Description
covers topic like The rights, powers and liabilities of shareholders, Private Limited Companies, Public Company etc with a few examples
How to: The rights, powers and liabilities of shareholders
Introduction You are a "shareholder" if your name is entered on a company’s share register (see How to maintain a company share register) as being the holder at that time of one or more shares in the company, or if you are entitled to be on the register and are waiting to be included on it. Your rights as a shareholder are set out in the COMPANIES ACT 1993 and in the company’s constitution. (For information on the importance of the constitution and how a company is formed, see How to form a company.) What rights and powers can I exercise as a shareholder? While the day-to-day management of the company is the responsibility of the company’s board of directors, the shareholders may exert a significant indirect influence by exercising the rights and powers available to them. These include:
• • • •
• •
passing resolutions at shareholder meetings (see below) voting out directors electing to sell their shares exercising minority buy-out rights (this is where dissenting shareholders require the company to buy their shares: the right can give significant protection to disaffected shareholders wanting to sell and preserve their capital) requesting the company in writing to provide information held by the company (with a right to appeal to the court if the company refuses) requiring the company to provide the shareholder with a statement of the shares that he or she holds, and of the various rights, privileges, conditions and limitations that attach to those shares
Company decisions that require shareholder participation Certain decisions about the running of the company cannot be made without shareholders participating. These include:
• • • • •
various decisions requiring the unanimous assent of shareholders (see below) alterations to the constitution alterations to shareholders’ rights decisions involving major transactions decisions involving remuneration and other benefits
Shareholders may review the management of the company Irrespective of what is in the company constitution, the chairperson of a shareholders’ meeting must allow a reasonable opportunity for the shareholders at the meeting to question, discuss, or comment on the management of the company. In addition, shareholders are entitled to pass a resolution relating to the management of the company. However, the resolution will not be binding on the board of directors, unless the company constitution (if there is one) provides otherwise.
Shareholder meetings: ordinary resolutions and special resolutions The powers reserved for shareholders may only be exercised at a meeting of shareholders or by a resolution passed instead of a meeting. Shareholder powers may generally be exercised by ordinary resolution, which means a resolution passed by a simple majority. However, in certain cases shareholder powers must be exercised by "special resolution", that is, a resolution requiring a 75 percent majority. This applies where the shareholders wish to exercise their powers to:
• • • •
adopt, alter or revoke the company’s constitution approve a major transaction approve an amalgamation put the company into liquidation
Shareholder actions requiring unanimous assent In addition, there are certain types of actions that shareholders may take if all entitled shareholders agree unanimously. These actions include:
• • • • •
authorising dividends approving a discount scheme the acquisition by the company of its own shares the redemption of shares giving financial assistance to some other person or company to buy the company’s own shares
How do I enforce my rights in the courts? There are a number of ways in which shareholders can take court action against the company to enforce their rights, including:
• • • •
•
applying for an order restraining the company from taking action that would contravene the company’s constitution or the COMPANIES ACT 1993 applying for an order directing the company to take any action that its constitution or the Act requires it to take suing the company or a director for a breach of a duty owed to the shareholder if the company has acted unfairly or oppressively towards the shareholder, applying for an order that the company must take certain action, such as buying the shareholder’s shares or paying compensation applying for an order for the company’s records to be inspected
What are my liabilities as a shareholder? As a shareholder you are not liable for the company’s obligations merely by reason of being a shareholder, unless the company’s constitution provides that shareholder liability is unlimited. If the constitution does not provide this, then your liability as a shareholder is limited to:
•
any amount unpaid on a share held by you
• •
•
•
any liability expressly provided for the constitution any liability for breach of directors’ duties if the shareholders are deemed to be directors (this applies if the company gives the shareholders powers that would normally be exercised by the directors) any liability to repay distributions made to the shareholder when the company did not satisfy the solvency test under the COMPANIES ACT 1993, to the extent that the distribution is recoverable under the Act obligations to meet calls made by the company in relation to the liability attaching to shares
Former shareholders may be liable to the company for amounts outstanding in respect of any shares or for any liability provided for in either the Act or the constitution.
Cautionary notes •
•
Company law is detailed and can be complex. Also, frequently large amounts of money are at stake. At the earliest possible stage you should obtain legal advice as to your rights, powers, duties and liabilities as a shareholder so that your interests can be protected. In a number of situations the COMPANIES ACT 1993 sets out strict time limits for shareholders wanting to exercise their rights. For example, if you wish to exercise minority buy-out rights you must give the company written notice within 10 working days after the particular resolution from which you dissented.
CORPORATIONS
The law of corporations in India is governed by the Companies Act, 1956. Broadly, there are two types of companies – Public Limited Companies and Private Limited Companies. While Public Limited Companies describe themselves merely as “Limited Companies”, Private Limited Companies are obliged to indicate clearly the fact that they are a Private Company by adding after their name “Pvt. Ltd.” Private Limited Companies: A Private Limited Company can be formed with a minimum of two persons as shareholders and a minimum of two directors. The minimum paid up capital for a Private Company is about US$ 2500 (approximately). A private company has the following features:
1. The right to transfer shares is restricted as per its Articles of Association. 2. The maximum number of its shareholders is limited to 50. 3. No offer can be made to the public to subscribe to its shares and debentures. 4. No invitation or acceptance of deposits from persons other than members, directors or their relatives is allowed. 5. Lesser number of compliance requirements.
Thus generally, where there is no requirement for raising finances through the public and the ownership is intended to be closely held, a Private Limited model is followed. Public Company:
A company which does not contain restrictive provisions in its Articles is a Public company. Unlike Private companies, Public companies can be formed with a minimum of seven members. There is no maximum limit on shareholders for Public companies. The minimum paid-up capital required for a Public company is about US$ 12500 (approximately) and the minimum number of directors is three. Incorporation Formalities: There is no need to appoint an Indian director or Indian shareholder to incorporate a company. Incorporation is through registration with the Registrar of Companies (ROC). The ROC is a statutory authority formed under Companies Act and has numerous offices all over India. For incorporation, the following steps are involved:
1. Selection of name of the company and getting it approved from the ROC. Upon scrutiny and satisfaction, the ROC issues a name availability letter. 2. After the name is approved, Memorandum and Articles of Association (MoA) are drafted. 3. MoA along with other necessary documents are filed with the ROC. The filing fees is dependent on the authorised share capital of the Company. 4. After scrutinising the documents, the ROC issues a Certificate of Incorporation.
Whereas Private companies can commence their business from the date of Certificate of Incorporation, Public companies are required to file certain additional documents and obtain a Certificate of Commencement of Business.
Royal British Bank v Turquand (1856) 6 E&B 327 is a UK company law case that held people transacting with companies are entitled to assume that internal company rules are complied with, even if they are not. This "indoor management rule" or the "Rule in Turquand's Case" is applicable in most of the common law world. It originally mitigated the harshness of the constructive notice doctrine, and in the UK it is now supplemented by the Companies Act 2006 sections 39-41.
Contents
[hide]
• • • • •
1 2 3 4
Facts Judgment Significance See also
5 Notes
[edit] Facts
Mr Turquand was the official manager (liquidator) of the insolvent ‘Cameron’s Coalbrook Steam, Coal, and Swansea and London Railway Company’. It was incorporated under the Joint Stock Companies Act 1844. The company had given a bond for £2000 to the Royal British Bank, which secured the company’s drawings on its current account. The bond was under the company’s seal, signed by two directors and the secretary. When the company was sued, it alleged that under its registered deed of settlement (the articles of association), directors only had power to borrow what had been authorised by a company resolution. A resolution had been passed but not specifying how much the directors could borrow.
[edit] Judgment
Sir John Jervis CJ, for the Court of Exchequer Chamber affirmed the Queen’s Bench and said that it was valid, so the Royal British Bank could enforce the terms of the bond. He said the bank was deemed to be aware that the directors could borrow only up to the amount resolutions allowed. Articles of association were registered in Companies House, so there was constructive notice. But the bank could not be deemed to know about which ordinary resolutions passed, because these were not registrable. The bond was valid, because there was no requirement to look into the company’s internal workings. This is the ‘indoor management rule’, that the company’s indoor affairs are the company’s problem. Jervis CJ gave the judgment of the Court.
“
I am of opinion that the judgment of the Court of Queen's Bench ought to be affirmed. I incline to think that the question which has been principally argued both here and in that Court does not necessarily arise, and need not be determined. My impression is (though I will not state it as a fixed opinion) that the resolution set forth in the replication [332] goes far enough to satisfy the requisites of the deed of settlement. The deed allows the directors to borrow on bond such sum or sums of money as shall from time to time, by a resolution passed at a general meeting of the Company, be authorized to be borrowed: and the replication shews a resolution, passed at a general meeting, authorizing the directors to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and the Act of Parliament; but
”
the resolution does not otherwise define the amount to be borrowed. That seems to me enough. If that be so, the other question does not arise. But whether it be so or not we need not decide; for it seems to us that the plea, whether we consider it as a confession and avoidance or a special Non est factum, does not raise any objection to this advance as against the Company. We may now take for granted that the dealings with these companies are not like dealings with other partnerships, and that the parties dealing with them are bound to read the statute and the deed of settlement. But they are not bound to do more. And the party here, on reading the deed of settlement, would find, not a prohibition from borrowing, but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to infer the fact of a resolution authorizing that which on the face of the document appeared to be legitimately done.
Pollock CB, Alderson B, Cresswell J, Crowder J and Bramwell B concurred.
[edit] Significance
The rule in Turquand's case was not accepted as being firmly entrenched in law until it was endorsed by the House of Lords. In Mahony v East Holyford Mining Co[1] Lord Hatherly phrased the law thus:
“
When there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association, those so dealing with them externally are not to be affected by irregularities which may take place in the internal management of the company.
”
So, in Mahoney, where the company's articles provided that cheques should be signed by any two of the three named directors and by the secretary, the fact that the directors who had signed the cheques had never been properly appointed was held to be a matter of internal management, and the third parties who received those cheques were entitled to presume that the directors had been properly appointed, and cash the cheques. The position in English law is now superseded by section 40 of the Companies Act 2006,[2] but the Rule in Turquand's Case is still applied throughout many common law jurisdictions in the Commonwealth. According to the Turquand rule, each outsider contracting with a company in good faith is entitled to assume that the internal requirements and procedures have been complied with. The company will consequently be bound by the contract even if the internal requirements and procedures have not been complied with. The exceptions here are: if the outsider was aware of the fact that the internal requirements and procedures have not been complied with (acted in bad faith); or if the circumstances under which the contract was concluded on behalf of the company were suspicious.
However, it is sometimes possible for an outsider to ascertain whether an internal requirement or procedure has been complied with. If it is possible to ascertain this fact from the company's public documents, the doctrine of disclosure and the doctrine of constructive notice will apply and not the Turquand rule. The Turquand rule was formulated to keep an outsider's duty to inquire into the affairs of a company within reasonable bounds, but if the compliance or noncompliance with an internal requirement can be ascertained from the company's public documents, the doctrine of disclosure and the doctrine of constructive notice will apply. If it is an internal requirement that a certain act should be approved by special resolution, the Turquand rule will therefore not apply in relation to that specific act, since a special resolution is registered with Companies House (in the United Kingdom), and is deemed to be public information.
Doctrine of ultra vires
An action outside the memorandum is ultravires the company. Ashbury Railway carriage & Iron Co.Ltd V.Riche(1875)LR 7 HL London county council v. Attorney General 1902AC165. A.Lakshmanaswami mudaliar v. LIC AIR 1963SC1185 Introduction The object clause of the Memorandum of the company contains the object for which the company is formed. An act of the company must not be beyond the objects clause, otherwise it will be ultra vires and, therefore, void and cannot be ratified even if all the members wish to ratify it. This is called the doctrine of ultra vires, which has been firmly established in the case of Ashtray Railway Carriage and Iron Company Ltd v. Riche. The expression “ultra vires” consists of two words: ‘ultra’ and ‘vires’. ‘Ultra’ means beyond and ‘Vires’ means powers. Thus the expression ultra vires means an act beyond the powers. Here the expression ultra vires is used to indicate an act of the company which is beyond the powers conferred on the company by the objects clause of its memorandum. An ultra vires act is void and cannot be ratified even if all the directors wish to ratify it. Sometimes the expression ultra vires is used to describe the situation when the directors of a company have exceeded the powers delegated to them. Where a company exceeds its power as conferred on it by the objects clause of its memorandum, it is not bound by it because it lacks legal capacity to incur responsibility for the action, but when the directors of a company have exceeded the powers delegated to them. This use must be avoided for it is apt
to cause confusion between two entirely distinct legal principles. Consequently, here we restrict the meaning of ultra vires objects clause of the company’s memorandum. Origin Of The Doctrine The doctrine of ultra vires was first introduced in relation to the statutory companies.2 However, the doctrine was not paid due attention up to 1855. The reason appears to be this that doctrine was not felt necessary to protect the investors and creditors. The companies prior to 1855 were usually in the nature of an enlarged partnership and they were governed by the rules of partnership. Under the law of partnership the fundamental changes in the business of partnership cannot be made without the consent of all of the partners and also the act of one partner cannot be binding on the other partners if the act is found outside his actual or apparent authority, but it can always be ratified by all the partners. These rules of partnership were considered sufficient to protect the investors. On account of the unlimited liability of the members, the creditors also felt themselves protected and did not require any other device for their protection. Besides, during early days the doctrine had no philosophical support. The doctrine is based on the view that a company after incorporation is conferred on legal personality only for the purpose of the particular objects stated in the objects clause of its memorandum and transaction not authorized expressly or by necessary implication must be taken to have been forbidden, but this view was not followed during early days nd contrary to it, the view that a company has all the powers of a natural person unless it has been taken away expressly or by necessary implication was given a big support. In 1855 some important developments took place. One of them was the introduction of the principle of limited liability. After the introduction of this principle, it was possible to make the liability of the members limited. Set Off long as the liability of the members was unlimited, the creditors of the company considered themselves protected, but after the development of doctrine of limited liability, they found themselves in a miserable state. This necessitated a device to protect the creditors; this moulded the minds of the pioneers towards the doctrine of ultra vires. In addition to it, the companies were required to have two important documents, the memorandum and articles. The memorandum was to contain the objects of the company. The alteration of the memorandum was made difficult. Thus the importance of memorandum was realized and the management of the company was desired to
observe the objects stated in the memorandum. All these created an atmosphere favorable for the development of doctrine of ultra vires. Protection Of Creditors And Investors Doctrine of ultra vires has been developed to protect the investors and creditors of the company. This doctrine prevents a company to employ the money of the investors for a purpose other than those stated in the objects clause of its memorandum. Thus, the investors and the company may be assured by this rule that their investment will not be employed for the objects or activities which they did not have in contemplation at the time of investing their money in the company. It enables the investors to know the objects in which their money is to be employed. This doctrine rotects the creditors of the company by ensuring them that the funds of the company to which they must look for payment are not dissipated in unauthorized activities. The wrongful application of the company’s assets may result in the insolvency of the company, a situation when the creditors of the company cannot be paid.
This doctrine prevents the wrongful application of the company’s assets likely to result in the insolvency of the company and thereby protects creditors. Besides the doctrine of ultra vires prevents directors from departing the object for which the company has been formed and, thus, puts a check over the activities of the directions. It enables the directors to know within what lines of business they are authorized to act . Ascertainment Of The Ultra Vires To ascertain whether a particular act is ultra vires or not, the main purpose must first be ascertained, then special powers for effecting that purpose must be looked for, if the act is neither within the main purpose nor the special powers expressly given by the statute, the inquiry should be made whether the act is incidental to or consequential upon. An act is not ultra vires if it is found: (a) Within the main purpose, or (b) Within the special powers expressly given by the statute to effectuate the main purpose, or (c) Neither within the main purpose nor the special powers expressly given by the statute but incidental to or consequential upon the main purpose and a thing reasonably done for effectuating the main purpose. Basic principles included the following:
An ultra vires transaction cannot be ratified by all the shareholders, even if they wish
it to be ratified. The doctrine of estoppel usually precluded reliance on the defense of ultra vires where the transaction was fully performed by one party A fortiori, a transaction which was fully performed by both parties could not be attacked. If the contract was fully executory, the defense of ultra vires might be raised by either party. If the contract was partially performed, and the performance was held to be insufficient to bring the doctrine of estoppel into play, a suit for quasi contract for recovery of benefits conferred was available. If an agent of the corporation committed a tort within the scope of his or her employment, the corporation could not defend on the ground the act was ultra vires LIABILITY OF DIRECTORS 1. Liability towards the company: it is the duty of the directors to see that the funds of the company are used only for legitimate business of the company. Consequently if the funds of the company are used for a purpose foreign to its memorandum, the directors will be personally liable to restore to the company the funds used for such purpose. In other words, a shareholder can sue the directors to restore to the company the funds, which have been employed by them in the transactions, which they have no authority to enter into. 2. Liability towards the third party: the directors of a company are treated as agents of the company and therefore it is their duty not to go beyond the memorandum or powers of the company. Where the directors represents the third party that the contract entered into by them on behalf of the company is within the powers of the company while in reality the company has not such powers under its memorandum, the directors will personally be liable to the third party for his loss on account of the breach of warranty of authority. However, to make the directors personally liable for the loss to the third party, the following conditions must exist: (a) There must be representation of authority by the directors. The representation must be of fact, not of law. (b) By such representation the directors must have induced the third party to make a contract with the company in respect of a matter beyond the memorandum or powers of the company. (c) The third party must have acted on such inducement and suffered some loss.
doc_368375282.doc
covers topic like The rights, powers and liabilities of shareholders, Private Limited Companies, Public Company etc with a few examples
How to: The rights, powers and liabilities of shareholders
Introduction You are a "shareholder" if your name is entered on a company’s share register (see How to maintain a company share register) as being the holder at that time of one or more shares in the company, or if you are entitled to be on the register and are waiting to be included on it. Your rights as a shareholder are set out in the COMPANIES ACT 1993 and in the company’s constitution. (For information on the importance of the constitution and how a company is formed, see How to form a company.) What rights and powers can I exercise as a shareholder? While the day-to-day management of the company is the responsibility of the company’s board of directors, the shareholders may exert a significant indirect influence by exercising the rights and powers available to them. These include:
• • • •
• •
passing resolutions at shareholder meetings (see below) voting out directors electing to sell their shares exercising minority buy-out rights (this is where dissenting shareholders require the company to buy their shares: the right can give significant protection to disaffected shareholders wanting to sell and preserve their capital) requesting the company in writing to provide information held by the company (with a right to appeal to the court if the company refuses) requiring the company to provide the shareholder with a statement of the shares that he or she holds, and of the various rights, privileges, conditions and limitations that attach to those shares
Company decisions that require shareholder participation Certain decisions about the running of the company cannot be made without shareholders participating. These include:
• • • • •
various decisions requiring the unanimous assent of shareholders (see below) alterations to the constitution alterations to shareholders’ rights decisions involving major transactions decisions involving remuneration and other benefits
Shareholders may review the management of the company Irrespective of what is in the company constitution, the chairperson of a shareholders’ meeting must allow a reasonable opportunity for the shareholders at the meeting to question, discuss, or comment on the management of the company. In addition, shareholders are entitled to pass a resolution relating to the management of the company. However, the resolution will not be binding on the board of directors, unless the company constitution (if there is one) provides otherwise.
Shareholder meetings: ordinary resolutions and special resolutions The powers reserved for shareholders may only be exercised at a meeting of shareholders or by a resolution passed instead of a meeting. Shareholder powers may generally be exercised by ordinary resolution, which means a resolution passed by a simple majority. However, in certain cases shareholder powers must be exercised by "special resolution", that is, a resolution requiring a 75 percent majority. This applies where the shareholders wish to exercise their powers to:
• • • •
adopt, alter or revoke the company’s constitution approve a major transaction approve an amalgamation put the company into liquidation
Shareholder actions requiring unanimous assent In addition, there are certain types of actions that shareholders may take if all entitled shareholders agree unanimously. These actions include:
• • • • •
authorising dividends approving a discount scheme the acquisition by the company of its own shares the redemption of shares giving financial assistance to some other person or company to buy the company’s own shares
How do I enforce my rights in the courts? There are a number of ways in which shareholders can take court action against the company to enforce their rights, including:
• • • •
•
applying for an order restraining the company from taking action that would contravene the company’s constitution or the COMPANIES ACT 1993 applying for an order directing the company to take any action that its constitution or the Act requires it to take suing the company or a director for a breach of a duty owed to the shareholder if the company has acted unfairly or oppressively towards the shareholder, applying for an order that the company must take certain action, such as buying the shareholder’s shares or paying compensation applying for an order for the company’s records to be inspected
What are my liabilities as a shareholder? As a shareholder you are not liable for the company’s obligations merely by reason of being a shareholder, unless the company’s constitution provides that shareholder liability is unlimited. If the constitution does not provide this, then your liability as a shareholder is limited to:
•
any amount unpaid on a share held by you
• •
•
•
any liability expressly provided for the constitution any liability for breach of directors’ duties if the shareholders are deemed to be directors (this applies if the company gives the shareholders powers that would normally be exercised by the directors) any liability to repay distributions made to the shareholder when the company did not satisfy the solvency test under the COMPANIES ACT 1993, to the extent that the distribution is recoverable under the Act obligations to meet calls made by the company in relation to the liability attaching to shares
Former shareholders may be liable to the company for amounts outstanding in respect of any shares or for any liability provided for in either the Act or the constitution.
Cautionary notes •
•
Company law is detailed and can be complex. Also, frequently large amounts of money are at stake. At the earliest possible stage you should obtain legal advice as to your rights, powers, duties and liabilities as a shareholder so that your interests can be protected. In a number of situations the COMPANIES ACT 1993 sets out strict time limits for shareholders wanting to exercise their rights. For example, if you wish to exercise minority buy-out rights you must give the company written notice within 10 working days after the particular resolution from which you dissented.
CORPORATIONS
The law of corporations in India is governed by the Companies Act, 1956. Broadly, there are two types of companies – Public Limited Companies and Private Limited Companies. While Public Limited Companies describe themselves merely as “Limited Companies”, Private Limited Companies are obliged to indicate clearly the fact that they are a Private Company by adding after their name “Pvt. Ltd.” Private Limited Companies: A Private Limited Company can be formed with a minimum of two persons as shareholders and a minimum of two directors. The minimum paid up capital for a Private Company is about US$ 2500 (approximately). A private company has the following features:
1. The right to transfer shares is restricted as per its Articles of Association. 2. The maximum number of its shareholders is limited to 50. 3. No offer can be made to the public to subscribe to its shares and debentures. 4. No invitation or acceptance of deposits from persons other than members, directors or their relatives is allowed. 5. Lesser number of compliance requirements.
Thus generally, where there is no requirement for raising finances through the public and the ownership is intended to be closely held, a Private Limited model is followed. Public Company:
A company which does not contain restrictive provisions in its Articles is a Public company. Unlike Private companies, Public companies can be formed with a minimum of seven members. There is no maximum limit on shareholders for Public companies. The minimum paid-up capital required for a Public company is about US$ 12500 (approximately) and the minimum number of directors is three. Incorporation Formalities: There is no need to appoint an Indian director or Indian shareholder to incorporate a company. Incorporation is through registration with the Registrar of Companies (ROC). The ROC is a statutory authority formed under Companies Act and has numerous offices all over India. For incorporation, the following steps are involved:
1. Selection of name of the company and getting it approved from the ROC. Upon scrutiny and satisfaction, the ROC issues a name availability letter. 2. After the name is approved, Memorandum and Articles of Association (MoA) are drafted. 3. MoA along with other necessary documents are filed with the ROC. The filing fees is dependent on the authorised share capital of the Company. 4. After scrutinising the documents, the ROC issues a Certificate of Incorporation.
Whereas Private companies can commence their business from the date of Certificate of Incorporation, Public companies are required to file certain additional documents and obtain a Certificate of Commencement of Business.
Royal British Bank v Turquand (1856) 6 E&B 327 is a UK company law case that held people transacting with companies are entitled to assume that internal company rules are complied with, even if they are not. This "indoor management rule" or the "Rule in Turquand's Case" is applicable in most of the common law world. It originally mitigated the harshness of the constructive notice doctrine, and in the UK it is now supplemented by the Companies Act 2006 sections 39-41.
Contents
[hide]
• • • • •
1 2 3 4
Facts Judgment Significance See also
5 Notes
[edit] Facts
Mr Turquand was the official manager (liquidator) of the insolvent ‘Cameron’s Coalbrook Steam, Coal, and Swansea and London Railway Company’. It was incorporated under the Joint Stock Companies Act 1844. The company had given a bond for £2000 to the Royal British Bank, which secured the company’s drawings on its current account. The bond was under the company’s seal, signed by two directors and the secretary. When the company was sued, it alleged that under its registered deed of settlement (the articles of association), directors only had power to borrow what had been authorised by a company resolution. A resolution had been passed but not specifying how much the directors could borrow.
[edit] Judgment
Sir John Jervis CJ, for the Court of Exchequer Chamber affirmed the Queen’s Bench and said that it was valid, so the Royal British Bank could enforce the terms of the bond. He said the bank was deemed to be aware that the directors could borrow only up to the amount resolutions allowed. Articles of association were registered in Companies House, so there was constructive notice. But the bank could not be deemed to know about which ordinary resolutions passed, because these were not registrable. The bond was valid, because there was no requirement to look into the company’s internal workings. This is the ‘indoor management rule’, that the company’s indoor affairs are the company’s problem. Jervis CJ gave the judgment of the Court.
“
I am of opinion that the judgment of the Court of Queen's Bench ought to be affirmed. I incline to think that the question which has been principally argued both here and in that Court does not necessarily arise, and need not be determined. My impression is (though I will not state it as a fixed opinion) that the resolution set forth in the replication [332] goes far enough to satisfy the requisites of the deed of settlement. The deed allows the directors to borrow on bond such sum or sums of money as shall from time to time, by a resolution passed at a general meeting of the Company, be authorized to be borrowed: and the replication shews a resolution, passed at a general meeting, authorizing the directors to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and the Act of Parliament; but
”
the resolution does not otherwise define the amount to be borrowed. That seems to me enough. If that be so, the other question does not arise. But whether it be so or not we need not decide; for it seems to us that the plea, whether we consider it as a confession and avoidance or a special Non est factum, does not raise any objection to this advance as against the Company. We may now take for granted that the dealings with these companies are not like dealings with other partnerships, and that the parties dealing with them are bound to read the statute and the deed of settlement. But they are not bound to do more. And the party here, on reading the deed of settlement, would find, not a prohibition from borrowing, but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to infer the fact of a resolution authorizing that which on the face of the document appeared to be legitimately done.
Pollock CB, Alderson B, Cresswell J, Crowder J and Bramwell B concurred.
[edit] Significance
The rule in Turquand's case was not accepted as being firmly entrenched in law until it was endorsed by the House of Lords. In Mahony v East Holyford Mining Co[1] Lord Hatherly phrased the law thus:
“
When there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association, those so dealing with them externally are not to be affected by irregularities which may take place in the internal management of the company.
”
So, in Mahoney, where the company's articles provided that cheques should be signed by any two of the three named directors and by the secretary, the fact that the directors who had signed the cheques had never been properly appointed was held to be a matter of internal management, and the third parties who received those cheques were entitled to presume that the directors had been properly appointed, and cash the cheques. The position in English law is now superseded by section 40 of the Companies Act 2006,[2] but the Rule in Turquand's Case is still applied throughout many common law jurisdictions in the Commonwealth. According to the Turquand rule, each outsider contracting with a company in good faith is entitled to assume that the internal requirements and procedures have been complied with. The company will consequently be bound by the contract even if the internal requirements and procedures have not been complied with. The exceptions here are: if the outsider was aware of the fact that the internal requirements and procedures have not been complied with (acted in bad faith); or if the circumstances under which the contract was concluded on behalf of the company were suspicious.
However, it is sometimes possible for an outsider to ascertain whether an internal requirement or procedure has been complied with. If it is possible to ascertain this fact from the company's public documents, the doctrine of disclosure and the doctrine of constructive notice will apply and not the Turquand rule. The Turquand rule was formulated to keep an outsider's duty to inquire into the affairs of a company within reasonable bounds, but if the compliance or noncompliance with an internal requirement can be ascertained from the company's public documents, the doctrine of disclosure and the doctrine of constructive notice will apply. If it is an internal requirement that a certain act should be approved by special resolution, the Turquand rule will therefore not apply in relation to that specific act, since a special resolution is registered with Companies House (in the United Kingdom), and is deemed to be public information.
Doctrine of ultra vires
An action outside the memorandum is ultravires the company. Ashbury Railway carriage & Iron Co.Ltd V.Riche(1875)LR 7 HL London county council v. Attorney General 1902AC165. A.Lakshmanaswami mudaliar v. LIC AIR 1963SC1185 Introduction The object clause of the Memorandum of the company contains the object for which the company is formed. An act of the company must not be beyond the objects clause, otherwise it will be ultra vires and, therefore, void and cannot be ratified even if all the members wish to ratify it. This is called the doctrine of ultra vires, which has been firmly established in the case of Ashtray Railway Carriage and Iron Company Ltd v. Riche. The expression “ultra vires” consists of two words: ‘ultra’ and ‘vires’. ‘Ultra’ means beyond and ‘Vires’ means powers. Thus the expression ultra vires means an act beyond the powers. Here the expression ultra vires is used to indicate an act of the company which is beyond the powers conferred on the company by the objects clause of its memorandum. An ultra vires act is void and cannot be ratified even if all the directors wish to ratify it. Sometimes the expression ultra vires is used to describe the situation when the directors of a company have exceeded the powers delegated to them. Where a company exceeds its power as conferred on it by the objects clause of its memorandum, it is not bound by it because it lacks legal capacity to incur responsibility for the action, but when the directors of a company have exceeded the powers delegated to them. This use must be avoided for it is apt
to cause confusion between two entirely distinct legal principles. Consequently, here we restrict the meaning of ultra vires objects clause of the company’s memorandum. Origin Of The Doctrine The doctrine of ultra vires was first introduced in relation to the statutory companies.2 However, the doctrine was not paid due attention up to 1855. The reason appears to be this that doctrine was not felt necessary to protect the investors and creditors. The companies prior to 1855 were usually in the nature of an enlarged partnership and they were governed by the rules of partnership. Under the law of partnership the fundamental changes in the business of partnership cannot be made without the consent of all of the partners and also the act of one partner cannot be binding on the other partners if the act is found outside his actual or apparent authority, but it can always be ratified by all the partners. These rules of partnership were considered sufficient to protect the investors. On account of the unlimited liability of the members, the creditors also felt themselves protected and did not require any other device for their protection. Besides, during early days the doctrine had no philosophical support. The doctrine is based on the view that a company after incorporation is conferred on legal personality only for the purpose of the particular objects stated in the objects clause of its memorandum and transaction not authorized expressly or by necessary implication must be taken to have been forbidden, but this view was not followed during early days nd contrary to it, the view that a company has all the powers of a natural person unless it has been taken away expressly or by necessary implication was given a big support. In 1855 some important developments took place. One of them was the introduction of the principle of limited liability. After the introduction of this principle, it was possible to make the liability of the members limited. Set Off long as the liability of the members was unlimited, the creditors of the company considered themselves protected, but after the development of doctrine of limited liability, they found themselves in a miserable state. This necessitated a device to protect the creditors; this moulded the minds of the pioneers towards the doctrine of ultra vires. In addition to it, the companies were required to have two important documents, the memorandum and articles. The memorandum was to contain the objects of the company. The alteration of the memorandum was made difficult. Thus the importance of memorandum was realized and the management of the company was desired to
observe the objects stated in the memorandum. All these created an atmosphere favorable for the development of doctrine of ultra vires. Protection Of Creditors And Investors Doctrine of ultra vires has been developed to protect the investors and creditors of the company. This doctrine prevents a company to employ the money of the investors for a purpose other than those stated in the objects clause of its memorandum. Thus, the investors and the company may be assured by this rule that their investment will not be employed for the objects or activities which they did not have in contemplation at the time of investing their money in the company. It enables the investors to know the objects in which their money is to be employed. This doctrine rotects the creditors of the company by ensuring them that the funds of the company to which they must look for payment are not dissipated in unauthorized activities. The wrongful application of the company’s assets may result in the insolvency of the company, a situation when the creditors of the company cannot be paid.
This doctrine prevents the wrongful application of the company’s assets likely to result in the insolvency of the company and thereby protects creditors. Besides the doctrine of ultra vires prevents directors from departing the object for which the company has been formed and, thus, puts a check over the activities of the directions. It enables the directors to know within what lines of business they are authorized to act . Ascertainment Of The Ultra Vires To ascertain whether a particular act is ultra vires or not, the main purpose must first be ascertained, then special powers for effecting that purpose must be looked for, if the act is neither within the main purpose nor the special powers expressly given by the statute, the inquiry should be made whether the act is incidental to or consequential upon. An act is not ultra vires if it is found: (a) Within the main purpose, or (b) Within the special powers expressly given by the statute to effectuate the main purpose, or (c) Neither within the main purpose nor the special powers expressly given by the statute but incidental to or consequential upon the main purpose and a thing reasonably done for effectuating the main purpose. Basic principles included the following:
An ultra vires transaction cannot be ratified by all the shareholders, even if they wish
it to be ratified. The doctrine of estoppel usually precluded reliance on the defense of ultra vires where the transaction was fully performed by one party A fortiori, a transaction which was fully performed by both parties could not be attacked. If the contract was fully executory, the defense of ultra vires might be raised by either party. If the contract was partially performed, and the performance was held to be insufficient to bring the doctrine of estoppel into play, a suit for quasi contract for recovery of benefits conferred was available. If an agent of the corporation committed a tort within the scope of his or her employment, the corporation could not defend on the ground the act was ultra vires LIABILITY OF DIRECTORS 1. Liability towards the company: it is the duty of the directors to see that the funds of the company are used only for legitimate business of the company. Consequently if the funds of the company are used for a purpose foreign to its memorandum, the directors will be personally liable to restore to the company the funds used for such purpose. In other words, a shareholder can sue the directors to restore to the company the funds, which have been employed by them in the transactions, which they have no authority to enter into. 2. Liability towards the third party: the directors of a company are treated as agents of the company and therefore it is their duty not to go beyond the memorandum or powers of the company. Where the directors represents the third party that the contract entered into by them on behalf of the company is within the powers of the company while in reality the company has not such powers under its memorandum, the directors will personally be liable to the third party for his loss on account of the breach of warranty of authority. However, to make the directors personally liable for the loss to the third party, the following conditions must exist: (a) There must be representation of authority by the directors. The representation must be of fact, not of law. (b) By such representation the directors must have induced the third party to make a contract with the company in respect of a matter beyond the memorandum or powers of the company. (c) The third party must have acted on such inducement and suffered some loss.
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