By: kratika ojha

COMPANY LAW

Every outsider dealing with a company is deemed to have notice of the contents of the memorandum and the articles of association which on registration with the registrar assume the character of public documents. This is known as Constructive Notice Of Memorandum And Articles

What Is Constructive Notice Of Memorandum And Articles ?

Doctrine of Constructive Notice

According to Section 610, every person dealing with the company is deemed to have read M/A and A/A and understood the contents thereof in the correct perspective.

The rule was first laid down in Royal British Bank v. Turquand.

Rule of Indoor Management is an exception to the Doctrine of Constructive notice.

Doctrine of Indoor Management

Exceptions of Indoor Management1. Knowledge of irregularity : Case:

Howard v. Patent Ivory Co. 2. Negligence : Case: Anand Behari Lal v.

Dinshaw & Co. (Bankers) Ltd. 3. Forgery : Case: Ruben v. Great Fingal

Consolidated [Secy. Forged signatures of two directors]

4. No knowledge of articles : Case: Rama Corporation v. Proved Tin & General Investment Co.

Prospectus A prospectus, as per Section 2(36),

means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of a body corporate.

Prospectus … contd.

Thus, a prospectus is not merely an advertisement; it may be a circular or even a notice. A document shall be called a prospectus if it satisfies two things:(a) It invites subscription to shares or

debentures or invites deposits.(b) The aforesaid invitation is made to

the public.

Share and Share Capital According to Section 2(46), A ‘Share’

represents a unit into which capital of a company is divided. However, courts have held that a share is not merely a unit of capital, it represents a bundle of rights and obligations. Holder of a share is entitled to certain rights (say, right to receive dividends, to receive notice of meetings, to participate in the proceedings of a meeting, to elect directors) and is also subjected to a number of obligations (say, to abide by Articles of Association, to maintain decorum of the meetings).

Kinds of Shares … contd.

Preference Shares carry preference with respect to two things:1. Preference with respect to dividend

at a fixed rate or of a fixed amount.2. Preference with respect to return

of capital in case of winding up. Equity Shares means a share

which is not a preference share.

Administration/Management of a company

A company functions through the medium of Board of Directors. However, certain powers have been reserved to be exercised by shareholders in general body meetings. Section 291 of the Companies Act, 1956 confers general power on the Board of Directors. It provides: “Subject to the provisions of the Act, the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do.

Powers which are exerciseable only by the shareholders.

1. Sell, lease or otherwise dispose of the whole, substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole or substantially the whole, of any such undertaking.

2. Remit or give time for the repayment of any debt due by a director except in the case of renewal or of continuance of an advance made by a banking company to its directors in the ordinary course of business.

Powers …contd.

3. Invest, otherwise than in trust securities, the amount of compensation received by the company in respect of compulsory acquisition of any property or fixed assets of the company.

4. Borrow monies exceeding the aggregate of the paid-up capital of the company and its free reserves. ‘Borrowing’ does not include temporary loans (i.e., loans payable on demand or within six months but excluding loans for capital expenditure) obtained from the company’s bankers in the ordinary course of business.

Powers …contd.

The resolution passed at the general meeting must specify the total amount upto which moneys may be borrowed by the Board of directors in any financial year.

5. Contribute in any year, to charitable and other funds not directly relating to the business of the company or the welfare of its employees any amount exceeding Rs. 50,000 or five per cent of its average net profits of the last three financial years, whichever is higher.

Powers …contd.However, the resolution must specify the total

amount that may be contributed by the Board of directors in any financial year.

However, contributions to National Defence Fund, the Prime Minister’s National Relief Fund or any other fund approved by the Central Government* for the purpose are exempted from the above provisions.

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