1. Explain rules governing
contract is one which is entered into when the Company is in the process of
being incorporated but is not yet completed. Or a
pre incorporation contract is one which is purportedly made by or on behalf of
a corporation at a time when the corporation has not yet been incorporated.
Because the corporation
named in the promoter`s contract has not been formed at the time the contract made,
is not bound by the contract. However, adoption of the contract is anticipated
by the parties to the contract. If the corporation adopts the contract, then it
will assume those rights and liabilities set out in the contract.
The rule of privity of contract keeps away the company from pre-incorporation contract. But
recent development in corporate law and contract law makes the company liable
for pre-incorporation contract.
pre-incorporation contract is made, the corporation is not in existence and
therefore cannot be a party to the contract. The promoter thus must be a party
to the contract, and, under agency law principles, the promoter will be
personally bound as an agent acting on behalf of a non-existent principal.
In order to get the
benefits of a ‘corporate personality`, it is very necessary for ‘an association
of persons` to become incorporated under the Companies Act, 1956. After the
incorporation of association of persons the company comes in existence, and it
can start its business operations as company only after that. The simple reason
behind it is that before incorporation company do no has any legal existence
before incorporation, and if the ‘association of persons` enters into an
agreement in the name of company before incorporation; the agreement would be
void ab initio.
promoter is obligated to bring the company in the legal existence and to ensure
its successful running, and in order to accomplish his obligation he may enter
into some contract on behalf of prospective company. These types of contract
are called ‘Pre-incorporation Contract`.
The contract was in writing; when the
company was registered at the Companies Registration Office.
- The company`s memorandum of
association stated that one of the objects of the company was to ratify
- The pre-incorporation contract was
lodged with the Registrar of Companies at the same time as the company`s
memorandum of association and articles of association were lodged.
The only legal formalities for a valid
pre-incorporation contract under the new Companies Act are thus that the
contract must be in writing.
Must be entered into in the name of or
on behalf of the company still to be formed.
2. Explain reasons why 3rd
party dealing with a company may concern itself with doctrine itself with
Any action taken by a company beyond the powers conferred by its
memorandum of Association is known as ultra
vires transaction. Ultra vires in company law 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.
The doctrine of ultra vires was, thus,
developed as a matter of judicial control to protect the investors and
creditors of the company. This doctrine prevents a company to spend 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 that their
investment will not be used for the objects or activities which they did not
have in contemplation at the time of investing their money in the company.
This doctrine protects 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 repaid.
Besides the doctrine of ultra vires prevents directors from departing from the
objects 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.
Five circumstances under which a company may issue a bonus share.
Bonus Issues, also
known as Scrip Issue or Capitalization Issue, are an issue of free additional
shares to the existing shareholders of the company in direct proportion to
their existing shareholding in the company.
While Bonus Issues result in an increase of
shares in circulation, existing shareholders continue to retain their
proportionate ownership in the company.
In a Bonus Issue, the
nominal value (where applicable), also known as face or par
value of the company’s shares does not change.
pursue Bonus Issue for the following reasons:
One of the major reasons why companies
declare bonus issues is that a higher number of shares improves float and
liquidity and thereby traded volumes of the stock.
A lower price also makes the stock seem
more affordable to small retail investors, who might otherwise give it a miss
at high price levels.
Another aspect of a bonus issue is that
it reflects the confidence of the company in its ability to service a larger
equity base. Thus, bonus issues are said to be a good signaling mechanism on
the company’s capacity to deliver future benefits to shareholders in terms of
- To offer existing shareholders part
of their respective interests in the undistributed profits retained in the
company in the form of shares instead of cash distribution so as to conserve
cash for business operations or expansions
- To promote more active trading of
the company’s shares in the stock market through a reduction in the market
price per share within a more reasonable range as a result of the enlarged
share capital base so that they are within the reach of the retail
investors at large who might otherwise give the stock a miss due to its
initial high price levels
- To serve as a strong indication to
the stock market of the company’s financial strength through its continued
ability to service its larger equity base and future growth prospects,
thereby possibly enhancing the credit standing and hence borrowing
capacity of the company.
- Bonus Issue is a sign that the
company is expanding equity but it is not a performance indicator. In the
long run, Investors should look to the company’s fundamentals and growth
prospects beyond Bonus Issue in making investment decisions.