2 - Company Law Sessions

Besides the Memorandum of Association, which is
the most important basic document for the

registration of a
Public Company?
The Articles of Association
The rules, regulations and bye-laws for the

management of company’s internal affairs
and
the conduct of business
Articles of Association
• Framed to carry out the objects of the Co. as mentioned in
Memorandum
• Define powers of its officers and members - must not

exceed powers of Co. under Memorandum
• Articles constitute a binding contract between the

company and its members
• Must not be contrary to Companies Act.
• Establishes a contract between company and its members

• Subordinate to Memorandum
Alteration of the Articles
•Articles are empowered by Companies Act , Therefore, neither Co.

nor anybody can deprive from this power.
•Statutory powers can not be taken away by any agreement
•Any restrictive clause in Articles in this regard will be invalid under

the Companies Act
•Altered Articles are binding in the same way as original articles

LIMITATIONS ON ALTERATION OF THE ARTICLES
Basic requirement for alteration :

•Good faith- overall interest of Co.
•Fairness between different classes of shareholders
•Limitations:
•must not be inconsistent with Companies Act, or any other law
•Ex. : Alteration to provide dividends out of capital - in case there

is no profit (Violation of CA)
•Must not be inconsistent with Memorandum
•Must not be illegal or opposed to public policy - alteration authoring

gambling after office hours & to earn commission – invalid.
• Must be bona fide & in the interest of company as a whole
•Must not constitute a fraud on minority

(alteration to buy minority shares compulsorily to meet financial
difficulties ).
•Must not result in the increase of liability of a member without so

agreeing in writing
Consequences: Registration of Memorandum and Articles
with Registrar
•become public documents
•can be inspected
•law presumes that persons dealing with company have knowledge and
understood contents of M.A. & A. A.
Article of Association in their relation to outsiders
Doctrine of constructive notice
• If no actual notice of the contents of basic documents ,
• it is presumed he has an implied/Constructive notice
• Ex. AoA provides – all deeds should be signed By MD, secretary

and acting director – A accepted the deed signed by secretary and
acting director only- deed invalid -no claim
• - knowledge of MD’s sign was presumed
• The rule of constructive notice is subject to the “Rule of indoor

management”
•The rule of indoor management
• offers a protection to persons dealing with the company through

Company’s officers/ Managers/directors.
•If Officers fail to follow the internal procedures prescribed under the
articles before exercising powers, Company is liable.
•Third PARTY is not bound to enquire into the regularity of internal

proceedings.
•The rule is commonly known as Turquand’s Rule first laid down in the
case of The Royal British Bank v. Turquand. (1856)
•Ex. Director borrowed money on bond without authority by way of passing of

resolution of general body as mentioned in A o A – Assumption of - necessary
resolution passed - Co. liable
•The relief under ‘indoor management’ cannot be availed of under
the following circumstances:
•Main Exceptions – when Co. not liable
•Knowledge of Irregularity (a person who knows of irregularities-can not claim )
•No knowledge of Articles at all (articles contain-director may delegate his

authority to an officer, - except the power to borrow -persons not knowing this
provision -can not claim )
•Void or illegal transactions (Company not liable for forgery)
•Negligence (suspicion of irregularities)

Company Management
DUTIES AND LIABILITIES OF

MANAGERS & DIRECTORS
General Duties of Directors
•DUTY OF GOOD FAITH
•DUTY OF REASONABLE CARE
•DUTY TO ATTEND BOARD MEETINGS
•DUTY NOT TO DELEGATE
•DUTY TO DISCLOSE INTEREST

DUTY TO GOOD FAITH
•Directors must act honestly and in the interest of the company and
shareholders
•Should not exploit corporate opportunities to their own use
•should not make secret profits
•If No obligation or direction from company - no breach of duty,

And not liable to pay profits
DUTY OF REASONABLE CARE
•With due diligence and caution, Director has to attend the work
assigned to him, If fails, he is guilty of negligence

•Not liable for mere errors of judgement.
•Liability for negligence may not be avoided even by amending articles
•Exclusion of liability for negligence clause - in articles or in any such

agreement is void - as Companies Act does not allow it.
DUTY TO ATTEND BOARD MEETINGS
•Director exercise powers at the meeting of the Board so:
• He should attend them
•Not bound to attend all meetings
•But if he, without obtaining permission of Board, fails:

• to attend three consecutive meetings or
•absents in all the meetings for a consecutive period of three months

•his office shall be deemed to have been vacated:
• from the date of first meeting from which the director has absented
himself.
DUTY NOT TO DELEGATES
•Directors are appointed because of their skill, competence, and

integrity so:
•perform their functions personally and not to delegate them to other

persons
•Exceptions:
•Can delegate to the extent - Companies Act or Articles of Co.

authorize (Sec.292)
•Can be left to other officials- in case of exigencies of business- but in

a proper manner
DUTY TO DISCLOSE INTEREST
•To avoid the conflict between the personal interest and Director’s
duties towards the company:
•Directors should disclose his personal interest at the first meeting of

the Board held - after he becomes interested in a:
• Contract or some arrangements entered into or on behalf of the

company
• Punishment for non-disclosure- fine upto Rs.50 thousands

•Interested director can not participate in the discussion or arrangement
of his interest
•Can not vote on such matters - if votes,it shall not be taken into account
•Presence of such director shall not be counted for the purpose of

forming a quorum (Sec 287)
•No ban on the company to enter into a contract in which director is

interested
•Company must have separate register for entry of such contracts in

which directors are interested(301)
•Only requirement - such interest must be fairly disclosed
•Non-disclosure - makes the contract voidable at company’s option
•If whole body of the directors is already aware of such interest -

formal disclosure not necessary
•Failure to disclose his interest – liability to:
• refund his remuneration

•cease to become director &
•Fine of Rs. 50 thousands
Statutory Duties of Directors
Duties under Companies Act – including the duty :
•to file return of allotments,
• to disclose receipt of compensation from transfer of property and

shares
•to convene annual and the extraordinary general meeting

Liabilities of directors
Liability may arise from due to :
•breach of fiduciary duty- trust and confidence,

•ultra vires acts, beyond powers
• negligence- lack of reasonable care and skill, and
• mala fide acts- willful misconduct / willful negligence
•Directors may be held liable to compensate company or members -

for loss occasioned due to above reasons.
•Directors may be personally liable to third parties for untrue

statement in prospectus.

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Besides the Memorandum of Association, which is

the most important basic document for the

The rules, regulations and bye-laws for the

• Define powers of its officers and members - must not

• Articles constitute a binding contract between the

• Must not be contrary to Companies Act.

• Establishes a contract between company and its members

•Articles are empowered by Companies Act , Therefore, neither Co.

•Statutory powers can not be taken away by any agreement

•Any restrictive clause in Articles in this regard will be invalid under

•Altered Articles are binding in the same way as original articles

Basic requirement for alteration :

•must not be inconsistent with Companies Act, or any other law

•Ex. : Alteration to provide dividends out of capital - in case there

•Must not be illegal or opposed to public policy - alteration authoring

• Must be bona fide & in the interest of company as a whole

•Must not constitute a fraud on minority

•Must not result in the increase of liability of a member without so

•become public documents

Doctrine of constructive notice

• If no actual notice of the contents of basic documents ,

• it is presumed he has an implied/Constructive notice

• Ex. AoA provides – all deeds should be signed By MD, secretary

• - knowledge of MD’s sign was presumed

• The rule of constructive notice is subject to the “Rule of indoor

• offers a protection to persons dealing with the company through

•Third PARTY is not bound to enquire into the regularity of internal

•Ex. Director borrowed money on bond without authority by way of passing of

•Main Exceptions – when Co. not liable

•Knowledge of Irregularity (a person who knows of irregularities-can not claim )

•No knowledge of Articles at all (articles contain-director may delegate his

•Void or illegal transactions (Company not liable for forgery)

•Negligence (suspicion of irregularities)

DUTIES AND LIABILITIES OF

•DUTY OF GOOD FAITH

•DUTY OF REASONABLE CARE

•DUTY TO ATTEND BOARD MEETINGS

•DUTY NOT TO DELEGATE

•DUTY TO DISCLOSE INTEREST

•Should not exploit corporate opportunities to their own use

•should not make secret profits

•If No obligation or direction from company - no breach of duty,

assigned to him, If fails, he is guilty of negligence

•Liability for negligence may not be avoided even by amending articles

•Exclusion of liability for negligence clause - in articles or in any such

•Director exercise powers at the meeting of the Board so:

• He should attend them

•Not bound to attend all meetings

•But if he, without obtaining permission of Board, fails:

•absents in all the meetings for a consecutive period of three months

•Directors are appointed because of their skill, competence, and

•perform their functions personally and not to delegate them to other

•Can delegate to the extent - Companies Act or Articles of Co.

•Can be left to other officials- in case of exigencies of business- but in

•Directors should disclose his personal interest at the first meeting of

• Contract or some arrangements entered into or on behalf of the

• Punishment for non-disclosure- fine upto Rs.50 thousands

•Presence of such director shall not be counted for the purpose of

•No ban on the company to enter into a contract in which director is