Study the following case/situation and express your opinion.
1. The Articles of a company stated that while borrowing any money from outsiders, the
document must have the signatures of the Managing Director (MD) and any one of the
Director. The Articles of Association clearly stated the procedure to be followed while borrowing money. The Managing Director did not follow all the procedures but still
borrowed money from Mr. X. Mr. X assumed that the MD has followed the required
procedures.
a) Can the MD be held punishable for his act?
b) Under which Doctrine can Mr. X take action against the company?
c) Explain the Doctrine.
Ans:-
(a) The Managing Director (MD) can be held punishable for this act.
(b) Under the doctrine of indoor management, Mr. X can take action against the company.
(c) The doctrine of indoor management specifies that persons (third parties) entering into a contract with the company are not found to inquire or know whether the company or it’s MD or officers have properly followed the internal proceedings as stated in the Articles or not. As per the doctrine of indoor management, it is assumed that the company or it’s MD or Officer acts as per Memorandum and Articles of Association. This doctrine protects the interest of the outsiders when they are unaware of the correctness of the internal proceedings of the company.
2) Mr. A entered into a contract with Star Limited company and as advance payment gave a
cheque of ` 1 lac to a Director Mr Sam. Mr. Sam is not the Managing Director. Articles
states that only the MD is authorized to sign any contracts or receive any payments on
behalf of the company.
a) Did Mr. Sam have the authority to accept the cheque? Why?
b) Can Mr. Sam’s action be called as Ultra Vires? Why?
Ans:-
(a) Mr. Sam does not have the authority to accept the cheque from the outside party because Mr. Sam although a director but not a managing director of the company. As per’ the provisions made in the articles only managing director has the authority to sign contracts and receive any payment.
(b) Mr. Sam’s action can be called ultra Vires because accepting a cheque of Rs 1 lac, by a director Mr. Sam, is an act beyond the scope and authority or power of articles of the company.
3) The Object clause of Memorandum of a company stated the main object as manufacturing
of plastic chairs and tables and any other activity in furtherance of achievement of its
main activity. The Board of Directors wants to now also produce TV. Serials and feels that
the shareholders may give their permission.
a) Can the company with immediate effect start producing TV. Serials? Why?
b) How can the object clause of the company be altered?
Ans:-
(a) The company (the Board of Directors) cannot start producing TV serials immediately. This is because producing a TV serial is not the main as well as an ancillary object for Which company is incorporated. A company cannot do anything beyond or outside the scope of the objects. The object of producing TV serials is a completely different object from the main object of manufacturing plastic chairs and tables.
(b) The object clause of the company can be changed by passing a special resolution in the General Meeting of the shareholders. The resolution which is passed by 3/4th (75%) majority of votes is called special resolution.
4) A public limited company has issued all the shares mentioned in its Memorandum as
Authorized Capital. Now the Company wants to make a public issue of 10,000 shares at
face value of ` 100 Per share, to raise more funds for its expansion activities.
a) Which clause of Memorandum needs to be altered?
b) In which meeting the alteration can be approved?
c) Which document should the company issue to invite the public to buy its shares?
Ans:-
(a) The capital clause needs to be altered to raise capital more than its authorised capital.
(b) The capital clause can be altered by passing an ordinary resolution in the General Meeting of the shareholders.
(c) The company has to issue a document called ‘Prospectus’ to invite the public to buy its shares.
5) A Company stated in its prospectus that it has been making profits since the last 5 years.
However, Mr. X. an investor found out that two years back the company had not made
any profit. The prospectus was filed with the ROC on 1 st Jan, 2017 and was issued to the
public on 10 th Feb 2018.
a) Can Mr. X state that there was a misstatement in the prospectus?
b) If found guilty which two types of liability will the company and its officers face?
c) Can the prospectus be valid for issue to the public on 10th Feb 2018.
Ans:-
(a) Mr. X can state that there was a misstatement in the prospectus.
(b) If found guilty the company and its officers will face civil liability and criminal liability for misstatement in the prospectus.
(c) Prospectus cannot be valid for the issue to the public on 10th February 2018.
6) A Company plans to offer Rights Issue.
a) Which document must it send to its shareholders for offering the Rights Issue?
b) Instead of Rights Issue, if the company wants to issue shares to the public, which
document must it issue for inviting the public to subscribe for it?
c) Name the document which is called as incomplete prospectus.
Ans:-
(a) A document (Prospectus) called ‘Letter of Offer’ a company must send to its shareholders for offering the Right issue.
(b) If the company wants to issue shares to the public, for inviting the public to subscribe for it. the company has to issue Abridged prospectus.
(c) Red herring prospectus is called an incomplete prospectus.