the powers of the company has the means of ascertaining and is thus presumed to know the powers of the company and the extent to which they have been delegated to the directors. In other words, every person dealing with the company is presumed to have read these documents and understood them in their true perspective. This is known as doctrine of constructive notice. [1]
The memorandum of association and articles of association are two most important documents needed for registration and incorporation of a company. The memorandum of association of a company contains the fundamental conditions upon which alone the company has been incorporated. According to Section 2(28) of the Companies Act, 1956 defines the memorandum means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act. According to Palmer, the memorandum of association is a document of great importance in relation to the proposed company. [2] It contains the objects for which the company is formed and therefore identifies the possible scope of its operation scope of its operation beyond which its action cannot go.
The Articles of association of a company are its bye-laws or rules and regulations that govern the management of its internal affairs and the conduct of its business. According to section 2(2) of the Companies Act, 1956 ‘articles’ means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies laws or of the present Act.
Both memorandum of association and the articles of association are public documents according to section 610 of the Act. These documents become public documents as soon as they get registered and can be accessible by any members of the public under the provision of the Act. Therefore, notice about the contents of memorandum and articles is said to be within the knowledge of both members and non-members of the company. Such notice is a deemed notice in case of a members and a constructive notice in case of non-members.
The rule of constructive notice extends not merely to Memorandum and Articles but also to all such documents as are required to be registered with the Registrar of Companies. There is however no constructive notice of documents which are filed with the Registrar of Companies for the sake of record only. [3]
The effect of the doctrine of constructive notice is harsh on the outsider who does business with a company. An outsider who dealt with a company is deemed to have a constructive notice of the contents of the documents of the company. An outsider cannot claim relief on the ground that he was unaware of the powers of the company in case of ultra vires of the company.
The ‘doctrine of constructive notice’ is more or less an unreal doctrine. It does not take notice of the realities of business life. People know a company through its officers and not through its documents. [4] The courts in India do not seem to have taken it seriously though. For example, in Dehra Dun Mussorie Electric Tramway Co. v. Jagmandardas, the Allahabad high court allowed an overdraft incurred by the managing agent of a company when under the articles the directors had no power to delegate their borrowing power.
The European Communities Act, 1972 contained the provision of constructive notice, which has now abrogated. A person who dealt with a company was at common law deemed to have notice of the contents of its memorandum and articles of association when the company’s certificate of incorporation was issued by the Registrar of Companies and such a person also had constructive notice of the other documents which companies were required to deliver to the registrar of companies, provided they were open to public inspection and had been gazetted where necessary. This is no longer since an amendment was made in 1989 to the Companies Act 1985, providing that a person shall not be taken to have notice of any matter merely because it is disclosed in a document delivered to the Registrar of Companies and so is available to public inspection. The statutorily modified doctrine of constructive notice may therefore, according to the circumstances, mean that a person will be treated as being aware of the contents of certain documents filed in respect of the company with which he deals. These documents will tell the person who deals with the company what objects it may pursue, how much share capital it ahs issued and may issue in future, how its board of directors is constituted etc. In theory, therefore, a person who deals with a company cannot complain if a transaction which he enters into with the company is held to be invalid because it patently conflicts with the provisions or requirements of those documents which he could, and should in the circumstances, have inspected, at the companies registry.
As criticisms of the doctrine of constructive notice, the new theory called the doctrine of indoor management has been evolved by the courts. The doctrine of constructive notice seeks to protect the company against the outsider; the other doctrine operates to protect outsiders against the company. The rule of indoor management is based upon obvious reasons of convenience in business relations. Firstly, the memorandum and articles of association are public documents, open to public documents. But, the details of internal procedures are not thus open to public inspection. [5] Hence, an outsider is presumed to know the constitution of a company; but not what may or may not have taken place within the doors that are closed to him.
EFFECT OF THE DOCTRINE OF CONSTRUCTIVE LIABILITY
The effect of the doctrine of constructive liability is harsh on the other party. It is, therefore, the duty of every person dealing with a company to inspect its public documents and make sure that his contract is in conformity with their provisions. The Madras High Court discussed the scope of the rule of constructive liability in kotla Venkataswamy v. Rammurthy. [6] The dispute in this case was whether the mortgage bond was validly executed as per the company’s articles of association so as to make the company liable. Article 15, of the Company's Articles of Association provides that all deeds, hundies, cheques, certificates and other instruments hall be signed by the Managing director, the Secretary and the working Director on behalf of the Company, and shall be considered valid. In the instant case, the plaintiff accepted a deed of mortgage executed by the secretary and a working director only. The court held that the plaintiff could not claim under this deed. The Court further observed that if the plaintiff had consulted the articles she would have discovered that a deed such as she took required execution by three specified officers of the company and she would have refrained from accepting a deed inadequately signed. Notwithstanding, therefore, she may have acted in good faith and her money may have been applied to the purposes of the company, the bond is nevertheless invalid.
One of the effects of the rule of constructive liability is that a person dealing with the company is considered not only to have read those documents but to have understood them according to their proper meaning. He is presumed to have understood not merely the company’s powers but also those of its officers. [7]
In Re Jon Beauforte (London) Ltd case [8] , where the insolvent company’s stated objects were to manufacture dresses but it had for sometime instead been making veneered panels, a combination of actual knowledge of the business being carried on by the company and of constructive notice of its stated objects resulted in all but one of its creditors’ claim being ultra vires. The court said that the result of this rule of constructive notice was that where the business being carried on by the company were known to the third party and, whether he actually knew it or not, were ultra vires, he would be unable to sue the company.
In case of ultra vires acts of the company the other party cannot claim relief on the ground that he was unaware of the powers of the company. The rules of common law established over the years have already provided extensive protection for persons dealing with a company in good faith where the act or transaction concerning or involving such persons is not ultra vires and beyond the company’s powers. The Court in Royal British Bank v. Turquand [9] established a principal to provide the protection to other party who is dealing with a company. According to the rule propounded in this case, although those dealing with a company were deemed to have notice of the contents of memorandum and articles, they were not required to satisfy themselves that all the internal regulations se out therein had been complied with. This, however, was no help when the transaction was beyond the company’s capacity.
COMMON LAW CASES
The rule of constructive notice was laid down by the House of Lords in Ernest v. Nicholls [10] and was further explained by House of Lords in Mahony v. East Holyford Mining Co case. Lord Wensleydale in Ernest case took the view that the rules of partnership would apply in the absence of the doctrine of constructive liability. The objective was to hold the shareholders liable. The observation of Lord Wensleydale is not clear. However, it appears that he seems to have considered that it was to avoid this result that the legislature saw fit to require a company to register articles and so to make available the world information so as to make available to the world information as to who were the persons authorized to bind the shareholders. [11]
The British Courts in several cases observed that the doctrine of constructive notice has a potentially drastic effect on outsiders as they were deemed to know about any internal procedures in the constitution as it is a public document. So, sometimes, even though an action is within the capacity of the company, it may be outside the powers of the individual representing the company because an internal procedure was not complied with. For example in Knopp v. Thane Investment Limited (2003) the court found the director’s failure to observe the articles rendered a contract contrary to the articles unenforceable. If the doctrine of constructive notice was applied strictly the outsider could not complain about the lack of authority as they were deemed to know that there was a limit on the actual authority of the company’s agent. [12]
However, the Courts were often keen to mitigate the effect of constructive notice. In Royal British Bank v. Turquand (1856) an action was brought for the return of money borrowed by the company. The company argued that it was not required to pay back the money because the manager who negotiated the loan should have been authorized by a resolution of the general meeting to borrow but he had no such authorization. As a result of the doctrine of constructive notice the bank was deemed to know this. The Court held that the public documents only revealed that a resolution was required not whether the resolution had been passed. The bank had no knowledge the resolution had not been passed and thus it did not appear on the face of the public documents that the borrowing was invalid.
Criticism Of Doctrine Of Constructive Liability: Evolution Of Doctrine Of Indoor Management
The rule of constructive notice has proved too inconvenient for business transaction, particularly where the directors or other officers of the company were empowered under the articles to exercise certain powers subject only to certain prior approvals or sanctions of the shareholders. Whether those sanctions and approvals had actually been obtained or not could not be ascertained because in real situations, the investors, vendors, creditors and other outsiders could not dare to ask the directors in so many words about those sanctions having been obtained or to produce the relevant resolutions. Since, there are no means to ascertain whether necessary sanctions and approvals have been obtained before a certain officer exercises his powers which, as per articles, can only be exercised subject to certain approvals, those dealing with the company can assume that if the directors or other officers are entering into those transactions, they would have obtained the necessary sanctions. This is known as the ‘doctrine of indoor management’ and was first laid down in the case of Royal British Bank v. Turquand. [13]
The Courts in India have also been reluctant in applying the doctrine of constructive liability. The Allahbada High Court in Dehradun Mussoorie Electric Tramway Co. v. Jagamanandaradas [14] case rejected the doctrine of constructive liability and the Company was held liable to the party to the transaction even the directors of the company borrowed the money which was neither in compliance with the articles nor it was done after obtaining the resolution in the general body.
The Madras High Court in the case of official Liquidator, Manasube & Co. (P.) Ltd. v. Commissioner of Police [15] observed that the lenders to a company should acquaint themselves with memorandum and articles, but they cannot be expected to embark upon an investigation as to legality, propriety and regularity of acts of directors.
STATUTORY REFORM OF CONSTRUCTIVE NOTICE
Section 9 of the European Communities Act, 1972 has abrogated the doctrine of constructive notice. The provision of Section 9 is now incorporated in Section 35 of the Companies Act, 1985. Additionally the Companies Act, 1989 introduced two further sections into the 1985 Act to deal with the constructive notice. Section 35B of the Companies Act satted:
“A party to a transaction with the company is not bound to enquire as to whether it is permitted by the company’s memorandum or as to any limitation on the powers of the board of directors to bind the company or authorize others to do so."
This was supposed to be introduced by Companies Act, 1985, S.711A which was to abolish the concept of constructive notice for corporations. However, S.711A has never been implemented and so only section 35 B dealt with constructive notice. [16]
An example of the impact of this provision was seen in the case of TCB Limited v. Gray, [17] where the debenture issued by the company was signed by solicitor but not by the director himself. The articles of the company required the signature of the director for this purpose. Even so, the company was held liable. Stating the effect of the new provision, the Court said that before this enactment came into force a person dealing with the company was required to look into the memorandum and articles of the company to satisfy himself that the transaction was within the corporate capacity but that section 9(1) had changed this. The sub-section says that good faith is to be presumed and that the person dealing with the company is not bound to inquire. [18]
CONCLUSION
The rule of constructive liability is a unrealistic doctrine. It is an imaginary doctrine and is a fiction created by the judicial pronouncement of the Courts. Innumerable parties enter into a number of contracts in everyday business of the company. This doctrine expects each and every outsider not only to know the documents of the company but also presume to understand the exact nature of documents, which is practically not possible. In reality, the company is not known by the documents but by the people who represent it and deal with an outsider. The outsiders do the business and enter into contracts not always on the basis of documents of the company but the goodwill and the reputation of the directors or officers who are representing the company.
This is the reason why the British Courts and Indian Courts have shifted its approach in dealing with the cases relating to the outsider of the company. The Indian Courts have not given much importance to this doctrine. The European Communities Act has also abrogated the concept of constructive notice by bringing Section 9 of the Act which recognizes the concept of good faith in business transaction. This provision is in the tune of the reality of the business transaction, where the outsiders of the company enter into the various contracts not on the basis of the documents of the company but on the good faith of the company.
This is the reason why the courts have evolved the doctrine of indoor management as an opposite to the doctrine of constructive notice in order to protect the interests of the outsiders.
The researcher on the basis of the various commentaries on the subject and the cases decided by the British Courts and Indian Courts is of view that merely registration of a company should not constitute the notice of the documents submitted to the registrar. Also, an outsider should always have the freedom to make some assumption which a reasonable person may infer into the particular circumstances.