CONDITIONS AND WARRANTS CP-302 · 2019-01-21 · 1. Voluntary Waiver: The buyer may, if he so desires, treat the breach of a condition by the seller as a breach of warranty and make

Subject: Business Legislation

Course Code: CP-302 Author: Dr. Gagan Singh

Lesson No.: 6 Vetter: -Prof. M.C. Garg CONDITIONS AND WARRANTS

Structure

6.0 Objectives

6.1 Introduction

6.2 Meaning of Conditions and Warranties

6.2.1 Difference between Conditions and Warranty

6.2.2 When a Breach of Condition is Taken as a Breach

6.3 Express and Implied Conditions and Warranties

6.3.1 Implied Conditions

6.3.2 Implied Warranties

6.4 Doctrine of Caveat Emptor

6.5 Summary

6.6 Keywords

6.7 Self Assessment Questions

6.8 Suggested Readings

6.0 Objectives

After studying this unit, you should be able to:

Define the concept of ‘condition’ and ‘warranty’ in a contract of sale.

Describe the implied conditions and warranties in a contract of sales.

Describe the legal rules regarding conditions and warranties.

Explain the concept of ‘doctrine of caveat emptor’.

6.1 Introduction

Whether a stipulation in a contract of sale is a condition or a warranty,

depends upon the circumstances and the construction of the contract as a whole. Ram

bought a washing machine from Shyam. While using the machine he found that the

machine is not fit for washing cloths. He cannot do anything about it. He himself is

responsible for making a bad choice. Another instance, Ram asked Shyam to give a

washing machine which if fit for washing woolen cloths. Shyam suggested him a

machine, and Ram bought it. When Ram used it to wash woolen cloths, they got

damaged. The machine turned out to be unfit for the purpose. This is breach of

express condition by Shyam. Ram can return this machine to Shyam and get back the

price paid. Alternatively, Ram found that although the machine is fit for washing

woolen cloths, but it turned out to be a stolen machine. He was compelled to return it

to its true owner. This is a breach of implied warranty, and Ram can claim

compensation from Shyam for the price paid.

When Ram went to buy the machine that, this machine is having best features

in comparison to all the other machines available. Ram found that different machines

available. Ram also found that different machines were having different superior

features than that of this machine. Ram cannot do anything about it because the

remark given by Shyam was not a condition or warranty, it was a statement of

opinion which in no way binds anybody.

As a general rule, when a person buys something, it is his duty to see whether

that something suits his purpose or not. He cannot hold any body responsible for

making a bad choice. This is known as ‘doctrine of caveat emptor’. But when a seller

gives express condition or warranty regarding a product, he is bound to honour that.

In case the goods bought do not comply with such condition or warranty, the seller is

liable to compensate the buyer. Even in the absence of express stipulations by the

seller, law presumes that products should meet certain conditions and warranties,

breach of which has the same effect as the breach of express stipulations. However,

when a seller makes any statement amounting to a statement of opinion, it does not

bind him in anyway. The Act recognize ‘condition’ and ‘warranty’ separately

although both the terms denote the promise made by the seller. The difference lies in

the nature of promise. If the promise is such that it effects the very basis of the

contract, it is a condition. If the promise is collateral to the main purpose of the

contract, it is ‘warranty’. Definitely the severity of the consequences of breach

differs accordingly.

In this lesson, we will study when a stipulation amounts to a condition, when

it is warranty, when law presupposes stipulation in a contract, what are the

consequences of their breach in the given circumstances, and in which circumstances

the doctrine of caveat emptor will not apply.

6.2 Meaning of Conditions And Warranties

It is usual for the seller to make certain statements about the goods he is

selling before a contract of sale is concluded. These statements or representations

may or may not form part of the contract depending on this fact whether they amount

to stipulations or mere expression of opinion. A representation made by the seller

will be taken as a stipulation if he assumes to assert a fact of which the buyer is

ignorant. However, if he merely states a judgment upon a matter of which he has no

special knowledge and on which the buyer may also be expected to have an opinion,

representation made by him will simply amount to an expression of an opinion. A

stipulation is considered to be a part of the contract of sale and its breach provides

remedy to the buyer against the seller. The nature of remedy depends on whether the

stipulation is a condition or a warranty. While an expression of an opinion is not

considered to be a part of the contract, and therefore, it creates no obligation on the

seller.

Examples

(i) A wants to sell his horse. He says to B, an intending buyer.

“The horse is a beauty and is worth ₹ 1,000”. In this case A is simply

commending his goods and his representation is a mere expression of an opinion.

The buyer in such a case will not have any remedy against the seller if later on the

representation proves to be incorrect.

(ii) If in the above case A says B, “the horse is a beauty and only yesterday he

bought it for ₹ 1,000”. Here in the later of his statement the seller is making an

assertion about which the buyer is ignorant. This amounts to a stipulation. The

remedy of the buyer in case of the stipulation providing to be untrue will depend

upon this fact whether it is a condition or a warranty.

The terms ‘condition’ and ‘warranty’ have been defined by the Sale of Goods

Act as under:

Condition: ‘A condition is a stipulation essential to the main purpose of the

contract, the breach of which gives rise to a right to reject goods and treat the

contract as repudiated’ [Sec. 12(2)].

Warranty: ‘A warranty is stipulation collateral to the main purpose of the

contract, the breach of which gives rise to claim for damages but not a right to reject

goods and treat the contract as repudiated” [Sec. 12(3)].

“Whether a stipulation in a contract of sale is a condition or a warranty

depends in each case on the construction of the contract. A stipulation may be a

condition, though called a warranty in the contract” [Sec. 12(4)].

Examples

(i) A goes to B, a horse dealer and says, “I want a horse which can run at a speed

of 40 mph”. The horse dealer out at a particularly horse and says, “This will suit

you”. A buys the horse. Later on, A finds that horse can run only at the speed of 30

mph.

There is a breach of condition because the stipulation made by the seller

forms the, very basis of the contract.

(ii) A goes to B a horse dealer, and says, “I want a good horse”. The horse dealer

shows him a horse and says, “it can run at a speed of 60 mph”. A buys the horse.

Later on, A finds that the horse can run at a speed of 30 mph.

There is a breach of warranty because the stipulation made by the seller was

only a collateral one.

Stipulations as to Time: Unless a different intention appears from the terms

of the contract, stipulations as to time of payment are not deemed to be of essence in

a contract of sale. Whether any other stipulation as to time is of the essence of the

contract or not depends on the terms of the contract (Sec. 11). But in mercantile

contracts, time for delivery of goods is always taken as of essence unless otherwise

agreed.

Examples

(i) There was a sale of goods C.I.F. Antwerp to be shipped in October. The

buyer was to reject delivery even if there was any difference in the type or value or

grade specified. The goods could not be shipped till November on account of strike

at the port. It was held that the buyer could refuse to take delivery of the goods.

(ii) There was a sale of some oak trees on the term that the trees might remain on

the seller’s land for four months and the buyer should pay for them within twelve

weeks from the date, the contract was made. The buyer failed by the price on due

date. Further time for payment was asked for, but it was not granted by the seller

who treated the contract as at an end. The buyer then tendered the price which the

seller refused to accept. The seller then sold away the oak trees to some other buyer.

It was held that the first buyer was entitled to damages as there was a wrongful

avoidance of the contract.

6.2.1 Difference Between Condition And Warranty

The difference between a condition and a warranty can be summarized as follows:

1. Nature: Condition is essential to the main purpose of the contract. It is of a

fundamental nature. The main purpose of the contract cannot be fulfilled

without the prior fulfillment of this stipulation.

Warranty is only collateral to the main purpose of the contract. It is of a

subsidiary of inferior character. Fulfillment of the main purpose of the

contract does not depend upon the fulfillment of the warranty.

2. Remedies for Breach: Breach of condition gives right to the party not at

fault either to repudiate the contract or to claim damages or to do both.

3. Condition as Warranty and Vice- versa: A breach of condition may be

treated as a breach of warranty.

A breach of warranty cannot be treated as a breach of condition.

6.2.2 When a Breach of Condition is Taken as a Breach of Warranty

In the following two cases a breach of condition will be taken as a breach of

warranty:

1. Voluntary Waiver: The buyer may, if he so desires, treat the breach of a

condition by the seller as a breach of warranty and make him liable only for paying

damages [Sec. 13(1)]. However, if the buyer prevents the possibility of the seller

fulfilling the conditions he will be deemed to have waived it.

It is to be noted that once the buyer decides to waive the condition, he cannot

afterwards insist on its fulfillment.

2. Compulsory Treatment of a Condition as a Warranty: Where a contract is

not severable and the buyer has accepted the goods or part thereof, the breach of any

condition to be fulfilled by the seller can only be treated as a breach of warranty,

unless there is a contrary term in the contract, express or implied to that effect [Sec.

13(2)].

Examples

(i) B agrees to buy from A twenty five sacks of flour by sample, the flour is

delivered to B who pays the price. B, upon examination, finds it not equal to sample

but uses two sacks and sells one. He cannot now rescind the contract and recover the

price. But he is entitled to get compensation from A for any loss caused by the

breach of warranty.

(ii) A bought a bale of dhotis from B and resold it to C, C found the bale infested

with white ants, and therefore, returned it to A. It was held that A must be deemed to

have accepted goods, and therefore, he could not repudiate the contract but could

claim only damages.

6.3 Express and Implied Conditions And Warranties

Conditions and warranties may be express or implied. Express conditions and

warranties are those which have been expressly agreed upon by the parties at the

time of the contract of sale. Implied conditions and warranties are those which the

law incorporates into the contract unless the parties stipulate to the contrary. They

may be cancelled or varied by an express agreement or by the course of dealings or

by usage and custom (Sec. 62).

But such exclusion by an express agreement or otherwise does not entitle a

party to give up his fundamental obligation under the contract. For example, if a

person agrees to deliver a car, he cannot escape his liability by delivering a pig even

though parties might have agreed to exclude all conditions and warranties express or

implied.

6.3.1 Implied Conditions (Sec. 14 to 17)

1. Condition as to Title: Unless a different intention appears from the contract,

there is an implied condition that the seller has a right to sell the goods in the case of

a sale, and he will have a right to sell the goods in the case of an agreement to sell at

the time when the property is to pass. Buyer is entitled to repudiate the contract if he

finds the title of the seller to the goods defective [Sec. 14(a)]. If the goods delivered

can only be sold by infringing a trade mark, the seller shall be deemed to have

broken the condition that he has a right to sell the goods.

Examples

(i) R bought a motor car from D and used it for four months. D had no title to

the car. R was forced to return the car to the true owner. R can claim back the price

paid to D notwithstanding the fact that he had used the car for four months because

of the breach of implied condition as to title.

(ii) A bought 3,000 tonnes of preserved milk from U.S.A. The tins were labeled

in such a way as to infringe Neselle’s trade mark. As a result they were detained by

custom authorities. To get the clearance from the custom authorities, A had to

remove the labels and had to sell the tins at a loss. Held, the seller had broken the

condition that he had a right to sell because goods could be sold only by infringing

the trade mark.

It is to be noted that if a seller who had no title to the goods at the time of

sale, subsequently acquire title to the goods, he will purify both the title of the

original buyer and the sub-buyer. Similarly, if the true owner leads the buyer to

believe that the seller is either the owner of the goods or has the authority to sell the

goods, the buyer purchasing the goods in good faith shall acquire a good title.

2. Condition as to Description: Where there is a contract of sale of goods by

description there is an implied condition that the goods shall correspond with the

description (Sec. 15). The term ‘correspond to description’ means that the buyer

must get the ‘article’ that was described in the contract. Thus, where a seller

described a car as of 10 h. p. when it was of 8 h. p., it was held that there was a

breach of condition.

In Bowes v. Shand, the learned judge observed: “If you contract to sell peas

you cannot oblige a party to take beans. If the description of the article tendered is

different in any respect, it is not the article bargained for the other party is not bound

to take it”.

Examples

(i) A wants to sell his typewriter. He says to B, intending buyer who has not

send the machine, that it is a brand new machine. B agrees to purchase it. On

delivery B finds that the machine is old and repaired. B can repudiated the contract.

(ii) In a contract for the sale of a quantity of seed described as “Common English

Sainfoin” the seed supplied was of a different kind, though the difference was not

discoverable except by sowing. The defect also existed in the sample. Held, the

buyer was entitled to recover damages for the breach of condition.

(iii) In a contract for the sale of a quantity of cases of Australian canned fruit, the

goods were stated in cases containing thirty tins each. The seller tendered the whole

quantity but nearly half the cases contained twenty-four tins each. On the buyer

refusing to take delivery, it was held that the buyer was entitled to reject the whole

consignment.

The condition as to description is applicable in all those cases where the

buyer has not seen the goods but relies solely on the description given by the seller.

It is also applicable in those cases where the buyer has seen the goods but relies not

on what he has seen but what was stated to him and the “deviation of the goods from

the description is not apparent”.

Example

A set of line napkins and table cloths, described as of seventeenth century,

was sold at an auction sale to an antique dealer who had seen the set. Later on, it was

found by the dealer that the set was of eighteenth century and, therefore, he wanted

to reject the set. Held, he could do so since he relied on the description given by the

auctioneer and the discrepancy between the actual quality and the description could

not have been discovered by a causal examination.

3. Condition as to Sample: A contract of sale is a contract of sale by sample

when there is a term in the contract express or implied to that effect. In the case of a

contract for the sale of goods by sample, there is' an implied condition :

(a) that the bulk of the goods shall correspond with the sample quality;

(b) that the buyer shall have reasonable opportunity of comparing the bulk with

sample;

(c) that the goods shall be free from any defect, rendering them unmerchantable,

which would not be apparent on reasonable-examination of the sample (Sec.

17).

Example

Some mixed worsted coatings were sold by sample. It was found that owing

to a latent defect, coats made out of it were not fit to stand ordinary wear. The same

defect appeared in the sample but could not be detected on reasonable examination.

Held, the buyer could reject the goods.

In case goods have been sold by description as well as by sample, they must

correspond to both.

Example

A seller undertakes to supply 100 tones of Java sugar warranted to be equal

to the sample. The sugar when supplied, corresponds to the sample but is not Java

sugar. The buyer can repudiate the contract.

It is to be noted that it does not follow merely because a sample is exhibited

that the seller intends to sell by sample because he may by express warranty exclude

its operation or may exhibit the specimen merely to enable the purchaser to form his-

own reasonable opinion. Lord Macanaughten also observed, "The office of a sample

is to present to the eye the real meaning and intention of the parties with regard to the

subject matter of the contract which owing to the imperfection of language, it may be

difficult or impossible to express in words." It is open for the seller to show the

sample but decline to sell by it, and require the buyer to purchase at his own risk.

Similarly, the buyer may not trust the sample and ask the seller to give a specific

warranty to that effect.

4. Condition as to Quality or Fitness (Sec. 16): Normally in a contract of sale

there is no implied condition as to quality or fitness of the article for any particular

purpose. It is the duty of the buyer to see and satisfy himself whether the article will

be suitable for the purpose for which he requires.

Following points in this connection are important to note:

1. (a) Where the goods are required for a particular purpose which the buyer

makes known to the seller either expressly or impliedly, (b) the buyer relies on the

seller's skill and judgment and (c) it is the seller's business to supply goods of that

description (whether he is the manufacturer or producer or not), there will be an

implied condition that the goods must be reasonably fit for the purpose intended. The

buyer cannot be said to rely on the seller's skill and judgment, when he selects the

article himself after inspection.

Example: An order was placed for six lorries to be used for' heavy traffic in a hilly

country.' Five lorries were supplied by the seller which were unfit for this purpose

and broke down. It was held that there was a breach of condition as to fitness.

2. Where the article can be used for only one particular purpose, the buyer

needs not to tell the seller the purpose for which he requires the goods.

A 'particular purpose' is not some purpose necessarily distinct from a general

purpose. In the case of food items, eating is both a general as well as a particular

purpose. Thus, even if the purpose is not expressly made known to the seller, it will

be deemed to be known to him if it can be readily gathered from a description of the

goods.

Example: A purchased a hot water bottle from B, a chemist. A was draper, who

could not be expected to have special knowledge with regard to hot water bottles.

While being used by A's wife, the bottle burst and injured her. Held, the seller was

responsible for damages.

3. In case the article can be used for a number of purposes, the buyer should tell

the seller the purpose for which he requires the goods if he wants to make the seller

responsible.

Example: There was a sale by sample of indigo cloth to a tailor who required the

cloth for the purpose of making it into liveries. The purpose was not made known to

the seller. The cloth was unfit for that purpose owing to a latent defect but could be

used for other purposes. Held, the buyer could not reject the contract.

4. In case the goods are purchased under a patent or other trade name, there is

no implied condition as to their fitness for' any particular purpose.

Example: A, the owner of a brewery placed an order with B, a manufacturer, to

supply him his patent smoke consuming furnace for fitting up in his (A's) brewery.

The furnace was supplied but it was not fit for the buyer's purpose. Held, the

purchase was of a defined and well known type of furnace and B, the seller, was not

liable for its unsuitability for the buyer's purpose.

It is to be noted that the mere fact that an article sold is described in the

contract by its trade does not necessarily make the sale, a sale under a trade name.

For this it is necessary that the buyer should specify the article under its trade name

in such a way as to indicate that he is satisfied, rightly or wrongly that it will answer

his purpose, and that he is not relying on the skill or judgment of seller, however

great skill or judgment may be. If the buyer takes the goods because they are

recommended by the seller as being suitable for the purchase intended, there is an

implied condition of fitness for the purpose.

Examples

(i) A went to a car dealer and\said that he wanted a car for touring purposes. The

seller recommended 'Bugatti' car for the purpose. The buyer ordered for one. The car

was found unfit for the purpose. Held, that the buyer can claim damages because

condition as to fitness had been broken though the sale was under as trade mark. .

(ii) In the above example if the buyer had told the seller that he had been

recommended by some one Buggatti car for touring purposes and he would like to

have one such car. The seller should not be liable if the car is found unfit for the

purpose.

5. In case the seller supplies an article of the description in which he usually

deals, under its patent or trade name, there is an implied condition that goods will be

fit for the purpose for which it is generally used.

Example: A, a dealer in refrigerators sells a 'Godrej' refrigerator to B. The name or

the article itself implies that the sever warrants the machine to be fit for a particular

purpose.

6. An implied condition as to quality or fitness for a particular purpose may also

be fixed or annexed by the usage of trade [Sec. 16(6)].

5. Condition as to Merchantability: Where goods are brought by description

from a seller who deals in goods of that description (whether he is the manufacturer

or producer or not) there is an implied condition that the goods shall be of

merchantable quality [Sec. 16(2)]. Even sold under a patent or trade mark must be of

a merchantable quality.

Merchantable quality implies that the goods should be of such quality and in

such a condition that a reasonable man acting reasonably would accept the goods

after a full examination under the same circumstances whether he buy for his own

use or reselling. In other words, goods should be such as are reasonably saleable

under the description by which they are known in the market. However, this does not

mean that there will be buyers ready to by the goods or that the goods will comply

with the law of a foreign country in order to be saleable there. Goods will be

unmerchantable if they have defect which will make them unfit for ordinary use or

are such that a reasonable person knowing of their conditions would not buy them.

Example A agreed to sell B some motor horns. Goods were to be delivered by

installments. The first installment was accepted but the second contained a

substantial quantity of horns which were damaged owing to bad packing. Held, the

buyer was entitled to reject the whole installment, as the goods were not of a

merchantable quality.

It is to be noted that there is no implied condition as regards those defects

which could have been revealed if the buyer had examined the goods. But if the

examination of the buyer does not reveal the defects and he approves and accepts the

goods but when put to work the goods are found to be defective, there is breach of

condition of merchantability.

Examples

(i) X wanted to purchase some glue. The glue was stored in the seller's

warehouse in barrels. Every facility was given to X for its inspection. X did not have

the barrels opened but only looked at the outside of the barrels. The glue was found

to have defects which would have been found out if X has inspected the contents of

the cases. Held, there was no breach of any implied condition as to merchantability.

(ii) A, a dealer in watches of a particular make, sells one watch to B, a layman

with the usual guarantee of keeping the watch in running condition for a period of

one year. The watch was found to be very unsatisfactory within one year. B wanted a

new watch or its price. State on what basis such a claim can be made. Can B

succeed?

The claim should be made on the basis of breach of an implied condition as

to merchantability. Merchantability does not merely mean that a thing is saleable in

the market because it apparently looks all right. An article may be considered to be

unmerchantable if it has latent defects rendering it unfit for its only proper use. In the

instant case, B had an opportunity to examine that watch, but the defect was latent

which could not have been found out by a buyer like B. Therefore, B must succeed.

The implied condition as to fitness for a particular purpose and

merchantability must be construed reasonably, and a seller will not be liable when

the unsuitability of the article arises from state of affairs relating to the buying of

which the seller was not made aware, e.g., when an article is sold to a customer who

is allergic to it, there is a duty on the customer to disclose known peculiarity.

Example: G, a woman with abnormally sensitive skin bought a Haris tweed coat and

got rashes through wearing it. She was not allowed to claim any compensation.

There was no breach of condition as she had not disclosed the fact of her skin being

abnormally sensitive.

6. Condition as to Wholesomeness: This condition applies in the case of

provisions and foodstuffs. The provisions supplied must not only answer to

description and be merchantable but also wholesome, pure unadulterated and suitable

for consumption at the time of sale.

Examples

(i) A purchased tinned salmon from B a grocer and provisions merchant. The salmon

was poisonous and A and his wife, who ate, fell ill. While A recovered from his

illness, his wife died from the effects of the poison. A claimed damages against B

both for his illness and for the death of his wife, which deprived him of the services

rendered by her. Held, A was entitled to get damages because the condition of

wholesomeness was violated by the seller.

(ii) X purchased milk from Y, a milk dealer. The milk contained typhoid germs.

Wife of X, on taking the milk, got infection and died. Held, X was entitled to get

damages.

6.3.2 Implied Warranties

The implied warranties can be put as follows:

1. Warranty of Quiet Enjoyment: This warranty implies the buyer shall have

and enjoy quiet possession of the goods [Sec. 14(c)].

Example: A had given his bicycle on hire for a period of ten days to B. Soon after A

sold it to C without disclosing to him that B was entitled to use bicycle on account of

the hire agreement. B claims the bicycle from C. C’s possession is disturbed. He is

entitled to get damages from A.

The breach of implied condition as to title may also result in breach of

warranty as to quiet possession. The buyer, therefore, will be entitled to recover

compensation for breach of both a condition as well as a warranty.

Example: M purchased a second-hand typewriter from B. M spent some money on

its repairs but was dispossessed of it after six months by the true owner. It was held

that M was entitled to recover from B not only price paid but also cost of repair.

2. Warranty of Freedom From Encumbrance: This warranty implies that the

goods shall be free from any charge or encumbrance in favour of a third party not

declared or known to the buyer before or at the time when the contract was made

[Sec. 16(3)]. Buyer shall have no right of action if the seller had disclosed the charge

or encumbrance at the time of contract.

Example: A pledges his bicycle with C for a loan of ₹ 100 and promises him to give

its possession the next day. Soon after he sells the bicycle to B, an innocent buyer,

who does not know about the fact of bicycle being pledged. B may either ask A to

clear the loan or may himself pay the money and then file a suit against A to recover

this money with interest.

3. By Usage of Trade: An implied warranty or condition as to quality or fitness

for a particular purpose may be annexed by the usage of trade [Sec. 16(3)].

Where drugs are sold by auction and where it is a usage of trade to disclose

beforehand any sea damage, such disclosure must be made. In case, no such

disclosure has been made, the goods are found to be defective, it will be taken as a

breach of warranty.

4. Dangerous Goods: Where the goods are dangerous and the seller knows that

the buyer is ignorant about the dangerous nature of the goods, the seller should warn

the buyer about the probable danger otherwise, he will be liable for damages to the

buyer for the injury caused to the buyer because of the dangerous quality of the

goods:

Example: A sold a tin of disinfectant powder to C. A knew that the tin was to be

opened with special care otherwise it might prove dangerous. He also knew that C

was ignorant about it. He did not warm C. C opened the tin and his eyes were injured

by the powder. Held, A was liable as he should have warned C of the probable

danger.

6.4 Doctrine of Caveat Emptor

It means ‘let the buyer beware'.

In sale of goods, the seller is under no duty to reveal unflattering truths about

the goods sold. Therefore, when a person buys some goods, it is his duty to example

them thoroughly. If the goods turn out to be defective or do not suit the purpose, or

when he depends upon his own skill and judgment and makes a bad selection, he

cannot blame anybody except himself. The buyer has to bear the consequences of his

wrong selection of goods. Under Section 16, the seller does not need to guarantee the

quality of goods or suitability of goods for a particular purpose unless quality or

fitness is made an express condition in the contract.

Exceptions to the Rule (Sec. 16): Following are the exceptions to the

Doctrine of Caveat Emptor:

(1) Fitness for Buyers' Purchase: Under Section 16(1), where the buyer,

expressly or by implication, makes known to the seller the particular purpose

for which he requires the goods and relies upon seller's skill or judgment, and

the goods are of a description which is in the course of seller's business to

supply, the seller must supply the goods which shall be fit for buyer's

purpose.

(2) Sale under a Patent or Trade Name: As per provision to Section 16(1), in

the case of a contract of sale of a specified article under its patent or other

trade name, there is an implied condition that the goods shall be reasonably

fit for any particular purpose.

(3) Merchantable Quality: Under Section 16(2), where goods of that description,

bought by description from a seller who deals in goods of that description,

there is an implied condition that the goods shall be of merchantable quality.

But where the buyer has examined the goods, there is no implied condition as

regards the defects, which such examination ought to have revealed.

6.5 Summary

A condition a stipulation which is essential to the main purpose of the

contract, the breach of which gives rise to a right to treat the contract as repudiated”.

A warranty is a stipulation collateral to the main purpose of the contract, the breach

of which gives rise to claim for damages, but not a right to treat the contract as

repudiated. Whether a stipulation in a contract of sale is a condition or a warranty,

depends upon the circumstances and the construction of the contract as a whole.

Express conditions and warranties are those which are agreed upon between the

parties at the time of entering into the contract of sale and have been expressly

provided in the contract. Implied conditions and warranties are those which are not

expressly agreed upon between the parties at the time of entering into the contract.

They are treated to be implied either under the law or as per customs of the trade.

Caveat Emptor means 'Let the buyer beware.' In sale of goods, the seller is

under no duty to reveal unflattering truths about the goods sold. Therefore, it is the

duty of the buyer to examine the goods thoroughly. The buyer has to bear the

consequences of his wrong selection of goods.

6.6 Keywords

Condition: A stipulation essential to the main purpose of the contract.

Warranty: A stipulation collateral to the main purpose of the contract.

Caveat Emptor: It implies ‘let the buyer beware’


1. Distinguish between a ‘condition and a ‘warranty’. What condition and

warranties an implied in a contract of sale?

2. What is meant by ‘sale of sample’? What are the conditions implied in such a

sale?

3. Explain the Doctrine of Caveat Emptor with its exceptions.


1. P.P.S. Gogna, Mercantile Law, S. Chand & Company, New Delhi.

2. N.D. Kapoor, Company Law, Sultan Chand & Sons, New Delhi.

3. S.C. Aggarwal, Company Law, Dhanpat Rai Publications, New Delhi.

4. S. S. Gulshan and G. K. Kapoor, Business Law including Company Law,

New Age International Publishers, New Delhi.

5. K.R. Balchandari, Business Law for Management, Himalaya Publication

House, New Delhi.



Lesson No.: 12 Vetter: Prof. M.C.Garg

MEMORANDUM OF ASSOCIATION

Structure

12.0 Objectives

12.1 Introduction

12.2 Meaning of Memorandum of Association

12.3 Forms, Printing and Signing of Memorandum of Association

12.4 Contents of Memorandum of Association

12.4.1 Name Clause

12.4.2 Situation Clause

12.4.3 Objects Clause

12.4.4 Liability Clause

12.4.5 Capital Clause

12.5 Alteration of Memorandum of Association

12.6 The Doctrine of Ultra-vires

12.7 Summary

12.8 Keywords



12.0 Objectives

After going through this lesson, you will be able to:

Define memorandum of association.

Explain different clauses of memorandum of association.

Explain the procedure of different clauses of alteration of memorandum of

association.

Describe the implications of Doctrine of Ultra-vires.

12.1 Introduction

The memorandum of association of a company is its principal document. It is

a document of great importance in relation to the proposed company. No company

can be registered without a memorandum of association and that is why it is

sometimes called a life giving document. In this lesson, you will learn about

memorandum of association, different clauses of memorandum of association,

procedure of alteration of different clauses of memorandum of association and the

implications of Doctrine of Ultra-vires.

12.2 Meaning of Memorandum of Association

The Memorandum of Association is an important document in relation to the

affairs of a company. It is the main document of the company which defines its

objects and lays down the fundamental conditions upon which alone the company is

allowed to be formed. It is the charter of the company. It governs the relationship of

the company with the outside world and defines the scope of its activities. Its

purpose is to enable shareholders, creditors and those who deal with the company to

know what exactly is permitted range of activities. It enables these parties to know

the purpose, for which their money is going to be used by the company and the

nature and extent of risk they are undertaking in making investment. Memorandum

of Association enable the parties dealing with the company to know with certainty as

whether the contractual relation to which they intend to enter with the company is

within the objects of the company.

Thus, the Memorandum of Association is a document which sets out the

constitution of the company and is the foundation on which the structure of the

company stands. It defines as well as confines the powers of the company. If the

company enters into contract or engages in any trade or business which is beyond the

powers conferred on it by the memorandum, such a contract or the act will be ultra

vires the company and hence void. However, the Companies Act, 2013 shall override

the provisions in the memorandum of a company, if the latter contains anything

contrary to the provisions in the Act.

The first step in the formation of a company is to prepare a document called

the Memorandum of Association. In fact, memorandum is one of the most essential

pre-requisites for incorporating any form of company under the Companies Act,

2013 (hereinafter referred to as ‘Act’). According to Section 2(56) of the Act

“memorandum” means the memorandum of association of a company as originally

framed and altered, from time to time , in pursuance of any previous company law or

this Act. Section 4 of the Act specifies in clear terms the contents of this important

document which is the charter of the company. The Memorandum of Association of

a company contains the objects of the company which it shall pursue.

12.3 Forms, Printing and Signing of Memorandum of Association

Section 4(6) of the Act provides that the memorandum of association should

be in any one of the Forms specified in Tables A, B, C, D or E of Schedule I to the

Act, as may be applicable in relation to the type of company proposed to be

incorporated or in a Form as near thereto as the circumstances admit. Sections 4 and

5 of the Companies Act, 2013 has given five forms of Memorandum of Association

in Schedule I. These are as follows:

Table A Memorandum of Association of a company limited by Shares.

Table B Memorandum of Association of a company limited by guarantee and

not having a share capital.

Table C Memorandum of Association of a company limited by guarantee and

having a share capital.

Table D Memorandum of Association of an unlimited company and not having

share capital.

Table E Memorandum of Association of an unlimited company and having

share capital.

Every company is required to adopt one of these forms or any other form as

near there to as circumstances admit.

Printing and Signing of Memorandum of Association

The Memorandum and Articles of Association of the company shall be signed

in the following manner, namely:

(1) The memorandum and Articles of Association of the company shall be signed

by each subscriber to the memorandum, who shall add his name, address,

description and occupation, if any, in the presence of at least one witness who

shall attest the signature and shall likewise sign and add his name, address,

description and occupation, if any and the witness shall state that “I witness to

subscriber/subscriber(s), who has/have subscribed and signed in my presence

(date and place to be given); further I have verified his or their Identity

Details (ID) for their identification and satisfied myself of his/her/their

identification particulars as filled in”.

(2) If a subscriber to the memorandum is illiterate, he shall affix his thumb

impression or mark which shall be described as such by the person, writing

for him, who shall place the name of the subscriber against or below the mark

and authenticate it by his own signature and he shall also write against the

name of the subscriber, the number of shares taken by him.

(3) Such person shall also read and explain the contents of the memorandum and

articles of association to the subscriber and make an endorsement to that

effect on the memorandum and articles of association.

(4) If the subscriber to the memorandum is a body corporate, the memorandum

and articles of association shall be signed by director, officer or employee of

the body corporate duly authorized in this behalf by a resolution of the board

of directors of the body corporate and where the subscriber is a Limited

Liability Partnership, it shall be signed by a partner of the Limited Liability

Partnership, duly authorized by a resolution approved by all the partners of

the Limited Liability Partnership:

Provided that in either case, the person so authorized shall not, at the same

time, be a subscriber to the memorandum and articles of association.

(5) If subscriber to the memorandum is a foreign national residing outside India-

(a) in a country in any part of the Commonwealth, his signatures and

address on the memorandum and articles of association and proof of

identity shall be notarized by a Notary (Public) in that part of the

Commonwealth.

(b) in a country which is a party to the Hague Apostille Convention,

1961, his signatures and address on the memorandum and articles of

association and proof of identity shall be notarized before the Notary

(Public) of the country of his origin and be duly apostillised in

accordance with the said Hague Convention.

(c) in a country outside the Commonwealth and which is not a party to

the Hague Apostille Convention, 1961, his signatures and address on

the memorandum and articles of association and proof of identity,

shall be notarized before the Notary (Public) of such country;

(d) visited in India and intended to incorporate a company, in such case

the incorporation shall be allowed if, he/she is having a valid Business

Visa.

12.4 Contents of Memorandum of Association

As per Section 4(1), the memorandum of a limited company must state the

following:

(a) the name of the company with “Limited” as its last word in the case of a

public company; and “Private Limited” as its last words in the case of a

private company; (Name Clause)

(b) the State in which the registered office of the company is to be situated;

(Situation Clause)

(c) the objects for which the company is proposed to be incorporated and any

matter considered necessary in furtherance thereof; (Objects Clause)

(d) the liability of members of the company, whether limited or unlimited, and

also state, (Liability Clause)

(e) in the case of a company having a share capital, (Capital Clause)

(f) in the case of a One Person Company, the name of the person who, in the

event of the death of the subscriber, shall become the member of the

company.

The above clauses are compulsory and are designated as “conditions”

prescribed by the Act on the basis of which a company is incorporated.

12.4.1 Name Clause

A company being a legal entity must have a name of its own to establish its

separate identity. The name of the company is a symbol of its independent corporate

existence. The first clause in the memorandum of association of the company states

the name by which a company is to be known. The company may adopt any suitable

name provided it is not undesirable.

According to section 4(2), the name stated in the memorandum shall not—

(a) be identical with or resemble too nearly to the name of an existing company

registered under this Act or any previous company law; or

(b) be such that its use by the company—

(i) will constitute an offence under any law for the time being in force; or

(ii) is undesirable in the opinion of the Central Government.

Section 4(3) provides that without prejudice to the provisions of Section 4(2), a

company shall not be registered with a name which contains—

(a) any word or expression which is likely to give the impression that the

company is in any way connected with, or having the patronage of, the

Central Government, any State Government, or any local authority,

corporation or body constituted by the Central Government or any State

Government under any law for the time being in force; or

(b) such word or expression, as may be prescribed, unless the previous approval

of the Central Government has been obtained for the use of any such word or

expression.

As stated above, Section 4(2) provides that the name stated in the

memorandum shall not be such that its use by the company, in the opinion of the

Central Government, is undesirable. A name which is identical to or too nearly

resembles, the name by which a company in existence has been previously

registered, will be deemed to be undesirable.

The Central Government under Section 16 is empowered to direct a

company, at any point of time to rectify its name if by inadvertence it has been

registered with a name which is identical to or too nearly resembles the name of an

existing company whether registered under this Act or the previous company law.

The company shall change its name within a period of three months from the issue of

the above direction after passing an ordinary resolution for the purpose. Where a

company changes its name or obtains a new name, it shall within a period of fifteen

days from the date of such change, give notice of the change to the Registrar along

with the order of the Central Government, who shall carry out necessary changes in

the certificate of incorporation and the memorandum.

12.4.2 Situation Clause

The name of the State in which the registered office of the company is to be

situated must be given in the memorandum. But the exact address of the registered

office is not required to be stated therein. According to Section 12 of the Act within

15 days of company’s incorporation, and at all times thereafter, the company must

have a registered office to which all communications and notices may be sent. The

company must also furnish to the Registrar verification of its registered office within

a period of thirty days of its incorporation in such manner as may be prescribed. (e-

form INC-22)

Publication of Name and Address of the Company

As per Section 12(3), every company is required to display its name and

address in legible letters in conspicuous position and in all its business letters, bill

heads, letter papers. Accordingly, the company shall—

(a) paint or affix its name, and the address of its registered office, and keep the

same painted or affixed, on the outside of every office or place in which its

business is carried on, in a conspicuous position, in legible letters, and if the

characters employed therefore are not those of the language or of one of the

languages in general use in that locality, also in the characters of that

language or of one of those languages;

(b) have its name engraved in legible characters on its seal, if any;

(c) get its name, address of its registered office and the Corporate Identity

Number along with telephone number, fax number, if any, e-mail and website

addresses, if any, printed in all its business letters, billheads, letter papers and

in all its notices and other official publications; and

(d) have its name printed on negotiable instruments such as hundies, promissory

notes, bills of exchange.

However, where a company has changed its name or names during the last

two years, it shall paint or affix or print, as the case may be, along with its name, the

former name or names so changed during the last two years.

12.4.3 Objects Clause

The third compulsory clause in the memorandum sets out the objects for

which the company has been formed. Under Section 4(1)(c) of the Act, all

companies must state in their memorandum the objects for which the company is

proposed to be incorporated and any matter considered necessary in furtherance

thereof.

This clause is of great importance because it determines the purpose and the

capacity of the company. It indicates the purpose for which the company has been set

up and its actual capability, besides its sphere of activities. It states affirmatively the

ambit and extent of powers of the company and, stated negatively, that nothing

should be done beyond that ambit and that no attempt shall be made to use the

company for any other purpose than that which is specified. The purpose of the

objects clause is to enable the persons dealing with the company to know its

permitted range of activities. The acts beyond this ambit are ultra vires and hence

void. Even the entire body of shareholders cannot ratify such acts.

The subscribers to the memorandum of association enjoy almost unrestricted

freedom to choose the objects. The only restriction is that objects should not be

illegal and against the provisions of the Companies Act, 2013. The memorandum of

association of a company is its charter defining the objects of its existence and

operations. As pointed out in Cotman v. Brougham 1918 AC 514, its purpose is ‘to

enable the shareholders, creditors and those dealing with the company to know that

what is the permitted range of the enterprise. The objects clause or clauses in the

memorandum are to be so construed as to confer on the company all powers

reasonably required to the attainment of the objects.’

12.4.4 Liability Clause

Section 4 1(d) of the Act states that the liability of members of the company

is to be specifically mentioned in the Memorandum of Association. It is provided

that the liability of member may either be limited or unlimited, further it shall also

state that,—

(i) in the case of a company limited by shares, the liability of its members is

limited to the amount unpaid, if any, on the shares held by them; and

(ii) in the case of a company limited by guarantee, the amount up to which each

member undertakes to contribute—

(i) to the assets of the company in the event of its being wound-up while

he is a member or within one year after he ceases to be a member, for

payment of the debts and liabilities of the company or of such debts

and liabilities as may have been contracted before he ceases to be a

member, as the case may be; and

(ii) to the costs, charges and expenses of winding-up and for adjustment

of the rights of the contributories among themselves;

12.5.5 Capital Clause

This clause shall state the amount of the capital with which the company is

registered. The shares into which the capital is divided must be of fixed value, which

is commonly known as the nominal value of the share. The capital is variously

described as nominal, authorized or registered.

The amount of nominal capital is determined having regard to the present as

well as future requirements of the company with reference to its objects. The usual

way to state the capital in the memorandum is: “The capital of the company is

`10,00,000 divided into 1,00,000 equity shares of `10 each”. This amount lays down

the maximum limit beyond which the company cannot issue shares without altering

the memorandum as provided by Section 61 of the Companies Act, 2013.

If there are both equity and preference shares, then the division of the capital

is to be shown under these two heads. A company is not authorized to issue capital

beyond its authorized/nominal/registered capital. If it receives applications for shares

beyond the shares covered by the authorized capital, the amount received on excess

number of shares should be returned. Out of the issued capital, the total amount

actually subscribed or agreed to be subscribed is known as subscribed capital, and

this subscribed capital again may be wholly paid or partly paid, in which latter case

the balance would be payable on future calls when made. The amount actually paid

by the shareholders is called the paid-up capital. According to Section 60 of the Act,

if the amount of the authorized capital (nominal capital), of the company is stated in

any notice, advertisement, official publication, business letter, bill head or letter

paper, it shall also contain a statement in an equally prominent position and in

equally conspicuous terms the amount of capital which has been subscribed and the

amount paid-up.

The subscribers to the memorandum declare: “We, the several persons whose

names and addresses are subscribed below, are desirous of being formed into a

company in pursuance of this memorandum of association, and we respectively

agree to take the number of shares in the capital of the company set opposite our

respective names”. Then follow the names, addresses, description, occupations of the

subscribers, and the number of shares each subscriber has agreed to take and their

signatures attested by a witness.

The statutory requirements regarding subscription of memorandum are that:

each subscriber must take at least one share;

each subscriber must write opposite his name the number of shares which he

agrees to take. [Section 4(1)(e)]

12.5 Alteration of Memorandum of Association

Section 13(1) of the Act provides that a company may, by a special resolution

and after complying with the procedure specified in this section, alter the provisions

of its memorandum. The memorandum of association of a company may be altered

in the following respects:

(1) By changing its name [Sections 13(2)].

(2) By altering it in regard to the State in which the registered office is to be

situated [Section 13(4) & (7)].

(3) By altering its objects [Section 13 (1) & (9).

(4) By altering its share capital (Section 61).

(5) By reorganising its share capital (Sections 230 to 237).

(6) By reducing its capital (Section 66).

The provisions or conditions of the memorandum of association relating to

the name clause, situation clause, the objects clause, limited liability clause,

subscriber’s share clause as provided in Section 4 of the Companies Act, 2013 or any

other specific provisions contained therein, can be altered by following the

prescribed procedure laid down in the Act. Strict compliance of the prescribed

procedure is demanded by law. Failure to comply with the express provisions made

under the Act for the purpose of alteration of the provisions or conditions contained

in the memorandum will be deemed as a nullity.

Further, Section 13(6) provides that a company shall, in relation to any

alteration of its memorandum, file with the Registrar the special resolution passed by

the company under Section 13(1). Section 13(10) provides that no alteration made

under this section shall have any effect until it has been registered in accordance with

the provisions of the said section.

Contents of the Memorandum of association can be altered as under:

1. Alteration of Name Clause

The name of the company can be altered by a special resolution and with the

approval of the Central Government in writing. Approval of the Central Government

is not required, in case where the change in the name of the company relates to the

addition/deletion of the word ‘Private’ to the name of the company consequent to the

conversion of a company into a public company and vice versa. [Section 13 (2)]

When any change in the name of a company is made under section 13(2), the

Registrar shall enter the new name in the register of companies in place of the old

name and issue a fresh certificate of incorporation with the new name and such

change in the name shall be complete and effective only on the issue of such a

certificate [Section 13(3)]. According to Rule 29 of Companies (Incorporation)

Rules, 2014, the change of name shall not be allowed to a company which has not

filed annual returns or financial statements due for filing with the Registrar or which

has failed to pay or repay matured deposits or debentures or interest thereon.

Provided that the change of name shall be allowed upon filing necessary documents

or payment or repayment of matured deposits or debentures or interest thereon as the

case may be. An application shall be filed in Form No. INC-24 along with the fee for

change in the name of the company and a new certificate of incorporation in Form

No. INC-25 shall be issued to the company consequent upon change of name.

Under Section 16 of the Act, rectification of the name of the company is

required to be carried out if, through inadvertence or otherwise, a company (whether

on its first registration or on its registration by a new name) is registered by a name

which is identical to or too nearly resembles the name of a company already in

existence. The rectification of the name must also be carried out if the Central

Government so directs at any point of time after the registration of the company. The

direction of the Central Government is required to be complied with by the company

within a period of three months from the date of issue thereof. Further where a

company changes its name or obtains a new name under section 16 (1), it shall

within a period of fifteen days from the date of such change, give notice of the

change to the Registrar along with the order of the Central Government, who shall

carry out necessary changes in the certificate of incorporation and the memorandum.

Any default in complying with the direction issued by the Central Government

would render the company liable for punishment with fine which may extend to one

thousand rupees for every day during which default continues and its officers in

default shall be liable for fine which shall not be less than five thousand rupees but

which may extend to one lakh rupees.

Effect of Change

The change of name shall not affect any rights or obligations of the company,

or render defective any legal proceedings by or against it, and any legal proceedings

which might have been continued or commenced by or against the company in its

former name may be continued by or against the company in its new name.

However, where a company changes its name and the new name has been

registered by the Registrar, the commencing of legal proceedings in the former name

is not valid [Malhati Tea Syndicate Ltd. v. Revenue Officer, (1973) 43 Com Cases

337]. In spite of a change in name the entity of the company continues. The company

is not dissolved nor does any new company come into existence. If any legal

proceeding is commenced, after change in the name, against the company in its old

name, the company should be treated as if it is not in existence. It is not an incurable

defect and the plaint can be amended to substitute the new name [Pioneer Protective

Glass Fibre (P) Ltd. v. Fibre Glass Pilkington Ltd., (1986) 60 Com Cases 707 (Cal.)].

2. Alteration of Situation Clause

The alteration in the registered office clause can be made in the following

manner:

(A) Change within the Local Limits of Same Town

The change of registered office of the company within the local limits can be

implemented by the Board of Directors. A company by passing Board Resolution

can change the situation of its registered office within the limits of same city, town

or village. An intimation of the change of registered office and verification of

registered address shall be given to the registrar in e-form INC-22, within fifteen

days of such change. This does not involve alteration of memorandum.

(B) Change Outside the Local Limits of any City, Town or Village

According to Section 12(5) of the Act except on the authority of a special

resolution passed by a company, the registered office of the company shall not be

changed,—

(a) in the case of an existing company, outside the local limits of any city, town

or village where such office is situated at the commencement of this Act or

where it may be situated later by virtue of a special resolution passed by the

company; and

(b) in the case of any other company, outside the local limits of any city, town or

village where such office is first situated or where it may be situated later by

virtue of a special resolution passed by the company.

In case the company is eligible for conducting business through postal

ballot any change in place of registered office outside the local limits of any

city, town or village the same shall be transacted only by means of voting

through a Postal Ballot [Rule 22 of Companies (Management and

Administration) Rules, 2014.

(C) Change within the same State from the jurisdiction of one Registrar of

Companies to the jurisdiction of another Registrar of Companies

No company shall change the place of its registered office from the

jurisdiction of one Registrar to the jurisdiction of another Registrar within the same

State unless such change is confirmed by the Regional Director. Proviso to Section

12(5) provides that confirmation by the Regional Director will be necessary for

changing registered office of a company from one place to another if the change of

registered office is from the jurisdiction of one Registrar to the jurisdiction of

another within the same State.

Change of Registered Office From One State to Another

The change of registered office from one State to another State involves

alteration of memorandum, and the change can be effected by a special resolution of

the company which must be confirmed by the Central Government on an application

made to it [Section 13(4)]. According to Section 13(1), a company may, by special

resolution and after complying with the procedure specified alter the provisions of its

memorandum.

Further, the alteration of the provisions of the memorandum relating to the

change of the place of its registered office from one State to another shall not take

effect unless it is confirmed by the Central Government on an application made to it

in the prescribed form and manner [Section 13(4)]. A company shall, in relation to

any alteration of its memorandum involving change of registered office from one

State to another, file with the Registrar the special resolution passed by it. [Section

13(6)].

Where an alteration of the memorandum results in the shifting of the

registered office of a company from one State to another, a certified copy of the

order of the Central Government approving the alteration shall be filed by the

company with the Registrar of each of the States within such time and in INC-22,

who shall register the same, and the Registrar of the State where the registered office

is being shifted to, shall issue a fresh certificate of incorporation indicating the

alteration. [Section 13(7)].

3. Alteration of Objects Clause

Object clause is a main clause of the memorandum because it works out the

objects and indicates the sphere of its activities. A company cannot legally perform

any business going beyond to its objects specified under this clause. If somehow it is

done beyond the limits of the aforesaid then it will be considered as ultra- vires and

void. This rule is meant to protect the members of the company, the public and the

creditors as well.

According to Section 13(1), a company may, by a special resolution and after

complying with the procedure specified in this section, alter the provisions of its

memorandum. It means that a company can change its objects by passing a special

resolution. Further, Section 13(6)(a) provides that a company shall, in relation to any

alteration of its memorandum, file with the Registrar the special resolution passed by

the company under Section 13(1). As per Section 13(9), the Registrar shall register

any alteration of the memorandum with respect to the objects of the company and

certify the registration within a period of thirty days from the date of filing of the

special resolution in accordance with Section 13(6)(a).

Consequently pursuant to Section 13(1), a company can change its objects

clause by passing a special resolution. Further in case the company is eligible for

conducting business through postal ballot any alteration in the objects clause of the

Memorandum of Association, shall implement the same through Postal Ballot in

terms of section 110.

Further, Section 13(8) lays down that a company, which has raised money

from public through prospectus and has any unutilised amount out of the money so

raised, shall not change its objects for which it raised the money through prospectus

unless a special resolution is passed by the company and—

(i) the details, as may be prescribed, in respect of such resolution shall be

published in the newspapers (one in English and one in vernacular language)

which is in circulation at the place where the registered office of the company

is situated and shall also be placed on the website of the company, if any,

indicating therein the justification for such change;

(ii) the dissenting shareholders shall be given an opportunity to exit by the

promoters and shareholders having control in accordance with regulations to

be specified by the Securities and Exchange Board.

Also for deleting any portion of the objects clause, the procedure laid down in this

section has to be followed.

A company may wish to alter its objects stated in its memorandum due to

various reasons e.g. if a company wishes to cut-back i.e. where it feels it has

diversified in various directions and that management of the company has become

difficult or uneconomical, it may alter its objects to sell or dispose of whole or part

of its undertaking(s).

4. Alteration of Liability Clause

This clause requires a clarification about the nature of liability of the

members of a company. The liability of a company may be limited or unlimited as

discussed earlier. In the case of the company with limited liability, the liability clause

must state that liability of members is limited by further stating whether limited by

shares or by guarantee. In the case of unlimited liability company, this clause need

not be given in the memorandum of association.

According to Section 13(1), a company may, by a special resolution and after

complying with the procedure specified in this section, alter the provisions of its

memorandum. It means that a company can change the liability clause of its

memorandum of association by passing a special resolution. Further, Section

13(6)(a) provides that a company shall, in relation to any alteration of its

memorandum, file with the Registrar the special resolution passed by the company

under section 13(1).

5. Alteration of Capital Clause

A limited company having a share capital may make the following types of

alterations in its memorandum by an ordinary resolution, if so authorized by its

articles, at its general meeting to (Section 61)—

(i) increase its authorised share capital by such amount as it thinks expedient;

(ii) consolidate and divide all or any of its share capital into shares of a larger

amount than its existing shares:

(iii) convert all or any of its fully paid-up shares into stock, and reconvert that

stock into fully paid-up shares of any denomination;

(iv) sub-divide its shares, or any of them, into shares of smaller amount than is

fixed by the memorandum, so, however, that the proportion between the

amount paid and unpaid shall remain the same.

(v) cancel shares which, at the date of the passing of the resolution in that behalf,

have not been taken or agreed to be taken by any person, and diminish the

amount of its share capital by the amount of the shares so cancelled.

All the above alterations do not require the confirmation by the Tribunal

except that alteration relating to consolidation and division which results in changes

in the voting percentage of shareholders shall not take effect unless it is approved by

the Tribunal on an application made in the prescribed manner.

These alterations are, however, required to be notified and a copy of the resolution

should be filed with the Registrar within 30 days of the passing of the resolution

along with an altered memorandum. [Section 64(1)]

The Registrar shall record the notice and make any alteration which may be

necessary in the company’s memorandum or articles or both. It must be noted that

cancellation of shares in pursuance of Section 61(1) does not amount to reduction of

share capital.

Registration of Alteration

Section 13(6)(a) provides that a company shall, in relation to any alteration

of its memorandum, file with the Registrar:

(a) the special resolution passed by the company under section 13(1); and

(b) the approval of the Central Government under section 13(2), if the alteration

involves any change in the name of the company.

The special resolution shall be filed with the Registrar within thirty days of the

passing or making thereof in the prescribed manner and payment of prescribed fees

within the time specified under section 403. As per Section 13(9), the Registrar shall

register any alteration of the memorandum with respect to the objects of the

company and certify the registration within a period of thirty days from the date of

filing of the special resolution in accordance with Section 13 (6)(a).

Further, Section 13(7) provides that where an alteration of the memorandum

results in the transfer of the registered office of a company from one State to another,

a certified copy of the order of the Central Government approving the alteration shall

be filed by the company with the Registrar of each of the States within such time and

in such manner as may be prescribed, who shall register the same, and the Registrar

of the State where the registered office is being shifted to, shall issue a fresh

certificate of incorporation indicating the alteration.

12.6 The Doctrine of Ultra-Vires

This is another important doctrine of Company Law. The word ‘Ultra’ stands

for beyond the limit and ‘vires’ stands for power. Hence an Ultra-vires act implies an

act which is beyond the power. Ultra-vires of Article of Association means an act

beyond article of association’s power. Similarly an act beyond the purview of

memorandum of association is considered as ultra-vires to the company. The

company is formed for the achievement of some specific objectives described in its

Memorandum of Association. The company cannot do any act which goes beyond

the powers given by the Memorandum of Association. It cannot easily alter its object

clause. The Memorandum of Association defines and confines the objectives of the

company in a clear manner so that everybody dealing with the company may have a

clear picture of the scope of activities of the company. The company has a right to

perform all the necessary activities for the achievement of its objectives as described

in its Memorandum. So the Memorandum draws a line of activities which the

company cannot cross in any way. If the company does so, the activity will be

considered ultra-vires activity.

This doctrine provides that those transactions of a company which are beyond

the scope of the Memorandum or are against the provisions of the Companies Act or

the general laws of the land are ultra-vires. The ultra-vires transactions are absolutely

null and void and even the whole body of shareholders cannot ratify them and make

them binding on the company. However, it is not necessary that an ultra-vires act

must be illegal. It may or may not be. It is pertinent to note that this doctrine does not

restrain a company from doing such things as are reasonably fair and incidental to its

objects.

In the case of a company whatever is not stated in the memorandum as the

objects or powers is prohibited by the doctrine of ultra vires. As a result, an act

which is ultra vires is void, and does not bind the company. Neither the company nor

the contracting party can sue on it. Also, as stated earlier, the company cannot make

it valid, even if every member assents to it.

The general rule is that an act which is ultra vires the company is incapable

of ratification. An act which is intra vires the company but outside the authority of

the directors may be ratified by the company in proper form [Rajendra Nath Dutta v.

Shilendra Nath Mukherjee, (1982) 52 Com Cases 293 (Cal.)].

The rule is meant to protect shareholders and the creditors of the company. If

the act is ultra vires (beyond the powers of) the directors only, the shareholders can

ratify it. If it is ultra vires the articles of association, the company can alter its

articles in the proper way. The memorandum of the company in the said case defined

its objects thus: “The objects for which the company is established are to make and

sell, or lend or hire, railway plants to carry on the business of mechanical

engineers and general contractors…………………………… ”.

The company entered into a contract with M/s. Riche, a firm of railway

contractors to finance the construction of a railway line in Belgium. On subsequent

repudiation of this contract by the company on the ground of its being ultra vires,

Riche brought a case for damages on the ground of breach of contract, as according

to him the words “general contractors” in the objects clause gave power to the

company to enter into such a contract and, therefore, it was within the powers of the

company. More, so because the contract was ratified by a majority of shareholders.

The House of Lords held that the contract was ultra vires the company and,

therefore, null and void. The term “general contractor” was interpreted to indicate as

the making generally of such contracts as are connected with the business of

mechanical engineers. The Court held that if every shareholder of the company had

been in the room and had said, “That is a contract which we desire to make, which we

authorise the directors to make”, still it would be ultra vires. The shareholders cannot

ratify such a contract, as the contract was ultra vires the objects clause, which by Act

of Parliament, they were prohibited from doing.

Loans, Borrowings, Guarantees and Ultra Vires Rule

An ultra vires borrowing does not create a relationship of a debtor and

creditor. In a case, a company had accepted deposits from outsiders which was

outside the scope of the Memorandum. When the company was ordered to be wound

up, a question was raised whether the depositors were creditors of the company and

whether the contributories could be asked to contribute towards payment of deposits.

The Court held that the relationship between the company and the depositors was not

that of debtor and creditor. But if the lender had lent the amount for discharging

lawful expenses, he may recover the amount.

Whether a transaction is ultra vires the company can be decided on the basis of the

following:

(1) if a transaction entered into by a company falls within the objects, it is not

ultra vires and hence not void;

(2) if a transaction is outside the capacity (objects) of the company, it is ultra

vires;

(3) if a transaction is in excess or abuse of the company’s powers, such

transaction will be set aside by the shareholders;

Shareholder’s Right in Respect of Ultra Vires Acts

A shareholder can get back the money paid by him to the company under an

ultra vires allotment of shares. A transferee of shares from him would not have been

so allowed. [Margarate Linz v. Electric Wire Co. of Salestine Ltd. (1948) 18 Com

Cases 201, 205: AIR 1949 PC 51]. Sometimes, an act or transaction is beyond the

powers of the directors or beyond the scope of the Articles but within the powers of

the company. The company can ratify these acts or transactions by means of a

resolution at a general meeting.

Effects or Consequences of Ultra-vires Transactions

When a company does an ultra-vires act or transaction, it brings the following

consequences:

(i) Void ab initio: The ultra vires acts are null and void ab initio. The company

is not bound by these acts. Even the company cannot sue or be sued upon

[Ashbury Railway Carriage and Iron Company v. Riche ].

Ultra vires contracts are void ab initio and hence cannot become intra vires

by reason of estoppel or ratification.

(ii) Injunction: The members can get an injunction to restrain a company

wherein ultra vires act has been or is about to be undertaken [Attorney

General v. Gr. Eastern Rly. Co., (1880) 5 A.C. 473].

(iii) Personal Liability of Directors: It is one of the duties of directors to ensure

that the corporate capital is used only for the legitimate business of the

company and hence if such capital is diverted to purposes alien to the

company’s memorandum, the directors will be personally liable to replace it.

In Jehangir R. Modi v. Shamji Ladha, [(1866-67) 4 Bom. HCR (1855)], the

Bombay High Court held, “A shareholder can maintain an action against the

directors to compel them to restore to the company the funds of the company

that have by them been employed in transactions that they have no authority

to enter into, without making the company a party to the suit”. In case of

deliberate misapplication, criminal action can also be taken for fraud.

However, a distinction must be drawn between transactions which are

ultra vires the company and the transactions which are ultra vires the

directors. Where the directors exceed their authority the same may be ratified

by the general body of the shareholders. Provided the company has the

capacity to do that transaction as per its memorandum of association.

(iv) Where a company’s money has been used ultra vires to acquire some

property, the company’s right over such property is held secure and the

company will be the right party to protect the property. This is because,

though the property has been acquired for some ultra vires object, it

represents the money of the company.

(v) Ultra vires borrowing does not create the relationship of creditor and debtor

[In Re. Madras Native Permanent Fund Ltd., (1931) 1 Com Cases 256

(Mad.)].

12.7 Summary

The preparation of Memorandum of Association is the first step in the

formation of a company. It is a document which contains the fundamental conditions

upon which the company is allowed to be incorporated. The contents of the

memorandum are called compulsory clauses and are name clause, situation clause,

objects clause, liability clause, and capital clause. Section 16 of the Companies Act

provides that the company cannot alter the conditions contained in the Memorandum

of Association except in the cases and in the mode and to the extent express

provision has been made in the Act. The activities of the company are confined

strictly to the objects mentioned in its memorandum, and if they beyond these

objects, then such acts will be ultra-vires. The object of declaring such acts as ultra-

vires is to protect the interests of shareholders and all others who deal with the

company.

12.8 Keywords

Memorandum of Association: It is the document which defines the objects and lays

down the fundamental conditions upon which along the company is allowed to be

incorporated.

Doctrine of Ultra-vires: A doctrine declaring that any act contrary or in excess of

the scope of the activity of the company will be null and void and not binding on the

company.


1. What is a Memorandum of Association? Discuss its various clauses.

2. How the alteration in the different clauses of Memorandum of Association

can be made?

3. Discuss the Doctrine of Ultra-vires with reference to the Memorandum of

Association of a limited company.

4. What are the steps necessary for alteration of objects clause of the

Memorandum of Association?

5. What do you understand by the memorandum of association? What is its

purpose?

6. “Memorandum of association is a charter of the company”. Comment upon

the statement and explain the clauses which are included in a memorandum

of association of a company.

7. What is the importance of the objects clause of the memorandum of

association? If a company undertakes to do anything which is not either

expressly or impliedly provided for by the objects clause, what would be the

consequences?

\


1. P.P.S. Gogna, Mercantile Law, S.Chand & Company, New Delhi.


3. S. S. Gulshan and G K Kapoor, Business Law including Company Law, New

Age International Publishers, New Delhi.


House, New Delhi.

5. M. C. Kuchhal and Deepa Prakash, Business Legislation for Management,

Vikas Publishing House Pvt. Ltd., New Delhi.



Lesson No.: 13 Vetter: Prof. M.C. Garg

ARTICLES OF ASSOCIATION

Structure

13.0 Objectives

13.1 Introduction

13.2 Meaning of Articles of Association

13.3 Contents of Articles of Association

13.4 Alteration of Articles of Association

13.5 Difference Between Memorandum of Association and Articles of Association

13.6 Legal Effect of Memorandum and Articles of Association

13.7 Doctrine of Constructive Notice

13.8 Doctrine of Indoor Management

13.9 Summary

13.10 Keywords



13.0 Objectives


Define articles of association and enumerate the contents of articles of

association.

Describe the procedure regarding the alteration of articles of association.

Explain the binding effects of company’s articles of association.

Explain the concept of Doctrine of Constructive Notice and Doctrine of

Indoor Management.

13.1 Introduction

The preparation of articles of association is the next step in the formation of

the company. The articles of association may be understood as a document

containing regulations for the internal management of the affairs of the company.

They prescribe the rules and bye-laws for the general management of the company

and for the attainment of its objects as given in the memorandum of association. The

articles of association is considered second most important document of the company

which is submitted to the registrar at the time of formation of company. It contains

bye-laws related to the company’s internal management. This document is prepared

satisfying broad objectives laid in the memorandum.

According to Section 2(5) of the Companies Act, 2013, ‘articles’ means the

articles of association of a company as originally framed or as altered from time to

time or applied in pursuance of any previous company law or of this Act. It also

includes the regulations contained in Table A in Schedule I of the Act, in so far as

they apply to the company. In terms of Section 5(1), the articles of a company shall

contain the regulations for management of the company. The articles play a very

important role in the affairs of a company. It deals with the rights of the members of

the company inter se. They are subordinate to and are controlled by the

memorandum of association.

13.2 Meaning of Articles of Association

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. Every company is required to file Articles of Association along with the

Memorandum of Association with the Registrar at the time of its registration.

Companies Act defines Articles as “Articles of Association of a company as

originally framed or as altered from time to time in pursuance of any previous

companies Acts”. They also include, so far as they apply to the company, those in

the Table A in Schedule I annexed to the Act or corresponding provisions in earlier

Acts. They may be described as the internal regulation of the company governing its

management and embodying the powers of the directors and officers of the company

as well as the powers of the shareholders. They lay down the mode and the manner

in which the business of the company is to be conducted.

The articles of a company are subordinate to and subject to the memorandum

of association and any clause in the Articles going beyond the memorandum will be

ultra vires. But the articles are only internal regulations, over which the members of

the company have full control and may alter them according to what they think fit.

Only care has to be taken to see that regulations provided for in the articles do not

exceed the powers of the company as laid down by its memorandum [Ashbury v.

Watson, (1885) 30 Ch. D 376 (CA)]. Articles that go beyond the company’s sphere

of action are inoperative, and anything done under the authority of such article is

void and incapable of ratification.

Every type of company whether public or private and whether limited by

shares or limited by guarantee having a share capital or not having a share capital or

an unlimited liability company must register their articles of association. The articles

of a company shall be in respective forms specified in Tables, F, G, H, I and J in

Schedule I as may be applicable to such company either in totality or otherwise.

[Section 5(6)] The articles must be printed, divided into paragraphs, numbered

consecutively, stamped adequately, signed by each subscriber to the memorandum

and duly witnessed and filed along with the memorandum. The articles must not

contain anything illegal or ultra vires the memorandum, nor should it be contrary to

the provisions of the Companies Act 2013.

13.3 Contents of Articles of Association

The articles set out the rules and regulations framed by the company for its

own working. The articles should contain generally the following matters:

1. Exclusion wholly or in part of Table F.

2. Adoption of preliminary contracts.

3. Number and value of shares.

4. Issue of preference shares.

5. Allotment of shares.

6. Calls on shares.

7. Lien on shares.

8. Transfer and transmission of shares.

9. Nomination.

10. Forfeiture of shares.

11. Alteration of capital.

12. Buy back.

13. Share certificates.

14. Dematerialisation.

15. Conversion of shares into stock.

16. Voting rights and proxies.

17. Meetings and rules regarding committees.

18. Directors, their appointment and delegations of powers.

19. Nominee directors.

20. Issue of Debentures and stocks.

21. Audit committee.

22. Managing director, Whole-time director, Manager, Secretary.

23. Additional directors.

24. Seal.

25. Remuneration of directors.

26. General meetings.

27. Directors meetings.

28. Borrowing powers.

29. Dividends and reserves.

30. Accounts and audit.

31. Winding up.

32. Indemnity.

33. Capitalisation of reserves.

Utmost caution must be exercised in the preparation of the articles of

association of a company. At the same time, certain provisions of the Act are

applicable to the company "notwithstanding anything to the contrary in the articles".

Therefore, the articles must contain provisions in respect of all matters which are

required to be contained therein so as not to hamper the working of the company

later.

13.4 Alteration of Articles of Association

A company has a statutory right to alter its articles of association. But the

power to alter is subject to the provisions of the Act and to the conditions contained

in the memorandum. Section 14(1) provides that subject to the provisions of this Act

and the conditions contained in its memorandum, if any, a company may, by a

special resolution, alter its articles including alterations having the effect of

conversion of a private company into a public company; or a public company into a

private company. First provision to section 14(1) lays down that where a company

being a private company alters its articles in such a manner that they no longer

include the restrictions and limitations which are required to be included in the

articles of a private company under this Act, the company shall, as from the date of

such alteration, cease to be a private company. Second provision to Section 14(1)

stipulates that any alteration having the effect of conversion of a public company into

a private company shall not take effect except with the approval of the Tribunal

which shall make such order as it may deem fit.

Every alteration of the articles under this section and a copy of the order of

the Tribunal approving the alteration as per section 14(1) shall be filed with the

Registrar, together with a printed copy of the altered articles, within a period of

fifteen days in such manner as may be prescribed, who shall register the same

[Section 14 (2)]. Any alteration of the articles registered under section 14(2) shall,

subject to the provisions of this Act, be valid as if it were originally in the articles

[Section 14(3)]. The right to alter the articles is so important that a company cannot

in any manner, either by express provisions in the articles or by independent

contract, deprive itself of the powers to alter its articles [Walker v. London Tramway

Co. (1879) 12 Ch. D. 705].

Limitations Regarding Alteration of Articles

However, in spite of the power to alter its articles, a company can exercise

this power subject only to certain limitations. These are:

1. The alteration must not exceed the powers given by the memorandum. In the

event of conflict between the memorandum and the articles, it is the

memorandum that will prevail.

2. The alteration must not be inconsistent with any provisions of the Companies

Act or any other statute.

Similarly, where a resolution was passed expelling a member and authorising the

director to register the transfer of his shares without an instrument of transfer, the

resolution was held to be invalid as being against the provisions of the Act [Madhava

Ramachandra Kamath v. Canara Banking Corporation [1941] 11 Com Cases 78

(Mad)].

On the other hand, articles may impose on the company conditions stricter than those

provided under the law; for example, they may provide that a matter should be

passed by a special resolution when the Act requires it to be passed by an ordinary

resolution.

3. The Articles must not include anything which is illegal or opposed to public

policy.

4. The alteration must be bona fide for the benefit of the company as a whole.

5. The alteration must not constitute a fraud on the minority by a majority. If the

alteration is not for the benefit of the company as a whole, but for majority of

shareholders, then the alteration would be bad. [All India Railway Mens

Benefit Fund v. Jamadar Baheshwarnath Bali (1945) 15 Com Cases 142

(Nag.)]

6. Articles cannot be altered so as to compel an existing member to take or

subscribe for more shares or in any way increase his liability to contribute to

the share capital, unless he gives his consent in writing (Section 38).

7. By effecting alteration in its articles, a company cannot defeat escape from its

contractual obligation with any person. The company will always be liable in

such a case.

8. The Articles of Association cannot be altered so as to have retrospective

effects. The articles only operate from the date of the amendment [Pyare Lal

Sharma v. Managing Director, J.K. Industries Ltd. (1989) 3 Comp LJ (SL)

70].

9. The alteration must not be inconsistent with an order of the Court under

Sections 397 or 398 and 404 of the Companies Act, 1956.

Effect of Altered Articles

Alteration binds members in the same way as original articles. The altered

articles shall bind the company and the members to the same extent as if they had

been signed by the company and by each member, means the articles as originally

framed, or as they may from time to time stand altered are valid under the provisions

of the Act. There is clear power to alter the articles, and as altered, they bind

members just in the same way as did the original articles. Section 8(4)(i) provides

that a company registered under section 8 i.e. companies with charitable objects shall

not alter the provisions of its memorandum or articles except with the previous

approval of the Central Government.

13.5 Difference between Memorandum of Association and Articles

of Association

The difference between memorandum of association and articles of

association is as under:

1. Meaning: Memorandum of Association is the charter of the company. It

contains those fundamental conditions upon which alone the company is

granted incorporation. Articles of Association contain the rules and

regulations framed to govern the internal management of the company.

2. Mode of Alteration: Different clause of the Memorandum cannot be easily

altered. They can be altered for specified purposes and in accordance with the

mode prescribed by the Act. Alteration of some of them requires the

permission of the Company Law Board while in other cases sanction of the

court is necessary. Members have full control over the articles. They can alter

the articles by passing a special resolution provided other conditions are

satisfied. Permission of the court or the government is not required for

ordinary alteration.

3. Scope: Memorandum defines the objects and powers of the company. It fixes

up the scope and the extent of the activities of the company. Articles form the

bye-laws of the company and provide those regulations by which the objects

and powers of the company can be carried out.

Moreover, though both are public documents, yet Memorandum

defines the relation between the company and the outsiders, while the

Articles regulate the relation between the company the members as members

atone or members inter se.

4. Contents: Memorandum of Association cannot include any clause contrary

to the provisions of the Companies Act. Articles of Association is subsidiary

to both the Companies Act and Memorandum of Association. Articles cannot

be framed in contravention of the provisions of law and the Memorandum.

5. Ratification: Things done by a company beyond the scope of the

Memorandum are absolutely void and cannot be ratified even by a unanimous

vote of all the shareholders. But things done by a company beyond the

Articles are simply irregular and not void and can easily be confirmed or

subsequently ratified by the shareholders.

13.6 Legal Effect of Memorandum and Articles of Association

The memorandum and articles, when registered, bind the company and its

members to the same extent as if they have been signed by the company and by each

member to observe and be bound by all the provisions of the memorandum and of

the articles. Also, all monies payable by any member to the company under the

memorandum or articles shall be a debt due from him to the company (Section 10).

We shall examine the extent to which the memorandum and articles bind:

(a) the members to the company;

(b) the company to the members;

(c) the members inter se; and

(d) the company to outsiders.

Members Bound to the Company

The memorandum and articles constitute a contract binding the

members of the company. The members, as members, are bound to the

company. Each member must, therefore, observe the provisions of the

memorandum and articles. Each member is bound by the covenants of the

Memorandum as originally made and as altered from time to time [Malleson

v. National Insurance Co.]. In another case, the shareholders could not enter

into an agreement which was contrary to or inconsistent with the articles of

association of the company [V.B. Rangaraj v. V.B. Gopalkrishnan (1992) 73

Com Cases 201 (SC)].

Company Bound to the Members

Since the articles constitute a contract binding the company to its members in

their capacity as members, a member can bring an action against the company for

infringement by it of the memorandum or articles. For example, an individual

member can sue the company for an injunction restraining it from improper payment

of dividend [Hoole v. Great Western Railway (1867) 3 Ch. D. 262]. Further, the

company is bound to individual members in respect of their ordinary rights as

members, e.g. the right to receive share certificate in respect of shares allotted to

them, or to receive notice of general meeting, etc. Normally, action for breach of

articles against the company can be brought only by a majority of the members.

Individual or minority members cannot bring such a suit except when it is intended

for enforcement of personal rights of members or to prevent the company from doing

any ultra vires or illegal act, fraud, or oppression and mismanagement.

Member Bound to Member

As between the members inter se each member is bound by the articles to the

other members but that does not mean the memorandum and articles create an

express contract among the members of the company. Thus, a member of a company

has no right to bring a suit to enforce the articles in his own name against any other

member or members. It is the company alone which can sue the offender so as to

protect the aggrieved member. It is in this way that the rights of members inter se are

regulated. A shareholder may, however, sue in his own name to restrain another, or

others from doing fraudulent or ultra vires acts. Articles do not affect or regulate the

rights arising out of a commercial contract, with which the members have no

concern, i.e., rights completely outside the company’s relationship.

Company Not Bound to Members

The term “outsider” signifies a person who is not a member of the company

even if he is a director of or solicitor to the company. Even in regard to members, the

articles bind the company to them in their capacity as members. As between

outsiders and the company, neither the memorandum nor the articles would give any

contractual rights to outsiders against the company or its members even though the

names of outsiders are mentioned in those documents in connection with the

arrangements that the company might have contemplated for carrying on its

business. The articles do not confer any contractual rights even upon a member in a

capacity other than that of a member. To succeed, the party suing must prove a

contract outside and independent of the articles [Eley v. Positive Life Insurance Co.,

(1876) 1 E.X.D. 88]. In this case the articles provided that the solicitor to the

company would not be removed from office except for misconduct. Eley acted as

solicitor to the company and also became a member of the company. The company

discontinued his services and then he sued the company for damages for breach of

contract. It was held that he had no cause of action because the articles did not

constitute any contract between the company and himself. His action was dismissed.

13.7 Doctrine of Constructive Notice

The memorandum and articles, when registered, become public documents

and can be inspected by anyone on payment of nominal fee. Therefore, every person

who contemplates entering into a contract with a company has the means of

ascertaining and is consequently presumed to know, not only the exact powers of the

company but also the extent to which these powers have been delegated to the

directors, and of any limitations placed upon the exercise of these powers. In other

words, every person dealing with the company is deemed to have a “constructive

notice” of the contents of its memorandum and articles. In fact, he is regarded not

only as having read those documents but also as having understood them according

to their proper meaning [Griffith v. Paget, (1877) Ch. D. 517]. Consequently, if a

person enters into a contract which is beyond the powers of the company, as defined

in the memorandum, or outside the limits set on the authority of the directors, he

cannot, as a general rule, acquire any rights under the contract against the company

[Mohony v. East Holyfrod Mining Co., (1875) L.R. 7 H.L. 869]. For example, if the

articles provide that a bill of exchange to be effective must be signed by two

directors, a person dealing with the company must see that it is so signed; otherwise

he cannot claim under it.

In another case, the articles required that all documents should be signed by

the managing director, secretary and the working director on behalf of the company.

A deed of mortgage was executed by the secretary and the working director only and

the Court held that no claim would lie under such a deed. The Court said that the

mortgagee should have consulted the articles before the deed was executed.

Therefore, even though the mortgagee may have acted in good faith and the money

borrowed applied for the purpose of the company, the mortgage was nevertheless

invalid [Kotla Venkataswamy v. Rammurthy, AIR 1934 Mad 579]. The doctrine of

indoor management protects third parties who are entitled to an assurance that all the

procedural aspects of a transaction are carried out.

Outsiders dealing with incorporated bodies are bound to take notice of limits

imposed on the corporation by the memorandum or other documents of constitution.

Nevertheless they are entitled to assume that the directors or other persons exercising

authority on behalf of the company are doing so in accordance with the internal

regulations as set out in the Memorandum and Articles of Association.

13.8 Doctrine of Indoor Management

Doctrine of Indoor Management protects an outsider against company in

contrast to the doctrine of constructive notice. According to this doctrine it is

presumed that the person dealing with company is not well versed with the

company’s internal affairs. Rather he may not know where there is a fault in

company’s internal matters? It is the duty of the officer concerned of the company to

look into the matter. The rule is that persons dealing with the company in good faith

have a right to assume that the internal requirements prescribed in public documents

have been observed. They are not bound to enquire into the regularity of the internal

proceedings. The doctrine of indoor management is an exception to the rule of

constructive notice. A person dealing with a company is deemed to have knowledge

of the memorandum and the articles of association of the company. So, if he enters

into a transaction with the company which is ultra-vires of the memorandum or

articles, he cannot treat the transaction as binding on the company. On the other

hand, if the transaction appears to be proper one, when compared with the

memorandum and articles, it would be grossly unfair if the company could escape

liability under it by showing that there was some irregularity in the conduct of the

company’s affairs leading upto the transaction, when the other party did not know of

the irregularity and had no means of discovering it.

While the doctrine of constructive notice seeks to protect the company

against the outsiders, the principal of indoor management operates to protect the

outsiders against the company. According to this doctrine, as laid down in Royal

British Bank v. Turquand, (1856) 119 E.R. 886, persons dealing with a company

having satisfied themselves that the proposed transaction is not in its nature

inconsistent with the memorandum and articles, are not bound to inquire the

regularity of any internal proceedings. In other words, while persons contracting with

a company are presumed to know the provisions of the contents of the memorandum

and articles, they are entitled to assume that the provisions of the articles have been

observed by the officers of the company. It is no part of the duty of an outsider to see

that the company carries out its own internal regulations.

Section 176 provides for the validity of acts of directors. No act done by a

person as a director shall be deemed to be invalid, notwithstanding that it was

subsequently noticed that his appointment was invalid by reason of any defect or

disqualification or had terminated by virtue of any provision contained in this Act or

in the articles of the company provided that nothing in this section shall be deemed

to give validity to any act done by the director after his appointment has been noticed

by the company to be invalid or have been terminated.

The object of the section is to protect persons dealing with the company -

outsiders as well as members-by providing that the acts of a person acting as director

will be treated as valid although it may afterwards be discovered that his

appointment was invalid or that it had terminated under any provision of this Act or

the Articles of the company [Ram Raghubir Lal v. United Refineries (Burma) Ltd.,

(1932) 2 Com Cases 359; AIR 1931 Rang 139].

Exceptions to the Doctrine Indoor Management

The above noted ‘doctrine of indoor management’ is, however, subject to

certain exceptions. In other words, relief on the ground of ‘indoor management’

cannot be claimed by an outsider dealing with the company in the following

circumstances:

1. Where the Outsider had Knowledge of Irregularity — The rule does not

protect any person who has actual or even an implied notice of the lack of

authority of the person acting on behalf of the company. Thus, a person

knowing fully well that the directors do not have the authority to make the

transaction but still enters into it, cannot seek protection under the rule of

indoor management. In Howard v. Patent Ivory Co. (38 Ch. D 156), the

articles of a company empowered the directors to borrow upto one thousand

pounds only. They could, however, exceed the limit of one thousand pounds

with the consent of the company in general meeting. Without such consent

having been obtained, they borrowed 3,500 pounds from one of the directors

who took debentures. The company refused to pay the amount. Held that, the

debentures were good to the extent of one thousand pounds only because the

director had notice or was deemed to have the notice of the internal

irregularity.

2. No Knowledge of Memorandum and Articles — Again, the rule cannot be

invoked in favour of a person who did not consult the memorandum and

articles and thus did not rely on them. In Rama Corporation v. Proved Tin &

General Investment Co. (1952) 1All. ER 554, T was a director in the

company. He, purporting to act on behalf of the company, entered into a

contract with the Rama Corporation and took a cheque from the latter. The

articles of the company did provide that the directors could delegate their

powers to one of them. But Rama Corporation people had never read the

articles. Later, it was found that the directors of the company did not delegate

their powers to T. The plaintiff relied on the rule of indoor management.

Held, they could not because they even did not know that power could be

delegated.

3. Forgery — The rule of indoor management does not extend to transactions

involving forgery or to transactions which are otherwise void or illegal ab

initio. In the case of forgery it is not that there is absence of free consent but

there is no consent at all. The person whose signatures have been forged is

not even aware of the transaction, and the question of his consent being free

or otherwise does not arise. Consequently, it is not that the title of the person

is defective but there is no title at all. Therefore, howsoever clever the forgery

might have been, the personates acquire no rights at all. Thus, where the

secretary of a company forged signatures of two of the directors required

under the articles on a share certificate and issued certificate without

authority, the applicants were refused registration as members of the

company. The certificate was held to be nullity and the holder of the

certificate was not allowed to take advantage of the doctrine of indoor

management [Rouben v. Great Fingal Consolidated (1906) AC 439].

Forgery, in the case of a company, can take different forms. It may,

besides forgery of the signatures of the authorised officials, include the

execution of a document towards the personal discharge of an official’s

liability instead of the liability of the company. Thus, a bill of exchange

signed by the manager of a company with his own signature under words

stating that he signed on behalf of the company, was held to be forgery when

the bill was drawn in favour of a payee to whom the manager was personally

indebted [Kreditbank Cassel v. Schenkers Ltd. (1927) 1 KB 826]. The bill in

this case was held to be forged because it purported to be a different

document from what it was in fact; it purported to be issued on behalf of the

company in payment of its debt when in fact it was issued in payment of the

manager’s own debt.

4. Negligence — The ‘doctrine of indoor management’, in no way, rewards

those who behave negligently. Thus, where an officer of a company does

something which shall not ordinarily be within his powers, the person dealing

with him must make proper enquiries and satisfy himself as to the officer’s

authority. If he fails to make an enquiry, he is estopped from relying on the

Rule. In the case of Underwood v. Bank of Liverpool (1924) 1 KB 775, a

person who was a sole director and principal shareholder of a company

deposited into his own account cheques drawn in favour of the company.

Held, that, the bank should have made inquiries as to the power of the

director. The bank was put upon an enquiry and was accordingly not entitled

to rely upon the ostensible authority of director.

Similarly, in the case of Anand Behari Lal v. Dinshaw & Co. (Bankers) Ltd.

AIR 1942 Oudh 417, an accountant of a company transferred some property

of a company in favour of Anand Behari. On an action brought by him for

breach of contract, the Court held the transfer to be void. It was observed that

the power of transferring immovable property of the company could not be

considered within the apparent authority of an accountant.

5. Again, the doctrine of indoor management does not apply where the question

is in regard to the very existence of an agency. In Varkey Souriar v.

Keraleeya Banking Co. Ltd. (1957) 27 Com Cases 591 (Ker.), the Kerala

High Court held that the ‘doctrine of indoor management’ cannot apply

where the question is not one as to scope of the power exercised by an

apparent agent of a company but is with regard to the very existence of the

agency.

6. This Doctrine is also not applicable where a pre-condition is required to be

fulfilled before company itself can exercise a particular power. In other words, the

act done is not merely ultra vires the directors/officers but ultra vires the company

itself — Pacific Coast Coal Mines v. Arbuthnot (1917) AC 607.

In the end, it is worthwhile to mention that Section 6 of the Companies Act,

2013 gives overriding force and effect to the provisions of the Act, notwithstanding

anything to the contrary contained in the memorandum or articles of a company or in

any agreement executed by it or for that matter in any resolution of the company in

general meeting or of its board of directors. A provision contained in the

memorandum, articles, agreement or resolution to the extent to which it is repugnant

to the provisions of the Act, will be regarded as void.

Doctrine of Alter Ego

It is used by the courts to ignore the status of shareholders, officers, and

directors of a company in reference to their liability in their respective capacity so

that they may be held personally liable for their actions when they have acted

fraudulently or unjustly. In Lennards Carying Co. Ltd. v. Asiatic Petroleum Co. Ltd.

[1915] AC 705, Viscount Haldane propounded the “alter ego” theory and

distinguished it from vicarious liability. The House of Lords stated that the default of

the managing director who is the “directing mind and will” of the company, would

be attributed to him and he be held for the wrong doing of the company. It is to be

noted that every gathering or assembly does not constitute a meeting. Company

meetings must be convened and held in perfect compliance with the various

provisions of the Companies Act, 2013 and the rules framed thereunder. A company

is composed of members, though it has its own entity distinct from members. The

members of a company are the persons who, for the time being, constitute the

company, as a corporate entity. However, a company, being an artificial person,

cannot act on its own. It, therefore, expresses its will or takes its decisions through

resolutions passed at validly held meetings. The primary purpose of a meeting is to

ensure that a company gives reasonable and fair opportunity to those entitled to

participate in the meeting to take decisions as per the prescribed procedures.

Convening of one such meeting every year is compulsory. Holding of more general

meetings is left to the choice of the management or to a given percentage of

shareholders to exercise their power to compel the company to convene a meeting.

Shareholder democracy, class action suits and protection of interest of investors are

the essence and attributes of the Companies Act, 2013.

13.9 Summary

The articles of association contain the rules with regard to the internal

management of the company. The articles should not be contrary to the provisions of

the Companies Act and not any other law for the time being in force. The articles

must be printed, divided into paragraphs and signed by each subscriber of the

memorandum of association. The memorandum of association and articles of

association, when registered become public documents and can be inspected by

anyone on the payment of a nominal fee in the office of Registrar of companies.

When, it is so, every person dealing with the company is presumed to have the

known the contents of the two important public documents of the company.

Imputation of knowledge as to the contents of memorandum of association and

articles of association is known as constructive notice of the public documents. There

is, however, one limitation to the doctrine of constructive notice, namely, doctrine of

indoor management.

13.10 Keywords

Articles of Association: There are the rules, regulation and bye-laws for governing

the internal affairs of the company.

Doctrine of Constructive Notice: A doctrine declaring that both memorandum of

association and articles of association are public documents after being registered

with the Registrar of Companies and everyone dealing with the company is deemed

to have constructive notice of them.

Doctrine of Indoor Management: A doctrine declaring that the outsiders dealing

with the company are entitled to presume that the internal formalities as required by

the company’s articles must have been lawfully observed by the management of the

company.


1. What is Articles of Association? What are its contents?

2. Distinguish between Memorandum of Association and Articles of

Association.

3. “Articles of association of a company constitute a contract between the

members inter se and between the company and the members qua member”.

Elucidate.

4. Enunciate the doctrines of constructive notice and indoor management. What

are the exceptions, if any, to doctrine of indoor management?

5. What are the binding effects of the articles of association? Indicate the

limitations on the powers of the company to alter its articles of association.

6. “The doctrine of indoor management is a silver lining to strangers dealing

with the company”. Explain.

7. “The power of altering the articles is wide, yet it is subject to a large number

of limitations”. Explain.

8. Discuss the extent to which articles of association binds:

(a) the members to the company,

(b) the company to the members,

(c) the members among themselves, and

(d) the company to the outsiders.







House, New Delhi.

5. S.K. Aggarwal, Business Law, Galgotia Publishing Company, New Delhi.



Lesson No.: 14 Vetter: Prof. M.C. Garg

MEETINGS OF COMPANIES

Structure

14.0 Objectives

14.1 Introduction

14.2 Company Meetings

14.3 Requisites of a Valid Meeting

14.4 Types of Meetings

14.4.1 Annual General Meeting

14.4.2 Extraordinary General Meeting

14.4.3 Class Meeting

14.5 Resolutions

14.5.1 Ordinary Resolution

14.5.2 Special Resolution

14.5.3 Resolution requiring special notice

14.6 Summary

14.7 Key Words



14.0 Objectives


Understand the essentials of a valid meeting.

Explain different types of company meetings.

Describe the types of resolutions and when are they passed.

14.1 Introduction

A meeting is defined as coming together of two or more people at a certain

time and place especially for discussion. In case of a company, in certain exceptional

cases, even one person may constitute a valid meeting. A meeting may be generally

defined as a gathering or assembly or getting together of a number of persons for

transacting any lawful business. There must be atleast two persons to constitute a

meeting. Therefore, one shareholder usually cannot constitute a company meeting

even if he holds proxies for other shareholders. However, in certain exceptional

circumstances, even one person may constitute a meeting. It is to be noted that every

gathering or assembly does not constitute a meeting. Company meetings must be

convened and held in perfect compliance with the various provisions of the

Companies Act, 2013 and the rules framed thereunder. In this lesson, you will learn

about company meetings, types of meetings, essentials of valid meeting, resolutions

and different types of resolution.

14.2 Company Meetings

The meaning of meeting as explained above is the coming together or

gathering of persons for discussing any lawful business. The meetings of a company

can be of shareholders, creditors, debenture holders, directors and contributories. A

company is required to hold meetings of the members to take approval of certain

business items, as prescribed in the Act. The meetings to be held for seeking

approval to ordinary business and special business are called annual general meeting

and extraordinary general meeting respectively. In certain cases, a company may

have to hold a meeting of the members of a particular class of members.

14.3 Requisites of a Valid Meeting

The business at a meeting is said to have been “validly transacted” if the

members of the organisation or body concerned, whether or not they were present,

are bound by the decision made there at. They cannot be so bound unless the meeting

is validly held. The essentials of a valid meeting are that the meeting should be:

(a) Properly Convened

(i) The meeting must be called by proper authority; and

(ii) Proper notice must be served in the manner specified under Section

101 and 102 of the Act.

(b) Properly Constituted

(i) Proper quorum must be present in the general meeting (Section 103 of

the Act)

(ii) Proper chairman must preside the meeting (Section 104 of the Act)

(c) Properly Conducted

(i) The business must be validly transacted at the meeting i.e. resolutions

must be properly moved and passed, and voting by show of hands

and on poll.

(ii) Proper minutes of the meeting must be prepared. (Section 118 of the

Act)

Procedure for Convening of a Valid General Meeting

Following are the requisites of a valid meeting of a company: ––

A. Proper Authority

B. Notice and Agenda of Meeting

C. Quorum of Meeting

D. Chairman of Meeting

E. Proxy

F. Voting

G. Minutes of Meeting

Let us understand them one by one:

A. Proper Authority

Proper authority means the complete power or right to do something. The

proper authorities to call meetings are Board of Directors, Shareholders and Central

Government / Tribunal. Articles of Association normally empower the Board of

Directors to call general meetings. The shareholders, in certain circumstances, can

call an extraordinary meeting. The directors on requisition of such meeting by

shareholders have to call such meeting, failing them the requisitions to themselves.

The Company Law Board may on petition of any member can call annual general

meeting as well as an extraordinary meeting. The Board shall call meeting within 21

days from the receipt of requisition from members.

B. Notice and Agenda of Meeting (Section 101)

A general meeting of a company may be called by giving not less than 21

clear days’ notice either in writing or through electronic mode. Notice through

electronic mode shall be given in such manner as may be prescribed. In case of

section 8 company, 14 days’ clear notice is required instead of 21 days. ‘Clear days’

means days exclusive of the day of the notice of service and of the day on which the

meeting is held. Where a notice of general meeting is sent by post, it shall be deemed

to be served at the expiration of 48 hours after the letter containing the same is

posted (Rule 35(6) of the Companies (Incorporation) Rules, 2014). Each of the 21

days must be full or complete days. The day on which the notice is deemed to be

served on the member, and the day of the general meeting have to be in addition to

the 21 days.

In case a valid special notice under the Act has been received from

member(s), the company shall give notice of the resolution to all its members at least

seven days before the meeting, exclusive of the day of dispatch of notice and day of

the meeting, in the same manner as a notice of any general meeting is to be given.

Where this is not practicable, the notice shall be published in a vernacular newspaper

in the principal vernacular language of the district in which the registered office of

the company is situated, and in an English newspaper in English language, both

having a wide circulation in that district, at least seven days before the meeting,

exclusive of the day of publication of the notice and day of the meeting. In case of

companies having a website, such notice shall also be hosted on the website.

Shorter Notice

A general meeting may be called after giving a shorter notice also if consent

is given in writing or by electronic mode by not less than 95% of the members

entitled to vote at such meeting.

Contents of Notice: The contents of the notice are as follows:

(i) Place of Meeting (Section 96): The notice should state the place where

the general meeting is scheduled to be held. In case of an annual general

meeting, the place of the meeting has to be either the registered office of

the company or some other place within the city, town or village in which

the registered office of the company is situated. Explanation to Rule 17(2)

of Companies (Management and Administration) Rules 2014 states that

requisitionists should convene meeting at Registered Office or in the

same city or town where the Registered Office is situated and such

meeting should be convened on working day. Act provides Annual

General Meetings shall be held either at the registered office of the

company or at some other place within the city, town or village in which

the registered office of the company is situated, whereas other General

Meetings may be held at any place within India. In case of Government

company, AGM shall be held either at the registered office of the

company or at such other place as the Central Government may approve.

Notice shall contain complete particulars of the venue of the Meeting

including route map and prominent land mark for easy location.

(ii) Day of Meeting (Section 96): The day and date of the meeting should be

clearly stated in the notice. In case of an annual general meeting, the day

should be one that is not a National Holiday. An extraordinary general

meeting can however be held on any day. However, as per the Companies

Act, a Meeting called by the requisitionists shall be convened only on a

working day.

(iii) Time of Meeting (Section 96): Exact time of holding the meeting should

be given in the notice. An annual general meeting can be called during

business hours only, i.e. between 9:00 a.m. and 6:00 p.m. There is no

restriction of timings in case of an extraordinary general meeting. In case

of Section 8 Company, the time, date and place of each AGM are decided

upon before-hand by the directors having regard to directions, if any,

given in this regard by the company in its general meeting.

(iv) Agenda (Section 102): A statement of the business to be transacted at

the general meeting should be given in the notice. In case, the meeting is

to transact a special business, a explanatory statement should be

attached about such item. Every notice calling a meeting of a company

which has a share capital, or the articles of which provide for voting by

proxy at the meeting, should carry with reasonable prominence, a

statement that a member entitled to attend and vote is entitled to

appoint a proxy, or, where that is allowed, one or more proxies, to attend

and vote instead of himself, and that a proxy need not be a member.

(v) Persons Entitled to Receive Notice: In terms of Section 101(3), notice

of every meeting of the company must be given to:

(a) every member of the company, legal representative of any deceased member

or the assignee of an insolvent member;

(b) the auditor or auditors of the company; and

(c) every director of the company.

A private company, which is not, a subsidiary of a public company may

prescribe, by its Articles, persons to whom the notice should be given. It does not

always follow that all the members of a company are entitled to receive notice of

meetings of the company; the Articles frequently provide that preference

shareholders shall not be entitled to receive notice of and vote at general meeting

of the company, except in certain circumstances.

C. Quorum for Meetings (Section 103)

Quorum refers to the minimum number of members required to constitute a

valid meeting. Following are the minimum numbers provided in Section 103, for

various categories of companies. However, the Articles of Association of the

company may provide for a higher number.

Public Company: 5 members personally present if the number of

members as on the date of meeting is not more than 1000; 15

members personally present if the number of members as on the date

of meeting is more than 1000 but up to 5000; and 30 members

personally present if the number of members as on the date of the

meeting exceeds 5000.

Private Company: 2 members personally present, shall be the

quorum for a meeting of the company.

Members who have voted by remote e-voting have the right to attend the

general meeting and accordingly their presence shall be, counted for the purpose of

quorum. A member who is not entitled to vote on any particular item of business

being a related party, if present, shall be counted for the purpose of quorum. The

stipulation regarding the presence of a quorum does not apply with respect to items

of business transacted through postal ballot.

Consequences of no Quorum- If the quorum is not present within half-an-hour

from the time appointed for holding a meeting of the company—

(a) the meeting shall stand adjourned to the same day in the next week at the

same time and place, or to such other date and such other time and place as

the Board may determine; or

(b) the meeting, if called by requisitionists (under Section 100), shall stand

cancelled.

Notice of an Adjourned Meeting- Where the meeting stands adjourned to the same

day in the next week at the same time and place, or to such other day, not being a

National Holiday, or at such other time and place as the Board may determine, there

the company shall give at least 3 days notice to the members either individually or by

publishing an advertisement in 2 newspapers (one in English and one in vernacular

language).

No Quorum in an Adjourned Meeting- If at the adjourned meeting also, a quorum

is not present within half- an-hour from the time appointed for holding meeting, the

members present, being not less than two in numbers, will constitute the quorum. If a

meeting is adjourned sine-die or for a period of thirty days or more, a notice of the

adjourned meeting shall be given in accordance with the provisions contained

hereinabove relating to Notice.

D. Chairman of Meetings (Section 104)

Unless the articles of the company otherwise provide, the members

personally present at the meeting shall elect one of themselves to be the chairman

thereof on a show of hands. If a poll is demanded on the election of the Chairman, it

shall be taken forthwith in accordance with the provisions of this Act and the

chairman elected on a show of hands shall continue to be the chairman of the

meeting until some other person is elected as chairman as a result of the poll, and

such other person shall be the chairman for the rest of the meeting.

Companies Act provides that the chairman of the Board shall take the chair

and conduct the meeting. If the chairman is not present within fifteen minutes after

the time appointed for holding the meeting, or if he is unwilling to act as chairman of

the Meeting, or if no Director has been so designated, the Directors present at the

meeting shall elect one of themselves to be the chairman of the meeting. If no

Director is present within fifteen minutes after the time appointed for holding the

meeting, or if no Director is willing to take the chair, the members present shall

elect, on a show of hands, one of themselves to be the chairman of the meeting,

unless otherwise provided in the Articles.

If a poll is demanded on the election of the chairman, it shall be taken

forthwith in accordance with the provisions of the Act and the chairman elected on a

show of hands shall continue to be the chairman of the meeting until some other

person is elected as chairman as a result of the poll, and such other person shall be

the chairman for the rest of the meeting. The chairman shall ensure that the meeting

is duly constituted in accordance with the Act and the Articles or any other

applicable laws, before it proceeds to transact business. The chairman shall then

conduct the meeting in a fair and impartial manner and ensure that only such

business as has been set out in the notice is transacted. The chairman shall regulate

the manner in which voting is conducted at the meeting keeping in view the

provisions of the Act.

E. Proxies (Section 105)

A person who is appointed by a member to attend and vote at a meeting in

the absence of the member at the meeting is termed as proxy. Thus proxy is an agent

of the member appointing him. The term ‘proxy’ is also used to refer to the

instrument by which a person is appointed as proxy. Section 105 of the Companies

Act, 2013 provides that a member, who is entitled to attend to vote, can appoint

another person as a proxy to attend and vote at the meeting on his behalf. This

section also provides the manner of appointing proxy. The provisions are as follows:

(1) Who can Appoint a Proxy: Any member of a company who is entitled to

attend and vote at a meeting of the company shall be entitled to appoint

another person as a proxy to attend and vote at the meeting on his behalf.

Companies Act further added that where allowed, one or more proxies, to

attend and vote instead of himself and a proxy need not be a member. A

proxy can act on behalf of members not exceeding fifty and holding in the

aggregate not more than ten percent of the total share capital of the company

carrying voting rights.

(2) Disabilities of Proxy: A proxy shall not have the right to speak at the

meeting. A proxy cannot vote on a show of hands. A proxy is not counted for

the purpose of quorum.

(3) Rights of Proxy: A proxy has the right to attend the meeting. A proxy has

the right to vote only on a poll. A proxy, if eligible under section 109, has the

right to demand a poll.

(4) Restriction on Proxy: A member of a company registered under section 8

(Not for Profit company) shall not be entitled to appoint any other person as

his proxy unless such other person is also a member of such company. A

person appointed as proxy shall not act as proxy on behalf of more than fifty

members and members holding in the aggregate more than ten percent of the

total share capital of the company carrying voting rights.

A member holding more than 10% of the total share capital of the company

carrying voting rights may appoint a single person as proxy, provided that

such person shall not act as proxy for any other person or shareholder.

(5) Time Limit for Deposit of Proxy Forms: The instrument appointing the

proxy must be deposited with the company, 48 hours before the meeting.

Any provision contained in the articles, requiring a longer period than 48

hours shall have effect as if a period of 48 hours had been specified.

F. Voting

The Articles prescribe regulations and procedure for voting at general

meetings subject to the provisions of the Act. Every equity shareholder with voting

right, whose name appears on the register of members has the right to vote on every

resolution placed before the general meeting.

Restriction on Voting Rights (Section 106): The articles of a company may

provide that a member shall not exercise any voting right in respect of any

shares registered in his name on which any calls or other sums presently

payable by him have not been paid or on which company has exercised any

right or lien. No member can be prohibited from exercising his voting right on

any other ground.

Voting by Show of Hands (Section 107): At any general meeting, a resolution put

to the vote of the meeting shall in the first instance be decided on a show of hands,

unless-

(a) A poll is demanded under section 109 of the Act.

(b) Voting is carried out electronically under section 108 of the Act.

A declaration by the chairman of the meeting of the passing of a resolution

(that the resolution has been passed or failed, as the case may be) on show of hands

and an entry to that effect in the minutes book shall be conclusive evidence of the

fact of passing of such resolution. No proof of numbers of votes casts in favor of and

against the resolution is required.

Voting through Electronic Means (Section 108): General meetings of

companies are held at their registered offices and it is not possible for every

member specially members holding minor shares to travel up to the registered

office of the company and participate in the general meetings of the company.

To eliminate this type of difficulty and to enhance the participation of

minority members, concept of e-voting has been introduced by the Companies

Act 2013. Now a member can cast his vote easily through electronic mode

without physically attending the general meeting. E-voting do not eliminate

members right to physically attend and vote at the general meeting. However

member can cast his vote through one mode only. A member after casting his

vote through e-voting can go and attend the general meeting but cannot cast

vote in that general meeting.

The facility of Remote e-voting does not dispose with the requirements of holding a

General Meeting by the company.

Applicability: Section 108 of the Act shall apply to such companies as may be

prescribed by the Central Government. The prescribed class of companies, for this

purpose, are-

(i) All companies whose equity shares are listed on a recognized stock

exchange; and

(ii) All companies having 1000 or more members.

However, the provisions of Section 108 shall not apply company referred to in

Chapter XB (Companies listed on SME exchange) or Chapter XC (Companies listed

on institutional trading platform without IPO) of the SEBI (Issue of Capital and

Depository Receipt) Regulations, 2009.

Following companies are out of ambit of e-voting:-

1. Companies having whose debenture/preference shares are only listed.

2. Companies listed on SME trading platform.

3. Companies listed on institutional trading platform.

Legal Requirement

(a) A company to which Section 108 is applicable, shall provide to its members

facility to exercise their right to vote on resolution proposed at general

meetings by electronic means.

(b) Once a resolution is proposed in general meeting, it shall not be withdrawn.

Demand for Poll (Section 109): Before or on the declaration of the result of the

voting on any resolution on show of hands, a poll may be ordered to be taken by the

Chairman of the meeting on his own motion, and shall be ordered to be taken by him

on a demand made in that behalf by the following person(s):

(a) in the case a company having a share capital: By the members present in

person or by proxy, where allowed, and having not less than one-tenth of the

total voting power or holding shares on which an aggregate sum of not less

than ₹ 5,00,000/- or such higher amount as may be prescribed, has been paid-

up; and

(b) in the case of any other company: By any member or members present in

person or by proxy, where allowed, and having not less than one-tenth of the

total voting power.

The chairman shall get the validity of the demand verified. The demand for a poll

may be withdrawn at any time by the persons who made the demand.

Time for Taking Poll and Declaring the Result: A poll shall be taken

forthwith, if it is demanded for adjournment of the meeting or

appointment of chairman of the meeting. A poll shall be taken at such

time, not being later than 48 hours from the time when the demand was

made on any other question. The chairman shall announce the date,

venue and time of taking the poll to enable members to have adequate

and convenient opportunity to exercise their votes. Further, the chairman

may permit any member who so desires to be present at the time of

counting the votes. The chairman shall inform the members, the modes

and the time of such communication, which shall in any case be within 24

hours of closer of meeting in case the date, venue not announced.

Where a poll is to be taken, the chairman of the meeting shall appoint such

number of persons, as he deems necessary, to scrutinize the poll process and votes

given on the poll and to report thereon to him in the manner as may be prescribed.

The result of the poll shall be deemed to be the decision of the meeting on the

resolution on which the poll was taken.

Postal Ballot (Section 110): As per Section 2(65) “postal ballot” means voting by

post or through any electronic mode. It includes voting by shareholders by postal or

electronic mode instead of voting personally for transacting businesses in a general

meeting of the company. Each item proposed to be passed through postal ballot shall

be in the form of a resolution and shall be accompanied by an explanatory statement

which shall set out all such facts as would enable a member to understand the

meaning, scope and implications of the item of business and to take a decision

thereon.

A company shall send a notice and draft resolution by registered post to all

shareholders explaining the reasons and requesting them to send their assent or

dissent in writing on a postal ballot. If a resolution is assented to by the requisite

majority of the shareholders by means of postal ballot, it shall be deemed to have

been duly passed at a general meeting convened in that behalf.

G. Minutes of Meeting

The minutes refer to a written record of business transacted at a meeting.

Section 118 provides that every company shall prepare, sign and keep minutes of

proceedings of every general meeting, including the meeting called by the

requisitionists and all proceedings of meeting of any class of shareholders or

creditors or Board of Directors or committee of the Board and also resolution passed

by postal ballot within thirty days of the conclusion of every such meeting

concerned. In case of meeting of Board of Directors or of a committee of Board, the

minutes shall contain name of the directors present and also name of dissenting

director or a director who has not concurred the resolution. The chairman shall

exercise his absolute discretion in respect of inclusion or non-inclusion of the matters

which is regarded as defamatory of any person, irrelevant or detrimental to

company’s interest in the minutes. Minutes kept shall be evidence of the proceedings

recorded in a meeting and containing fair and correct summary of the proceeding

thereat.

Precautions to be Taken While Preparing the Minutes

(1) Uniformity in the Manner of Maintaining Minutes: Minutes may be

maintained in electronic form in such manner as prescribed under the

Act and as may be decided by the Board. Minutes in electronic form

shall be maintained with Time stamp. Every company shall, however,

follow a uniform and consistent form of maintaining the minutes. Any

deviation in such form of maintenance shall be authorized by the Board.

(2) Page Numbering: The pages of the Minutes Books shall be

consecutively numbered. This shall be followed irrespective of a break

in the book arising out of periodical binding in case the minutes are

maintained in physical form. This shall be equally applicable for

maintenance of minutes book in electronic form with time stamp.

In the event any page or part thereof in the Minutes Book is left blank, it

shall be scored out and initialled by the chairman who signs the Minutes.

Minutes shall not be pasted or attached to the minutes book, or tampered

with in any manner.

(i) Binding of Minutes: Minutes of meetings, if maintained in

loose-leaf form, shall be bound periodically depending on the

size and volume. There shall be a proper locking device to

ensure security and proper control to prevent removal or

manipulation of the loose leaves.

(ii) Place of Keeping Minutes: Minutes Books shall be kept at the

Registered Office of the company or at such other place, as may

be approved by the Board.

Recording of Minutes: Minutes shall contain a fair and correct summary of

the proceedings of the meeting. The company secretary shall record the proceedings

of the meetings. Where there is no company secretary, any other person authorised

by the Board or by the chairman in this behalf shall record the proceedings. The

chairman shall ensure that the proceedings of the meeting are correctly recorded.

Inspection of Minute Book of General Meeting (Section 119)

(1) Place of Keeping Minutes Book: In terms of Section 119, the minute’s book

of general meetings or of a resolution passed by postal ballot shall

(a) be kept at the registered office of a company; and

(b) shall be open for inspection to members during business hours

without any charge subject to such restrictions as the company may,

by its articles or in general meeting, impose so, however, that shall

not be less than two hours in each business day are allowed for

inspection.

(2) Issue of Copy of Minutes to the Member: Any member shall be entitled to

be furnished, within seven working days after he has made a request in that

behalf to the company, with a copy of any minutes of any general meeting,

on payment of such sum as may be specified in the articles of the company

but not exceeding a sum of ten rupees for each page or part of any page. A

member who has made a request for provision of soft copy in respect of

minutes of any previous general meetings held during a period of

immediately preceding three financial years shall be entitled to be furnished,

with the same free of cost.

14.4 Types of Meetings

The different types of meeting are given below:

a) Annual General Meeting

b) Extraordinary Meeting

c) Class Meeting

14.4.1 Annual General Meeting (Section 96)

Annual general meeting (AGM) is an important annual event where members

get an opportunity to discuss the activities of the company. Section 96 provides that

every company, other than a one person company is required to hold an annual

general meeting every year. Companies Act provides that the Board shall, every

year, convene or authorize convening of a meeting of its members called the annual

general meeting to transact items of ordinary business specifically required to be

transacted at an annual general meeting as well as special business, if any. If the

Board fails to convene its annual general meeting in any year, any member of the

company may approach the prescribed authority, which may then direct the calling

of the annual general meeting of the company. Following are the key provisions

regarding the holding of an annual general meeting:

Holding of Annual General Meeting

1. Annual general meeting should be held once in each calendar year.

2. First annual general meeting of the company should be held within 9 months

from the closing of the first financial year. Hence, it shall not be necessary

for the company to hold any annual general meeting in the year of its

incorporation.

3. Subsequent annual general meeting of the company should be held within 6

months from the date of closing of the relevant financial year.

4. The gap between two annual general meetings shall not exceed 15 months.

One person company is exempt from holding an AGM.

Date, Time and Place for Holding an Annual General Meeting

An annual general meeting can be called during business hours, that is,

between 9 a.m. and 6 p.m. on any day that is not a national holiday. It should be held

either at the registered office of the company or at some other place within the city,

town or village in which the registered office of the company is situated. The Central

Government is empowered to exempt any company from these provisions, subject to

such conditions as it may impose. In case of Government Company, the Central

Government may approve such other place for holding AGM, if the place is other

than registered office. In case of Section 8 company, the time, date and place of each

AGM are decided upon before-hand by the Board having regard to the directions, if

any, given in this regard by such company in the general meeting. “National

Holiday” for this purpose means and includes a day declared as national holiday by

the Central Government.

Penalty for Default in Holding the Annual General Meeting [Section 99]

Section 99 provides that if any default is made in complying or holding a

meeting of the company, the company and every officer of the company who is in

default shall be punishable with fine which may extend to one lakh rupees and in

case of continuing default, with a further fine which may extend to five thousand

rupees for each day during which such default continues.

If any default is made in holding the annual general meeting of a company,

any member of the company may make an application to the Tribunal to call or

direct the calling of, an annual general meeting of the company and give such

ancillary or consequential directions as the Tribunal thinks expedient. Such

directions may include a direction that one member of the company present in person

or by proxy shall be deemed to constitute a meeting.

Business to be Transacted at Annual General Meeting

Section 102(2)(a) provides that all other businesses transacted at an Annual General

Meeting except the following are special business:

(i) the consideration of financial statements and the reports of the Board of

Directors and auditors;

(ii) the declaration of any dividend;

(iii) the appointment of directors in place of those retiring;

(iv) the appointment of, and the fixing of the remuneration of, the auditors.

Explanatory statement is not required for transacting any item of ordinary

business. All business except specified above shall be deemed as special business at

an AGM.

In case of any other meeting, all business shall be deemed to be special.

Explanatory statement must be annexed to the notice for transacting every items of

special business. In case of non-disclosure or insufficient disclosure in explanatory

statement, any benefit accrues to a promoter, director, manager or other key

managerial personnel or their relatives, such person shall hold such benefit in trust

for the company, and shall compensate the company to the extent of benefit derived

by him.

Report on Annual General meeting (Section 121)

Section 121 of the Companies Act, 2013 provides the preparation of report on each

annual general meeting which is to be filed with the Registrar.

(1) Report to be Prepared by the Listed Public Company: Every listed public

company is required to prepare a report on each annual general meeting

including the confirmation to the effect that the meeting was convened, held

and conducted as per the provisions of the Act and the rules made thereunder.

(2) Filing of the Report with the Registrar: A copy of the report is to be filed

with the Registrar in Form No. MGT. 15 within thirty days of the conclusion

of annual general meeting along with the prescribed fee or with such

additional fees as may be prescribed, within the time as specified, under

section 403.

(3) Default in Filing of the Report: If the company fails to file the report before

the expiry of the period specified under section 403 with additional fee, the

company shall be punishable with fine which shall not be less than one lakh

rupees but which may extend to five lakh rupees and every officer of the

company who is in default shall be punishable with fine which shall not be

less than twenty-five thousand rupees but which may extend to one lakh

rupees.

14.4.2 Extra Ordinary General Meeting (Section 100)

There are so many matters relating to the business of a company, which

requires approval or consent of members in general meeting. It is always not possible

for consideration of such matters to wait until the next annual general meeting. The

articles of association of the company make provisions for convening general

meeting other than the annual general meeting. All general meetings other than

annual general meeting are called extraordinary general meetings.

Following are the key provisions, provided in section 100, regarding calling and

holding of an extraordinary general meeting:

(1) By the Board Suo motu [Section 100 (1)]: The Board may, whenever it

deems fit, call an extraordinary general meeting of the company, as per SS-2

such EGM may be held at any place within India.

(2) By Board on Requisition of Members [Section 100 (2)]:The Board shall,

call an extraordinary general meeting on receipt of the requisition from the

following number of members:

(a) in the case of a company having a share capital: Members who

hold, on the date of the receipt of the requisition, not less than one-

tenth of such of the paid-up share capital of the company as on that

date carries the right of voting;

(b) in the case of a company not having a share capital: Members who

have, on the date of receipt of the requisition, not less than one-tenth

of the total voting power of all the members having on the said date a

right to vote.

Matter Set Out for Consideration in Requisition: The requisition made as above,

shall set out the matters for the consideration of which the meeting is to be called and

shall be signed by the requisitionists and sent to the registered office of the company.

Time Period for Calling the Meeting: The Board is required to proceed to call a

meeting within 21 days from the date of receipt of a valid requisition, to convene a

meeting which should be held within 45 days of such deposit of the requisition with

the company.

(3) By Requisitionists [Section 100(4)]

(i) If the Board does not within 21 days from the date of receipt of a valid

requisition in regard to any matter, proceed to call a meeting for the

consideration of that matter on a day not later than 45 days from the

date of receipt of such requisition, the meeting may be called and held

by the requisitonists themselves. However in such case, the meeting

should be held within a period of 3 months from the date of the

requisition.

Such requisition shall not pertain to any item of business that is required

to be transacted mandatorily through postal ballot.

Requisition for Convening of EGM by Members: The members may

requisition convening of an extraordinary general meeting, by providing

such requisition in writing or through electronic mode at least clear

twenty one days prior to the proposed date of such extraordinary general

meeting.

(ii) The notice shall specify the place, date, day and hour of the meeting and

shall contain the business to be transacted at the meeting.

The requistionists should convene meeting at registered office or in the

same city or town where registered office is situated and such meeting

should be convened on working day.

(iii) If the resolution is to be proposed as a special resolution, the notice shall

be given as required by sub-section (2) of Section 114.

(iv) Notice to be Signed: The notice shall be signed by all the requistionists

or by a requistionists duly authorized in writing by all other

requistionists on their behalf or by sending an electronic request

attaching therewith a scanned copy of such duly signed requisition.

(v) No Explanatory Statement Annexed to the Notice: No explanatory

statement as required under section 102 need be annexed to the notice of

an extraordinary general meeting convened by the requistionists and the

requistionists may disclose the reasons for the resolution(s) which they

propose to move at the meeting.

(vi) Serving of Notice of the Meeting: The notice of the meeting shall be

given to those members whose names appear in the Register of

members of the company within three days on which the requistionists

deposit with the company a valid requisition for calling an extraordinary

general meeting.

(vii) No Meeting Convened: Where the meeting is not convened, the

requistionists shall have a right to receive list of members together with

their registered address and number of shares held and the company

concerned is bound to give a list of members together with their

registered address made as on twenty first day from the date of receipt

of valid requisition together with such changes, if any, before the expiry

of the forty-five days from the date of receipt of a valid requisition.

(viii) Mode of Giving Notice: The notice of the meeting shall be given by

speed post or registered post or through electronic mode. Any accidental

omission to give notice to, or the non-receipt of such notice by, any

member shall not invalidate the proceedings of the meeting.

(4) By Tribunal [Section 98]

Section 98 provides that if for any reason it is impracticable to call a meeting

of a company or to hold or conduct the meeting of the company, the Tribunal may,

either suo motu or on the application of any director or member of the company who

would be entitled to vote at the meeting:

(a) order a meeting of the company to be called, held and conducted in such

manner as the Tribunal thinks fit; and

(b) give such ancillary or consequential directions as the Tribunal thinks

expedient, including directions modifying or supplementing in relation to the

calling, holding and conducting of the meeting, the operation of the

provisions of this Act or articles of the company.

Such directions may include a direction that one member of the company

present in person or by proxy shall be deemed to constitute a meeting. Meeting held

pursuant to such order shall be deemed to be a meeting of the company duly called,

held and conducted.

14.4.3 Class Meetings

Meetings of members of a company fall into two broad divisions, namely,

general meetings and class meetings. Class meetings are meeting of shareholders,

holding a particular class of share which is held to pass resolution which will bind

only the members of the class concerned. Only members of the class concerned may

attend and vote at meeting. Usually the rules to voting apply to class meetings as

they govern voting at general meetings. These class meetings must be convened

whenever it is necessary to alter or change the rights or privileges of that class as

provided by the articles. For effecting such changes, it is necessary that these are

approved at a separate meeting of the holders of those shares and supported by a

special resolution. Under section 48 of the Companies Act, 2013 (variation of

shareholders’ rights) class meeting of the holders of different classes of shares shall

be held if the rights attaching to these shares are to be varied. Similarly, under

Section 232 (Merger and Amalgamation of companies), where a scheme of

arrangement is proposed, meeting of several classes of shareholders and creditors are

required to be held.

14.5 Resolutions

A passed resolution is initially a proposal in question in the meeting which is

accepted by members to make it a resolution. In other words, a ‘Proposed

Resolution’ when passed by requisite majority of votes by the shareholders becomes

a company resolution. There are three types of resolutions that may be passed in a

meeting of a company: ––

1. Ordinary Resolution

2. Special Resolution

3. Resolution Requiring Special Notice

Section 114 relates to Ordinary and Special Resolution.

14.5.1 Ordinary Resolution

A resolution shall be an ordinary resolution if the notice required under this

Act has been duly given and it is required to be passed by the votes cast, whether on

a show of hands, or electronically or on a poll, as the case may be, in favour of the

resolution, including the casting vote, if any, of the Chairman, by members who,

being entitled so to do, vote in person, or where proxies are allowed, by proxy or by

postal ballot, exceed the votes, if any, cast against the resolution by members, so

entitled and voting.

14.5.2 Special Resolution

A resolution shall be a special resolution when:

(a) the intention to propose the resolution as a special resolution has been duly

specified in the notice calling the general meeting or other intimation given to

the members of the resolution;

(b) the notice required under this Act has been duly given; and

(c) the votes cast in favour of the resolution, whether on a show of hands, or

electronically or on a poll, as the case may be, by members who, being

entitled so to do, vote in person or by proxy or by postal ballot, are required

to be not less than three times the number of the votes, if any, cast against the

resolution by members so entitled and voting.

If the notice convening the meeting (where at special business will be

transacted) does not state the nature of the special business, the meeting

would be deemed to have been convened irregularly. Consequently, that

special business cannot be dealt with at the meeting.

14.5.3 Resolutions Requiring Special Notice (Section 115)

Section 115 provides that where, by any provision contained in this Act or in

the articles of a company, special notice is required of any resolution, notice of the

intention to move such resolution shall be given to the company by such number of

members holding not less than 1% of total voting power or holding shares on which

such aggregate sum not exceeding ₹ 5,00,000/- as may be prescribed has been paid-

up and the company shall give its members notice of the resolution in the following

manner as prescribed in Rules.

Provisions Contained in the Act Requiring Special Notice

The matters in respect of which special notice is required are:

(a) A resolution for appointment of a person as auditor at the annual general

meeting other than the retiring auditor for providing expressly that the retiring

auditor shall not be re-appointed [Section 140(4)];

(b) A resolution for removing a director before the expiry of the period of his

office and appointing someone in the place of the director so removed

[Section 169(2)].

Procedure for Special Notice

(A) Signing of Special Notice: A special notice required to be given to the

company shall be signed, either individually or collectively by such number

of members holding not less than one percent of total voting power or

holding shares on which an aggregate sum of not more than five lakh rupees

has been paid up on the date of the notice.

(B) Sending of Notice to the Company: Such notice shall be sent by members

to the company not earlier than three months but at least 14 days before the

date of the meeting at which the resolution is to be moved, exclusive of the

day on which the notice is given and the day of the meeting.

(C) On Receipt of Notice by the Company: The company shall immediately

after receipt of the notice, give its members notice of the resolution at least

seven days before the meeting, exclusive of the day of dispatch of notice and

day of the meeting, in the same manner as it gives notice of any general

meetings.

(D) Publication of Notice: Where it is not practicable to give the notice in the

same manner as it gives notice of any general meetings, the notice shall be

published in English language in English newspaper and in vernacular

language in a vernacular newspaper, both having wide circulation in the State

where the registered office of the company is situated. Such notice shall also

be posted on the website, if any, of the company. Such notice shall be

published at least seven days before the meeting, exclusive of the day of

publication of the notice and day of the meeting.

Resolutions Passed at Adjourned Meeting

As per Section 116 where a resolution is passed at an adjourned meeting of a

company; or the holders of any class of shares in a company; or the Board of

Directors, the resolution shall be treated as passed on the day it was actually passed

and not on any earlier date.

Resolutions and Agreements to be Filed With the Registrar

Section 117 provides that a copy of every resolution and an agreement in

respect of matters specified therein together with the explanatory statement shall be

filed in Form No. MGT.14 with the registrar within thirty days of its passing. The

registrar shall register the same and in case of any default, a company and every

officer who is in default including the liquidator shall be punishable with fine which

shall not be less than one lakh rupees but which may extend to five lakh rupees.

Resolutions and agreements to be filed with the Registrar are as under:

(a) special resolutions;

(b) resolutions which have been agreed to by all the members of a company, but

which, if not so agreed to, would not have been effective for their purpose

unless they had been passed as special resolutions;

(c) any resolution of the Board of Directors of a company or agreement executed

by a company, relating to the appointment, re-appointment or renewal of the

appointment, or variation of the terms of appointment of a managing director;

(d) resolutions or agreements which have been agreed to by any class of

members but which, if not so agreed to, would not have been effective for

their purpose unless they had been passed by a specified majority or

otherwise in some particular manner; and all resolutions or agreements which

effectively bind such class of members though not agreed to by all those

members;

(e) resolutions passed by a company according consent to the exercise by its

Board of Directors of any of the powers under clause (a) and clause (c) of

sub-section (1) of section 180;

(f) resolutions requiring a company to be wound up voluntarily passed in

pursuance of section 59 of the Insolvency and Bankruptcy Code;

(g) resolutions passed in pursuance of sub-section (3) of section 179 provided

that no person shall be entitled under Section 399 to inspect or obtain copies

of such resolutions (This sub-clause is not applicable to private companies

vide exemption notifications dated 5th June, 2015); and

(h) any other resolution or agreement as may be prescribed and placed in the

public domain.

14.6 Summary

Companies often encompass through problems and various decisions are

taken to resolve them out. Some decisions are taken at individual level but some of

them require consensus of majority. Company meetings are conducted to get either

consent or denial on the subject involving board of directors, other staff, and

shareholders etc. As a lay man, we can say meeting means gathering of person to

ponder over subject in question. Company may hold different type of meetings

which are Shareholders Meetings, Annual general Meeting, Extraordinary General

Meeting, Class Meeting, Board Meetings, Meetings of Debenture Holders, and

Meeting of Creditors. All general meetings conducted other than the annual general

meetings are known as extraordinary general meetings. At times it is impracticable to

call or conduct an extraordinary general meeting. The Company Law Board

(Tribunal) may call or conduct the meeting. Class meeting means a meeting of one

particular class of shareholders.

When people in the meeting give their consensus by majority to do or to

abstain the act in question, it is said that resolution is passed. The Companies Act

provides three kinds of resolutions that can be passed at the general meeting of a

company, i.e. (a) Ordinary resolution; (b) Special resolution; and (c) Resolution

requiring special notice. A resolution shall be called an ordinary resolution if the

vote casted in favour of the resolution exceeds the votes in against. Special

resolution is passed by the ¾ majority of the members present in the meeting.

14.7 Keywords

Agenda: An agenda means the business to be transacted the meeting. The

notice must contain agenda of the meeting.

Quorum: It means the minimum number of members who must be present at a

meeting as per rules or law.

Proxy: A proxy is a person who is representative of a member for purpose of

voting.

Minutes: It means record of proceedings of a meeting.

Resolution: A passed resolution is initially a proposal in question in the meeting

which is accepted by members to make it a resolution.


1. What are the items that constitute ordinary business in an Annual General

Meeting of a company?

2. Who shall be chairman of a general meeting of a company? What are the

provisions of the Companies Act, 2013 regarding his election?

3. Every Annual General Meeting of a company shall be called on a day which

is not a National holiday. Can an adjourned Annual General Meeting of a

company be called on a National holiday?

4. A shareholder having given proxy, personally attends and votes at the

meeting. Comment.

5. What are the provisions of the Companies Act, in regard to the holding of a

Extra Ordinary General Meeting?

6. Write short notes on:

(i) Proxy; (ii) Special Business; (iii) Quorum; (vi) Scrutinizer.

7 What are the consequences for not calling annual general meeting?

8. Explain the requisites of a valid meeting.

9. Explain different types of resolutions. When and how can they be passed?

When notice be given for them?




3. S.C. Aggarwal, Company Law, Dhanpat Rai Publications, New Delhi.




House, New Delhi.

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CONDITIONS AND WARRANTS CP-302 · 2019-01-21 · 1. Voluntary Waiver: The buyer may, if he so desires, treat the breach of a condition by the seller as a breach of warranty and make