GPCL NOTES

Legal person and Person

The terms "legal person" and "person" are related but distinct concepts, and their meanings can vary
depending on the context. Here's an explanation of each term with examples:

1. Legal Person: A legal person is an entity that is recognized as having rights and responsibilities
under the law. This includes entities such as corporations, governments, non-profit
organizations, and other entities that are granted legal personality.

Examples:

 Corporations: When a company is considered a legal person, it means the law

recognizes it as a separate entity from its owners. The corporation can enter into
contracts, own property, and be held legally responsible for its actions.

 Non-profit Organizations: Entities like charities or foundations may be

recognized as legal persons, allowing them to engage in legal transactions, sue,
and be sued.

 Government Bodies: Certain government agencies or bodies may be treated as

legal persons with the authority to enter into legal agreements and be subject to
legal obligations.

2. Person: In a general sense, a person refers to a human being. This can be a natural person (an
individual) or a legal person (an entity recognized by the law).

Examples:

 Natural Persons: This refers to individual human beings. For example, John
Smith is a natural person with legal rights and responsibilities.

 Legal Persons: As mentioned earlier, entities like corporations, governments,

and non-profit organizations are also considered persons in a legal sense.

Key Differences:

 All legal persons are persons, but not all persons are legal persons. Natural persons (individuals)
are a subset of the broader category of persons that also includes legal entities.

 Legal persons are entities recognized by the law as having legal rights and obligations, while the
term "person" can refer to both natural and legal persons.

 Legal personality is a broader concept encompassing all entities, both natural and artificial,
recognized by the law. Corporate personality is a subset of legal personality, specifically
referring to corporations.
  Legal personality applies to a wide range of entities, including governments, non-profits, and
corporations. Corporate personality is more narrowly focused on business entities formed under
corporate law.

1) CORPORATE PERSONALITY

Concept - Corporate personality refers to the legal recognition of a corporation as a distinct entity with
rights and liabilities separate from its members or shareholders. This concept allows a corporation to
enter into contracts, own property, sue or be sued, and engage in legal activities as if it were an
individual person.

Personification of Corporations: Personification involves attributing human characteristics to non-

human entities, and it is often applied to corporations to facilitate legal and practical interactions. By
treating a corporation as a legal "person," it can be held accountable for its actions, enter into
agreements, and be subject to legal proceedings. This personification is a legal fiction designed to
simplify the complexities of dealing with large and complex organizations.

Theories of Corporate Personality:

1. Real Entity Theory:

 This theory suggests that a corporation is a real and tangible entity, distinct from its
members. It views the corporation as an organic entity with a personality of its own,
capable of holding property and entering contracts.

2. Concession Theory:

 According to this theory, the state grants corporations their legal personality as a
concession or privilege. The corporation exists because the state allows it to exist, and its
powers and rights are derived from this grant.

3. Fiction Theory:

 The fiction theory treats the corporate personality as a legal fiction, acknowledging that a
corporation is not a natural person but is treated as such for legal convenience. This
perspective emphasizes the practical benefits of personifying corporations.

4. Bracket Theory

As per this theory, legal individuality enables corporations to perform more efficiently. The members of
a corporation have specific rights that are delegated to the company for commercial purposes. Hohfeld,
an American jurist, has argued for this notion a little differently. He proposes that corporate personality
is an arbitrary legal norm to assist legal procedures. Only human beings are individuals and legal
personality is just an arbitrary procedural norm for accounting mass individual interaction.
5. Purpose Theory

The principal proposer of this theory is a German Jurist, Brinz. According to this theory, a corporation
should be recognized as a legal entity only if it serves a valid social or economic process. It proposes
that a legal personality should be granted to a corporation based on its ability to contribute to the public
welfare, promote economic growth, and serve the interests of various stakeholders.

This theory also disputes the view that corporate personality is an inherent characteristic but something
that is awarded because of a valid reason or purpose.

Three key requirements must be present in a corporation's legal personality:

 First, a group or body of human persons must be linked for a specific purpose;

 Second, the company must have organs through which it acts; and

 Third, the company is given will/animus by legal fiction.

Jurisprudential Aspects:

1. Legal Recognition:

 The concept of corporate personality is a legal construct, and its recognition varies across
jurisdictions. Legal systems provide the framework for acknowledging corporations as
legal persons and specifying their rights and obligations.

2. Limited Liability:

 One of the key jurisprudential aspects is the notion of limited liability, which protects the
personal assets of shareholders from the corporation's debts. This principle encourages
investment by mitigating the risk for individual investors.

3. Legal Rights and Liabilities:

 Corporations, as legal persons, have the capacity to hold rights and liabilities. They can
own property, sue or be sued, and enter into contracts. This legal framework provides a
basis for the conduct of business and resolution of legal disputes involving corporations.

Characteristics

1. Separate Legal Entity:

 A company is treated as a separate legal entity distinct from its members. This means that
the company has its own legal existence, rights, and liabilities, independent of its
shareholders.

2. Limited Liability:
  Shareholders of a company have limited liability, which means their personal assets are
protected from the company's debts. The liability of the shareholders is generally limited
to the amount unpaid on their shares.

3. Perpetual Succession:

 The concept of perpetual succession means that the company continues to exist
regardless of changes in its membership. The death, insolvency, or transfer of shares by a
shareholder does not affect the continuity of the company.

4. Common Seal:

 A company has a common seal, which is an official signature of the company. The
common seal is used to authenticate documents and contracts executed by the company.
While the use of a common seal is not mandatory for all transactions, it may still be used
for certain formalities.

5. Capacity to Sue and Be Sued:

 As a separate legal entity, a company has the capacity to enter into legal contracts and
can sue and be sued in its own name. This is distinct from the individual members of the
company.

6. Separation of Ownership and Management:

 The ownership of the company (held by shareholders) is separate from its management,
which is vested in the Board of Directors. This allows for professional management and
decision-making.

7. Transferability of Shares:

 The shares of a company are freely transferable, subject to any restrictions mentioned in
the Articles of Association. Shareholders can transfer their ownership interests in the
company to others.

8. Statutory Compliance:

 Companies are required to comply with various statutory provisions outlined in the
Companies Act, 2013. Compliance includes holding annual general meetings, filing
financial statements, and adhering to corporate governance norms.

9. Capacity to Own Property:

 A company has the capacity to own and hold property in its own name. The assets and
property of the company are considered separate from the assets of its shareholders.

10. Limited and Unlimited Companies:

  The Companies Act allows for the formation of both limited and unlimited companies. In
a limited company, the liability of shareholders is limited, while in an unlimited
company, the shareholders may have unlimited liability.

Cases

Salomon v. Salomon & Co. Ltd. (1897):

 Jurisdiction: United Kingdom

 Significance: This landmark case is fundamental to the concept of corporate personality. It

established that a company is a separate legal entity from its shareholders. Mr. Salomon, a sole
trader, incorporated his business, and when the company faced financial difficulties, the court
upheld the principle of limited liability, emphasizing the legal distinction between the individual
and the company.

Daimler Co. Ltd v. Continental Tyre and Rubber Co. (1916):

 Jurisdiction: United Kingdom

 Significance: This case clarified that a company's nationality is determined by the place of its
incorporation, not the nationality of its shareholders. It affirmed the separate legal personality of
the company.

Macaura v. Northern Assurance Co. Ltd. (1925):

 Jurisdiction: United Kingdom

 Significance: This case highlighted the concept that the assets of a company are separate from
the personal assets of its shareholders. Mr. Macaura owned a timber estate and sought an
insurance claim for the loss of timber owned by his company. The court held that the company's
assets were distinct from the personal assets of its owner.

Company – Definition, Nature, Characteristics, Classification of companies

2) DOCTRINE OF PIERCING THE CORPORATE VEIL – STATUTORY EXCEPTIONS AND JUDICIAL

INTERPRETATIONS

Corporate Veil

The statement "The existence of a company is in fiction or in contemplation of law" encapsulates the
fundamental concept of corporate personality. A company, unlike a natural person, exists as a separate
legal entity, distinct from its shareholders and directors. This artificial creation of law confers upon a
company certain advantages, such as limited liability for its shareholders and the ability to enter into
contracts and hold property in its own name. However, this veil of incorporation, while generally
beneficial, can also be misused to shield individuals from personal liability for their wrongful actions.
The concept of lifting the corporate veil comes into play in such instances, allowing courts to pierce the
corporate facade and hold individuals accountable for their actions.

Concept

Corporate Veil is a shield that protects the members from the actions of the company. The lifting of the
corporate veil refers to the exceptional circumstances where the law allows the courts to look beyond the
corporate entity and hold the individuals behind the company personally liable for the company's
actions. In India, the Companies Act, 2013, contains provisions related to lifting the corporate veil,
primarily in the context of determining the liability of directors and other officers.

The "Salomon v. A. Salomon & Co. Ltd." case is a landmark decision in corporate law that
established the principle of corporate personality and the concept of the corporate veil. The case played
a crucial role in shaping the legal understanding of the separate legal identity of a company and the
protection of shareholders from the company's liabilities.

 Mr. Salomon incorporated a company, A. Salomon & Co. Ltd., to take over his existing business
as a leather merchant.

 Shareholding: Salomon held 20,001 shares, and six family members each held one share.

 Debts and Liquidation: The company encountered financial difficulties, and when it went into
liquidation, there were not enough assets to cover all the debts. Salomon, as a secured creditor,
argued that he should be paid first.

 Separate Legal Entity: The central issue was whether the company was a separate legal entity
from its shareholders. The House of Lords held that, indeed, the company was a separate legal
entity, distinct from its shareholders.

 Limited Liability: The decision established the principle of limited liability, meaning that
shareholders were only liable to the extent of the nominal value of their shares. Shareholders
were not personally responsible for the company's debts.

 Corporate Veil: The concept of the corporate veil refers to the legal separation between a
company and its shareholders. The court emphasized that once a company is legally formed, it is
a distinct person with its rights and liabilities. The corporate veil can only be pierced in
exceptional circumstances.

Circumstances under which the Corporate Veil can be lifted

There are two circumstances under which the Corporate Veil can be lifted. They are:

1: Statutory Provisions

2: Judicial Interpretations

Statutory Provisions
Mis-Statements in Prospectus [Sections 34 & 35]

If a company issues a prospectus containing false statements, and any person has incurred losses due to
relying on those statements, the corporate veil may be pierced. This is to ensure accountability and to
protect investors.

Mis-Description of Name in Registered Clause [S-12]

If there is a misdescription of the company's name in its registered documents, and this misdescription
causes harm or confusion, the corporate veil can be lifted to hold those responsible accountable.

Failure to Return Application Money [Sec. 39]

If a company fails to return the application money for shares that were not allotted, it may be held
accountable. The corporate veil can be pierced to reach the individuals responsible for this failure.

Punishment for Contravention of Section 73 or Section 76 [Section 76a]

If a company contravenes provisions related to acceptance of deposits (Section 73) or repayment of

deposits (Section 76), individuals responsible for such contraventions may be personally liable, and the
corporate veil may be pierced.

For Facilitating the Task of an Inspector Appointed Under Section 210 or 212 or 213 to Investigate the
Affairs of the Company [Sec. 219]

If individuals obstruct or fail to cooperate with an inspector appointed to investigate the company's
affairs, the corporate veil may be lifted to identify and penalize those responsible.

For Investigation of Ownership of Company [Sec. 216]

In cases where there is a need to investigate the ownership of a company, the corporate veil can be
pierced to reveal the true ownership structure and individuals controlling the company.

Fraudulent Conduct [Sec. 339]

Fraudulent activities by the company or its officers may lead to the piercing of the corporate veil. This
ensures that those involved in fraudulent conduct cannot escape personal liability by hiding behind the
corporate entity.

Liability for Ultra Vires Acts

If a company engages in activities beyond its legal powers (ultra vires acts), and individuals are
responsible for such acts, the corporate veil may be lifted to hold those individuals personally liable.

Liability under Other Statutes

The corporate veil can be pierced if individuals associated with the company are found to be liable
under other statutes. This ensures that legal obligations are not evaded through the corporate structure.

Judicial Interpretations
 1. Lee v. Lee's Air Farming Ltd. (1960): In this landmark case, the court emphasized that the
corporate veil should only be pierced in exceptional circumstances, such as fraud or an agency
relationship that exceeds the normal scope. The court held that the company was a separate legal
entity despite the one-man ownership structure.

2. Daimler Company Ltd. v. Continental Tyre & Rubber Co. (Great Britain) Ltd. - Company
being an artificial person cannot be an enemy or friend. However, during war, it may become
necessary to lift the corporate veil and see the persons behind as to whether they are enemies or
friends. It was held that since both the decision-making bodies, i.e., the Board of directors and
the general body of shareholders were controlled by Germans, the company was a German
company and hence, an enemy company. Accordingly, the suit filed by the company to recover a
trade debt was dismissed on the ground that such payment would amount to trading with enemy.

3. U.P. v. Renusagar Power Supply Co. (1988): The Renusagar case clarified that the corporate
veil could be lifted if there was a clear misuse of the corporate structure, leading to injustice. The
court considered the economic realities and lifted the corporate veil to look at the real nature of
the transaction.

4. Tata Locomotive Co. Ltd. v. Teleco Industries (1964): In this case, the court held that the
corporate veil should not be lifted unless there was a clear case of fraud or the company was
incorporated for fraudulent purposes. The court emphasized the importance of respecting the
separate legal personality of a company.

5. Gilford Motor Co. Ltd. v. Horne (1933): This case involves an attempt to use a corporate
structure to evade a non-competition agreement. The court pierced the corporate veil to prevent
the misuse of the corporate form.

Directors Protection

The doctrine of corporate personality provides directors and officers of a company with limited liability,
shielding them from personal liability for the company's debts and obligations.

While the corporate veil can be lifted in specific circumstances, the law generally provides protection to
directors and officers for their acts done in good faith and within their authority. Section 149(12) of the
Companies Act, 2013, provides indemnity to directors against all losses incurred by them while acting
in the course of the company's business.

However, this protection is not absolute and can be breached when the individual's actions breach the
corporate form or they engage in personal wrongdoing.

Limited Liability Protection

Separate Legal Entity

Piercing the Veil

3) CORPORATE GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY

Meaning and evolution

Meaning of CG

 Corporate governance is the combination of rules, processes or laws by which businesses are
operated, regulated or controlled.
 Way a company is directed and controlled.
 Includes the internal and external factors that affect the interests of a company's stakeholders,
including shareholders, customers, suppliers, government regulators and management.

Evolution

 Father of CG- Bob Tricker, Idea of CG - Browne and Means

 Indian context -
 Pre-Liberalization Era: Before economic liberalization in the 1990s, corporate governance in
India was less regulated and often lacked transparency. Family-owned businesses dominated,
and there was a need for a more structured governance framework.
 Post-Liberalization Era: The opening up of the economy led to an influx of foreign
investments, necessitating improved corporate governance standards. The liberalization era
marked the beginning of reforms aimed at aligning Indian practices with global standards.
 Committee Reports: The Narayana Murthy Committee (2003), Kumar Mangalam Birla
Committee (2000), and Uday Kotak Committee (2017) have been instrumental in shaping
corporate governance practices. Their recommendations influenced regulatory changes,
emphasizing the role of independent directors, audit committees, and board accountability.
 Narayana Murthy committee report –
● 2nd Committee constituted by SEBI
● To review the existing corporate governance practices and codes
● Committee consisted of members from various walks of public and professional life.
 JJ Irani committee report - 1/3rd of the board of a listed company should comprise
independent directors.
 Committee recommendations
1. Cadbury Committee (code of best practices) - Cadbury Committee was one of the first and
renowned committees formed to deliberate on corporate governance; after a debating period,
they formed specific best practice codes to implement corporate governance. They are -
 role of the board of directors
 role of non-executive directors
 appointment, remuneration and performances of the directors
 financial reporting and audit
 regulation of both insider and outsider dominated system of management
2. King committee
 SEBI's Role
 Securities Exchange Board of India grounded the legislature factor of corporate governance
in India in 1988 and the 2013 amendment of the Indian Companies Act; both provided more
expansive and comprehensive provisions on corporate governance.
  SEBI constituted two committees to make recommendations relating to India’s corporate
governance, one in 2000, Kumar Manglam Birla committee, Narayana Murthy Committee in
2003. These committees made various essential recommendations –
1. Composition of Board
2. Formation of Audit Committee
3. Disclosure of relevant information to the shareholders
 In 2000 SEBI was directed to incorporate the Kumar Manglam Birla committee’s
recommendations by inserting a new clause in the Equity Listing Agreement – i.e. Clause 49
and 35B. Clause 35B was formulated to facilitate the active participation of shareholders in
the company affairs and board affairs. Clause 49 of the equity listing agreement was
formulated to incorporate the norms of corporate governance in the company’s internal
matters; which include the board of directors, audit committee, protection of shareholders,
corporate social responsibility, etc.

Four pillars of corporate governance

1. Accountability

● Accountability means a situation in which any person is responsible and needs to give a satisfactory
reason for anything wrong at work. Corporate governance makes accountability.

● Accountability ensures that working management is responsible to the Board of Directors (BOD).

● Accountability Ensure that the BOD is accountable to shareholders if anything bad happens.

2. Responsibility

Companies should integrate social and environmental considerations into their business practices.

3. Transparency

● CG ensures timely, accurate disclosure on all material matters of the company including the financial
situation, performance, ownership.

4. Fairness

● Corporate governance protects the rights of Shareholders.

● CG treat all shareholders equally including minorities i.e. who have small part of company’s
ownership.

● Provides effective redressal for any violations i.e Customer care.

Key Facets of Corporate Governance

The principles of corporate governance encompass a wide range of interconnected aspects, each
contributing to the overall effectiveness of an organization's governance framework. Some of the key
facets of corporate governance include:
 1. Board Composition and Independence: The composition of a company's board of directors plays
a pivotal role in ensuring effective governance. A well-structured board should comprise
independent directors who possess the expertise and experience to make sound decisions on
behalf of the company's stakeholders. Section 149(1) of the Companies Act mandates the
appointment of independent directors.

2. Transparency and Disclosure: Transparency is the cornerstone of trust in corporate governance.

Companies must be open and transparent about their financial performance, business strategies,
and risk management practices. This transparency is achieved through regular disclosures to
shareholders, regulatory bodies, and the public. Companies are required to adhere to Accounting
Standards and disclose financial information as per Section 129 and Schedule III of the
Companies Act. Section 177(9) mandates the establishment of a vigil mechanism for directors
and employees to report concerns about unethical behavior.

3. Accountability and Audit: Accountability ensures that the company's management is answerable
for its actions and decisions. A robust system of internal controls and external audits helps to
maintain accountability and prevent irregularities. Section 177 prescribes the constitution and
functioning of audit committees.

4. Risk Management: Effective risk management is essential to protect the company's assets and
reputation. Companies must identify, assess, and manage risks in a proactive manner to prevent
potential losses or damage to stakeholder interests.

5. Stakeholder Engagement: Corporate governance should recognize and address the interests of all
stakeholders, not just shareholders. This includes engaging with employees, customers,
suppliers, and the community to understand their concerns and incorporate their perspectives
into decision-making.

6. Corporate Social Responsibility (CSR): Companies with certain thresholds are mandated to
spend a portion of their profits on CSR initiatives, contributing to social and environmental
causes.

Current Developments in Indian Corporate Governance

The Indian corporate governance landscape continues to evolve, reflecting the dynamic nature of the
business environment:

 Investor Activism: Shareholders are becoming more vocal in demanding accountability and
transparency from companies, leading to increased investor activism.

 Environmental, Social, and Governance (ESG) Considerations: ESG factors are gaining
prominence in investment decisions, prompting companies to integrate sustainability into their
governance frameworks.

 Technology Adoption: Technological advancements are transforming corporate governance

practices, enabling enhanced data analytics, risk management, and stakeholder engagement.
  Focus on Independent Directors: The role of independent directors has been strengthened to
enhance their independence and effectiveness.

 Kotak Committee Recommendations (2017):

a. Reducing Board Size: The Kotak Committee recommended limiting the number of
directorships for individuals, aiming to enhance directors' effectiveness.

b. Separation of Roles: The committee suggested separating the roles of Chairman and
Managing Director to ensure a balance of power.

 SEBI's Regulatory Measures:

a. E-Voting: SEBI introduced mandatory e-voting for critical matters, ensuring greater
shareholder participation in decision-making.

b. Integrated Reporting: The integration of environmental, social, and governance (ESG)

factors in annual reports enhances transparency about a company's impact on society and the
environment.

 Insolvency and Bankruptcy Code (IBC):

a. Corporate Insolvency Resolution Process (CIRP): The IBC introduced a time-bound

resolution process, emphasizing the need for effective governance to prevent insolvency.

b. Stakeholder Involvement: The IBC prioritizes stakeholder interests, aligning with the
principles of good governance.

Cases

1. Satyam Computer Services Scandal (2009):

 Background: Satyam Computer Services, once considered one of India's leading IT

companies, faced a massive corporate governance scandal. Founder and Chairman
Ramalinga Raju confessed to inflating the company's financial statements and assets over
several years.

 Outcome: Raju and other key executives were arrested, and the scandal led to a
significant loss of shareholder value. The Indian government intervened, and Satyam was
eventually acquired by Tech Mahindra. The scandal prompted reforms in corporate
governance and increased scrutiny of financial reporting.

 Legal Holding: The case primarily involved corporate fraud and financial
mismanagement. The courts did not specifically address broader corporate governance
principles. However, the fallout from the scandal prompted regulatory and industry-wide
 reforms, emphasizing the need for robust corporate governance mechanisms and
increased transparency in financial reporting.

2. SEBI v. Sahara Group (2012):

 Background: The Sahara Group, led by Subrata Roy, faced legal action by the Securities
and Exchange Board of India (SEBI) for raising funds through Optionally Fully
Convertible Debentures (OFCDs) without complying with regulatory norms.

 Outcome: The case resulted in a long legal battle between SEBI and Sahara. The
Supreme Court of India ordered Sahara to refund the money to investors with interest.
This case highlighted the importance of regulatory compliance and investor protection.

 Legal Holding: The Supreme Court of India held Sahara Group and its chief, Subrata
Roy, accountable for non-compliance with regulatory norms. The court emphasized the
importance of investor protection and adherence to securities laws. The case underscored
the necessity for companies to follow regulatory requirements and maintain transparency,
especially when raising funds from the public.

3. IL&FS Financial Crisis (2018):

 Background: Infrastructure Leasing & Financial Services (IL&FS) faced a severe

financial crisis, revealing issues of corporate mismanagement, financial irregularities, and
inadequate regulatory oversight in the infrastructure and financial sectors.

 Outcome: The Indian government took control of IL&FS, and there were subsequent
investigations into the role of its top executives. The crisis led to concerns about the
stability of the financial system and prompted regulatory reforms in the non-banking
financial sector.

 Legal Holding: The IL&FS crisis exposed systemic issues related to corporate
mismanagement and regulatory oversight. The legal proceedings focused on restructuring
and stabilizing IL&FS rather than specific findings on corporate governance. However,
the crisis highlighted the importance of effective regulatory oversight and risk
management in the financial sector.

4. Cyrus Mistry vs. Tata Sons (2016):

 Background: Cyrus Mistry was ousted as the chairman of Tata Sons, the holding
company of the Tata Group. Mistry claimed that he was wrongfully terminated and
highlighted corporate governance issues within the Tata Group.

 Outcome: The legal battle unfolded in various forums, including the National Company
Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT).
Ultimately, the NCLT upheld Mistry's removal, but the NCLAT ruled in his favor,
criticizing the manner of his removal. The case highlighted the complex relationship
between boards and executive leadership in large conglomerates.
  Legal Holding: The legal battle between Cyrus Mistry and Tata Sons involved complex
corporate governance issues. The National Company Law Tribunal (NCLT) upheld
Mistry's removal but did not provide detailed reasoning. The National Company Law
Appellate Tribunal (NCLAT) ruled in Mistry's favor, criticizing the process of his
removal and emphasizing the principles of corporate governance. The case highlighted
the significance of fair corporate governance practices, transparency, and the proper
conduct of board decisions.

5. Fortis Healthcare Case (2018):

 Background: Fortis Healthcare faced allegations of financial irregularities and lapses in

corporate governance, leading to investigations by regulatory authorities.

 Outcome: The founders and former executives faced probes, and there were changes in
the leadership of Fortis Healthcare. The case underscored the importance of transparency,
ethics, and accountability in the healthcare sector.

 Legal Holding: The Fortis Healthcare case involved investigations into financial
irregularities and lapses in corporate governance. Regulatory actions focused on holding
individuals accountable for their roles in the alleged wrongdoing. While specific court
holdings may vary, the case underscored the importance of maintaining ethical standards,
transparency, and accountability in the healthcare sector.

6. Infosys Whistleblower Complaint (2019):

 Background: A whistleblower complaint alleged unethical practices at Infosys, one of

India's leading IT services companies, including irregularities in revenue recognition and
corporate governance lapses.

 Outcome: Infosys conducted internal investigations and cooperated with regulatory

authorities. The company emphasized its commitment to good corporate governance
practices. The case highlighted the significance of whistleblower protection and the role
of corporate boards in addressing concerns raised by whistleblowers.

 Legal Holding: Infosys conducted internal investigations, and regulatory authorities may
have been involved, but the case did not necessarily result in a court judgment related to
corporate governance. However, the incident emphasized the role of corporate boards in
addressing whistleblower concerns promptly and transparently, reinforcing the
importance of ethical conduct and governance practices.

CSR and its importance including statutory provisions (PDF)

Interrelationship between CG & CSR

Corporate Social Responsibility Committee (CSR Committee)

 Sec. 135(1) requires every company having net worth of rupees five hundred crore or more, or
turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during
 the immediately preceding financial year to constitute a Corporate Social Responsibility (CSR)
Committee of the Board.
 The CSR committee shall consist of three or more directors, out of which at least one director
shall be an independent director.
 The composition of the CSR committee shall be disclosed in the Board’s Report.
 The CSR committee is responsible for:

i. formulating and recommending to the Board, a CSR Policy indicating the activities to be undertaken
by the company;

ii. recommending the amount of expenditure to be incurred on the CSR activities;

iii. monitoring the Corporate Social Responsibility Policy of the company from time to time.

 It may be noted that the activities to be undertaken have been specified in Schedule VII of the
Act and the company is required to spend, in every financial year, at least two per cent of the
average net profit of the company made during the three immediately preceding financial years,
on CSR activities.

MAJORITY MINORITY RULE – RULE OF INTERFERENCE – FOSS V. HARBOTTLE (PDF)

DOCTRINE OF ULTRA VIRES

The doctrine of ultra vires, as articulated in the case of Ashbury Railway Carriage & Iron Co. v. Riche,
is a fundamental principle of corporate law that deals with the limitations on a company's legal capacity
and authority. The Latin term "ultra vires" translates to "beyond the powers." In the context of corporate
law, it refers to actions or activities that are beyond the scope of a company's authorized or
contemplated corporate powers as outlined in its memorandum of association.

A company which owes its incorporation to statutory authority cannot effectively do anything beyond
the powers expressly or impliedly conferred upon it by the statute or memorandum of association. Any
purported activity beyond such powers will be ineffective even if agreed to by all the members. This
rule is commonly known as ‘doctrine of ultra vires’. The word ‘ultra’ means beyond and the word
‘vires’ means the powers.

After the advent of Joint Stock Companies, the rule of ultra vires was for the first time laid down by the
House of Lords in ASHBURY RLY. CARRIAGE & IRON COMPANY V. RICHE. In this case, the object of
the doctrine was explained by Lord Justice Cairns as follows : (i) to protect investors of the company so
that they may know the objects in which their money is to be employed; and (ii) to protect the creditors
by ensuring that the company funds, to which they must look for payment are not dissipated in
unauthorised activities.

Applicability?????

Consequences

(1) 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 it— Ashbury Railway Carriage and Iron Company
v. Riche (supra). However, in NEPC India Ltd. v. Registrar of Companies, the Madras High Court
has held that a complaint alleging that a company was indulging in activities not mentioned in the
objects clause of the Memorandum of Association had to be filed within six months of the date of
knowledge.

(2) Injunction: In case a company is about to undertake an ultra vires act, the members (even a single
member) can get an order of injunction from the Court restraining the company from going ahead with
the ultra vires act.— Attorney General v. G.R. Eastern Railway Company.

(3) 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 into
purposes foreign to company’s memorandum, the directors will be personally liable to replace it. In
Jehangir R. Modi v. Shamji Ladha, 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
been employed in a transaction that they have no authority to enter into without making the company a
party to the suit’.

Case Laws

1. Lakshmanaswami Mudaliar vs. L.I.C. of India (1963):

 Though this case predates the Companies Act of 2013, it established the principle that the
ultra vires doctrine applies to government corporations as well. The court held that a
government corporation could not undertake an activity that was not expressly or
impliedly authorized by its enabling statute.

2. Satyabrata Ghose vs. Mugneeram Bangur & Co. (1954):

 This case, though not directly under the Companies Act of 2013, is foundational for
understanding the doctrine of ultra vires in contract law. The court held that an act ultra
vires the memorandum of association is void and cannot be ratified even if all the
shareholders agree.

DOCTRINE OF CONSTRUCTIVE NOTICE

The doctrine of constructive notice is a fundamental concept in company law that presumes that an
outsider dealing with a company is deemed to have knowledge of its public documents, including the
memorandum of association (MOA) and the articles of association (AOA). This presumption is based
on the principle that these documents are readily accessible to the public and any person dealing with
the company has a duty to familiarize themselves with their contents.

Even if the party dealing with the company does not have actual notice of the contents of these
documents it is presumed that he has an implied (constructive) notice of them.

Example - One of the articles of a company provides that a bill of exchange to be effective must be
signed by two directors. A bill of exchange is signed only by one of the directors. The payee will not
have a right to claim under the bill.
The doctrine of constructive notice is primarily governed by Section 399 of the Companies Act, 2013,

Again, Section 17 read along with Rule 34 of the Company (Incorporation) Rules, 2014 provides that a
company shall on payment of the prescribed fee send a copy of each of the following documents to a
member within seven days of the request being made by him -

1. the memorandum;

2. the articles, if any;

3. every agreement and every resolution referred to in sub-section (1) of section 117, if and so far as
they have not been embodied in the memorandum and articles.

Failure to supply the copy(ies), as above, will make the company as well as every officer in default
liable to a fine @ Rs. 1,000 per day for each day of the default or Rs. 1,00,000, whichever is less.

Exceptions to Constructive Notice under Companies Act 2013

A. Indoor Management Rule

The "indoor management rule" serves as a significant exception to constructive notice. While the
doctrine imputes notice based on public documents, the rule recognizes that those dealing with the
company internally (e.g., employees) are entitled to assume that internal procedures and requirements
have been followed. As such, external parties are generally not bound by irregularities in internal
company affairs.

B. Ultra Vires Transactions

If a company engages in transactions that fall outside the scope of its objects as outlined in the MOA,
these transactions are considered ultra vires. Section 9 of the Companies Act explicitly states that the
acts of a company are not invalidated merely because they are ultra vires. Therefore, third parties
dealing with the company may be protected against constructive notice if the company's actions are ultra
vires.

C. Negligence

Constructive notice assumes that parties dealing with the company will diligently inspect public
documents and records. However, if a person can establish that they acted in good faith and without
negligence, they may be exempt from the imputed notice. Courts may consider the circumstances
surrounding the transaction to determine if the party exercised due diligence.

D. Fraud and Misrepresentation

If a company engages in fraudulent conduct or misrepresentation, the party relying on constructive

notice may be estopped from asserting its applicability. Courts may intervene to prevent unfair
outcomes arising from fraudulent activities, ensuring that the doctrine is not abused to the detriment of
innocent parties.

E. Actual Knowledge of Irregularity

If an outsider can demonstrate that they had actual knowledge of the company's irregularity or lack of
authority, they will not be bound by the doctrine of constructive notice.

DOCTRINE OF INDOOR MANAGEMENT

The doctrine of constructive notice, while serving as a fundamental principle in legal frameworks, has
faced criticism for its inconvenience in the realm of business transactions. This is particularly evident
when dealing with companies, where the officers may be empowered under articles to exercise certain
powers subject to prior approvals or sanctions of shareholders. The practical challenge arises as external
parties may hesitate to directly inquire about the existence of such approvals or resolutions, creating a
need for a more pragmatic approach.

To address this issue, the 'doctrine of indoor management' emerges as a counterbalance within the
Companies Act of 2013. This doctrine, first established in the case of Royal British Bank v.
Turquand, allows those dealing with a company to presume that necessary internal procedures have
been followed. The doctrine essentially recognizes that external parties cannot be expected to scrutinize
the legality and regularity of every internal decision.

In Turquand's case, the directors of a company issued a bond without the required resolution from a
general meeting. However, the court held that the company was still liable on the bond, as the external
party (T) was entitled to assume that the necessary resolution had been passed.

This doctrine of indoor management operates on the premise that those dealing with a company need not
inquire into the regularity of internal proceedings. It acknowledges the practical challenges faced by
external parties in obtaining information about internal approvals.

Exceptions to the Doctrine of Indoor Management

However, the doctrine of indoor management is not absolute and is subject to certain exceptions:

1. Knowledge of Irregularity: The rule does not protect a person who has actual or implied notice
of the lack of authority of the person acting on behalf of the company. If an external party is
aware that directors do not have the authority for a particular transaction but proceeds anyway,
they cannot seek protection under the doctrine.

2. No Knowledge of Articles: The rule cannot be invoked if a person did not consult the
memorandum and articles and did not rely on them. This emphasizes the importance of
acquainting oneself with the company's governing documents.

3. Forgery: The doctrine does not extend to transactions involving forgery or void/illegal acts from
the beginning. If the signatures or documents involved are forged, the doctrine of indoor
management does not apply.

4. Negligence: The doctrine does not reward negligence. If an officer of a company acts beyond
their usual powers, the external party must make proper inquiries. Failure to do so may estop
them from relying on the doctrine.
 5. Existence of Agency: The doctrine is not applicable when the question is about the very
existence of an agency rather than the scope of power exercised by an apparent agent of a
company.

6. Pre-Condition for Company's Power: The doctrine does not apply when a pre-condition must
be fulfilled before the company itself can exercise a particular power.

7. Oppression: The doctrine of indoor management cannot be invoked in cases of alleged

oppression. It applies specifically to acts related to the provisions of the memorandum and
articles.

In summary, while the doctrine of indoor management provides a practical solution to the
inconveniences posed by the doctrine of constructive notice, it is not absolute. Exceptions ensure that
those dealing with a company are still accountable for their knowledge, diligence, and awareness of
irregularities. The balance struck by these exceptions aims to promote fairness and legal certainty in
corporate transactions.

DIRECTOR

Section 2(34) of the Companies Act, 2013 defines a ‘director’ to mean a director appointed to the Board
of a company. A director means a director who’s appointed to the board of the company. A company
needs a director because it’s an artificial person and hence requires some human to manage it. A director
can be owner but can also be separate from owners. A director provides direction and guidance. He
directly reports to Vice president or CEO.

Who may be appointed as director?

 Section 149 of the Companies Act specifies that only individuals can be appointed as directors;
bodies corporate, associations, or firms are ineligible for directorship.

 To be appointed as a director, an individual must have a Director Identification Number (DIN) or

another prescribed number under Section 153.

 Amendment Act, 2017 modified Section 153, allowing the Central Government to prescribe any
identification number as a Director Identification Number for the Act's purposes (Section
152(3)).

 Section 153 mandates that individuals seeking directorship must apply to the Central
Government for the allotment of a Director Identification Number. The application must adhere
to prescribed form, manner, and fees. Alternatively, the Central Government may prescribe any
other identification number as a DIN.

How appointed?

A director can be appointed by 4 methods -

1. By nomination (When an agreement between the shareholders has been included in the articles that
entitles every shareholder with more than 10% share to be appointed as a director, then they can be
nominated as director.)

2. Voting on an individual basis in general meeting

3. Proportional representation

4. By tribunal (section 161)

Retirement and re-appointment are done on a rotational basis - 2/3rd of directors retire every year on a
rotational basis at AGM which is held 2 times in a year.

Qualifications

The Companies Act doesn't specify academic or professional qualifications for directors, and there is no
mandatory share qualification imposed. Unless the company's articles state otherwise, a director isn't
required to be a shareholder, except voluntarily. Typically, articles include a minimum share
qualification.

Disqualifications

Section 164(1) of the Companies Act, 2013 provides that a person shall not be eligible for appointment
as a director of a company, if —

1. Declared Unsound mind by a court

2. Declared Insolvent by a court

3. Have no DIN

4. Is a director in more than 20 companies

5. Didn’t disclose financial statement for 3 years

6. Indulged in Related party transactions

Section 165(1) limits the number of directorships to 10 public companies and total companies to 20.

SEC: 149 MINIMUM DIRECTORS REQUIRED IN COMPANY

● One Person Company: 1 Director

● Private Limited Company: 2 Director

● Public Limited Company: 3 Director

Maximum no. of Director can be: 15 (However, Company can increase the directors beyond 15 by
passing Special Resolution)

The legal position of a director

  In the case of Imperial Hydropathic Hotel Co Blackpool v. Hampson the position of a
director has been cited as a versatile position in a corporate body. Difficulty in defining
exact legal position under Companies Act.

 Described as agents, trustees, or managing partners by judges.

Director can sometimes be:

 Directors as Agents:

 Directors are considered agents; the company acts through them. The Companies Act,
while not defining directors as agents, implicitly recognizes their role in acting on behalf
of the company.

 The chief executive's execution of a promissory note and borrowing for the company
does not imply personal liability - Kirlampudi Sugar Mills Ltd. v. G. Venkata Rao
[2003]

 Directors' surety in personal capacities - H.P. State Electricity Board v. Shivalik

Casting (P.) Ltd. [2003]

 Directors may be personally liable in specific circumstances.

 Acts beyond directors' powers but within company's powers can be ratified. Ratification
through resolution or acquiescence. Shareholders can ratify acts intra vires the company -
Floating Services Ltd. v. MV ‘San Fransceco Dipalola’ [2004]

 Directors as Trustees:

 Directors regarded as trustees of company’s assets. Powers, such as allotting shares, are
considered powers in trust.

 The fiduciary duties and responsibilities assigned to them imply a trust-like relationship.

 Directors are regarded as trustees for the company, and their misuse of company funds
can render them liable even after death - Ramaswamy Iyer v. Brahmayya & Co. [1966]

 Directors as Managing Partners:

 Company viewed as a large partnership; directors manage affairs.

 Other shareholders seen as virtually dormant partners.

 Provisions in the Memorandum and Articles of Association empower directors with vast
powers of management.

 Employee Status of Directors:

 Directors elected by shareholders. The Act specifies the rights and powers of directors
but doesn't automatically confer employee status. Shareholders cannot interfere with
 director's rights, except under certain circumstances. Directors are not employees by
default but can accept employment under a separate contract.

 Directors, while elected representatives of shareholders, are not necessarily employees or

servants of the company - Lee Behrens & Co., Re [1932]

Types of Directors

FIRM-IWWAAN

Executive Directors - Gives whole time to the company (whole time director/ managing director/ first
director). ● Company employee ● Closely witnesses daily affairs of company ● Have deep knowledge
of the company includes: 1. First director 2. Whole-time director 3. Managing director

Non – Executive Directors - Two types of non-executive directors - Independent and non-independent
directors. ● These directors are not employees, they just provide employees. ● They are not related to
the company in any way. ● These are not involved closely and in day to day management of the
company. ● Include professional and nominee directors.

1. First Director

 The individuals named or defined in AOA are first directors.

 Clause related to company can’t be altered despite resignation or induction of new directors in
the board.
 Requisite of appointment of director
1. Shall be appointed by company in general meeting
2. DIN
3. Consent Note- Additional director, alternate director and nominee directors can be appointed
without general meeting.

3. Managing director

 Involved in affairs of company

 Has substantial powers

5. Resident director

 As per law, every company needs to appoint one director who has stayed in India for a period
not less than 182 days in previous calendar year.

6. Woman director

 At least one woman director is necessary to have in a listed company and its securities are listed
in stock exchange.
 If specified company wants to appoint a woman director then it should have a paid-up capital of
100 cr and turnover 300 crore.

7. Alternate director
  Alternate directors are appointed by board to fill in for a director who might be absent from India
for more than 3 months.

8. Additional director

 Board of directors can appoint additional director if it’s mentioned in AOA.

 An additional director can occupy his post until the next AGM. In absence of the AGM, such
term would conclude on the date on which such AGM should have been held.
 A person who fails to get appointed in AGM can’t be appointed as additional director.

9. Nominee director

 Nominee directors could be appointed by a specific class of shareholders, banks or lending

financial institutions, third parties through contracts, or by the Union Government in case of
oppression or mismanagement.

Independent director

1. These directors have no relation or transaction with the company. They are independent individually.

2. They work as promoter (promoters are those who provide guidelines to the company).

3. They don’t get any profit

4. Can appoint atleast 2 independent director

5. Tenure- 5 consecutive years

6. Reappointment with special resolution

7. Appointment and reappointment both are done by passing special resolution

8. In Private company independent director is permanent

9. 2/3rd directors retire every year in the rotation is not applicable here

10.In public company, in every AGM one independent director retires and next director gets appointed

11.Not biased towards the company

12.Every listed company shall have at 1/3rd of the total number of directors as independent director.

13.Independent directors should meet once a year without the executive directors (only independent
directors should meet).

14.Remuneration - pay against advices. They don’t have stock option. ● Public Companies with Paid-up
Capital of Rs.10 Crores or more, ● Public Companies with Turnover of Rs.100 Crores or more, ● Public
Companies with total outstanding loans, deposits, and debenture of Rs.50 Crores or more.

Powers of the Board of Directors - (Section 179)

Section 179(3) of the Act provides that the Board of Directors of a company shall exercise the following
powers on behalf of the company by means of resolutions passed at meetings of the Board.

1. Make calls on shareholders

2. Borrow money

3. Invest funds

4. Issue debenture and securities

5. Approve financial statement and bonds

6. Increase number of businesses

7. Buyback of securities and shares

8. Grant loans

9. Amalgamation, merger

10. Take shares in other companies

Power to constitute audit committee

The board of directors has the authority to constitute the audit committee under Section 177 of the Act.

Power to constitute nomination and remuneration committee and stakeholder relationship

committee

Section 178 of the Companies Act of 2013 empowers the board of directors to form a nomination and
remuneration committee as well as a stakeholders' relationship committee.

Power to make contribution to charitable and other funds

Section 181 of the act allows the board of directors to contribute to a genuine and bonafide cause as a
charity.

Power to make a political contribution

Political contributions can be made by companies under Section 182 of the Companies Act of 2013,
with exception of a government company or the company which has been in existence for less than 3
years.

Power to contribute to National Defence Fund

Section 183 of the Companies Act empowers directors to contribute to the National Defense Fund and
any other fund established for the purpose of national defence.

Duties of the Directors (Section 166)

1. Duty to act in good faith (Section 166(1)):

 Directors must act in good faith to promote the objects of the company for the benefit of
its members as a whole.

2. Duty to act in the best interests of the company (Section 166(2)):

 Directors must act in the best interests of the company and must exercise their duties with
due and reasonable care, skill, and diligence.

3. Duty to exercise independent judgment (Section 166(3)):

 Directors must exercise their duties with independent judgment and not subordinate their
powers to the will of others.

4. Duty to exercise due diligence (Section 166(4)):

 Directors must exercise due diligence while making decisions, and they should not act
negligently or recklessly.

5. Duty to ensure compliance with laws (Section 166(4A)):

 Directors must ensure that the company complies with the provisions of the Companies
Act and other applicable laws.

6. Duty not to achieve or attempt to achieve undue gain or advantage (Section 166(5)):

 Directors must not achieve or attempt to achieve any undue gain or advantage either to
themselves or to their relatives, partners, or associates.

7. Duty to avoid conflicts of interest (Section 166(6)):

 Directors must not involve themselves in situations where they have a direct or indirect
interest that conflicts, or possibly may conflict, with the interests of the company.

8. Duty to participate in board meetings (Section 167(1)):

 Directors are required to attend board meetings and express their opinion on matters for
which they are responsible.

9. Duty to formulate and monitor company policies (Section 177):

 Directors, especially those on the audit committee, have a responsibility to formulate and
monitor the implementation of internal financial controls and policies.

10. Duty to disclose interest in contracts or arrangements (Section 184):

 Directors must disclose their interest in any contract or arrangement entered into by the
company during board meetings.

11. Duty to report fraud (Section 143(12)):

  Directors have an obligation to report any instances of fraud to the central government.

DE JURE, DE FACTO, SHADOW DIRECTOR

1. De jure director

● De jure means by law.

● Every director who is lawfully appointed is de jure director

● It includes all directors

● Going concern (means company remains unaffected with persons coming or going)

● Includes both executive and non-executive directors

2. De facto director

● De facto means by fact, actions, expressions (implied or express)

● These persons are not authorised to be directors

● Restricted in indian scenario

● Situation based

● Not going concern

3. Shadow director

● He’s a person who is accustomed with the act and gives advice to the board of directors.

● The only director who’s not appointed by board