Contracts :
With the extent of knowledge of the company law so far acquired, you will now be able to follow the procedures regarding contracts and deeds, investments, seal etc., which we shall presently deal with.
“A contract to take shares in company is governed by the same rule as any other contract”.
There being no difference between a contract to take shares and any other contract, it is not necessary that an agreement to take shares should be formal. If in substance, an agreement is made, the form is immaterial (Risto’s case 4 Ch. D. 782)..
The same rules, which govern the contract under the law of contracts also apply to a contract to take shares. The intending candidate sends in response to a prospectus, his application to the company for such number of shares as he wants to have or as the company may allot to him. It is treated as an offer from the applicant, which needs to be accepted by the company before a binding contract can come into being. The fact of acceptance is then communicated to the applicant through a notice of allotment [Polatt’s case (1867) L.R. 2 Ch. Appl. 527]. The application for shares or debentures, made in pursuance of a prospectus issued generally, cannot be revoked until after the expiry of the 6th day after the opening of the subscription list, or the giving, before the expiry of the said 5th day by some person responsible under Section 35 for the prospectus, of a public notice having the effect of excluding, limiting or diminishing the responsibility of that person. The applicant, however, can revoke his application, before the notice of allotment is put in the course of transmission to him, e.g., by post [Maclangan’s case (1882) 51 L.J. Ch. 841; Wallance’s case, (1920) 2 Ch. 671]. Where handing over of the notice of allotment to a postman, however, does not constitute its posting (Re. London & Northern Bank Exp. Jons (1900) 1 Ch. 210). On proper posting of the notice the contract is complete even if it is lost [Harri’s case, (1872) L.R. 7 Ch. App. 587). Again the acceptance must be communicated to the applicant in some way, whether by writing or verbally or conduct [Gunn’s case, (1867) by L.R. Ch. App. 40]. Even a notice of allotment brought home to the applicant, not from the company but from elsewhere will be binding on him [Wall’s case (1863) L.R. 3 Ch. App. 325].
Where shares have been applied for prior to the company’s incorporation, allotment and notice after incorporation in response to such application constitute a complete contract. This is because the application operates as a continuing offer and when the company accepts it after incorporation, it matures into a binding contract [Lawarence’s case, (1866) 2 Ch. App. 413; Donwnes vs. Ship (1868) L.R. 3 H.L. 344].
The aforesaid application may be either simple or conditional. In the former case, a simple allotment to the applicant with the notice thereof will constitute the agreement. If it is conditional, the allotment must be made in pursuance of the specified conditions [In Re. Universal Banking Co.; Roger’s case; Harison’s case (1858) 3 Ch. App. 633]. Where it has been made subject to a condition precedent, the applicant becomes a member only when the condition is complied with. But where the application has been made subject to a collateral condition or a condition subsequent, the applicant becomes a member in present, when he accepts the notice of allotment and his name has been placed on the register of members. Consequently, even if the company goes into liquidation, he cannot escape the liability as contributory, though the condition has not been complied with by the company before that time. He may be entitled to damages against the company for its failure in carrying out the condition [Elkington’s case (1867) 1 Ch. App. 511; Fisher’s case (1885) 31 Ch. D. 120]. But since the liability of a contributory arises ex lege and not ex contractu, he cannot set up the non-fulfilment of the condition as a defence against his statutory liability as a contributory, which is the direct result of his being a member of the company [Hansraj vs. Astana 35 Bom. L.R. 012 (P.G.)].
Even where an applicant waives notice of allotment or where there is no necessity for such notice, the contract for shares is nevertheless complete and the allottee becomes entitled to the membership of the company.
Besides, according to Section 2(55), the applicant, by agreeing to take shares, merely agrees to become a member but does not actually become a member; he becomes a member only when his name is entered on the register of members [Nicol’s case 32 Ch. D. 421; and Mussel White & Sons Ltd. (1962) 1 All E.K. 20].
Further, to decree specific performance of a contract by a person to take or a company to allot shares is well within jurisdiction of the Court [ New Burnswick etc. & Land Co. vs. Muggeridge (1860) Dr. & sm. 363; Odessa Tramways Co. vs. Monde (1878) 7 Ch. D. 235].
In view of the foregoing discussion it may thus be concluded that the statement that a “contract to take shares in a company is governed by the same rules as any other contract” is fully correct.
(a) Forms of contract: A company can enter into contracts just like an individual person. Suppose, a contract between private persons requires, for its validity, to be in writing signed by the parties to be charged. A similar contract may be made exactly in the same manner by any person acting under the authority of the company. Such an authority may be express or implied. Such a contract may be varied or discharged by the authorised representative of the company in the same manner as the one by private persons.
Likewise, where a private person can verbally make a legally valid contract, a company can also do so. The same rule will apply in respect of any variance or discharge of such type of contracts.
It is thus evident that a company can enter into oral contract when writing is not legally necessary as well as a written contract where writing is a ‘must’. As a general rule, it is permissible for a company to transact a contract without seal. As long as the contract is made by an expressly or impliedly authorised person on behalf of the company and is signed by him, it would be enough.
(b) Bill of Exchange and Promissory Note and Hundi: The next important question is whether a company can make, accept, endorse, or issue a bill of exchange, promissory note, hundi and such other negotiable instruments. The answer to this query will depend on the conditions laid down in the memorandum. Under Section 22 of the Companies Act, 2013, a bill of exchange, hundi or promissory note shall be deemed to have been made, accepted, drawn or endorsed on behalf of the company if drawn, accepted, made or endorsed in the name of, or on account of, or on behalf of, the company by any person acting under its authority, express or implied.
(c) Execution of deeds: Section 22 says that a company may, by writing under its common seal, authorise any person, either generally or in respect of any specified matters, as its attorney to execute other deeds on its behalf in any place either in or outside India. A deed signed by such an attorney on behalf of the company and under his seal shall bind the company and have the effect as if it were made under its common seal.
Annexure
Sections which is yet to be notified.
Section 75 : Damages for fraud: According to section 75 of the Companies Act, 2013-
(1) Where a company fails to repay the deposit or part thereof or any interest thereon referred to in section 74 within the time specified in sub-section (1) of that section or such further time as may be allowed by the Tribunal under sub-section (2) of that section, and it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall, without effecting to the provisions contained in sub-section (3) of that section and liability under section 447, be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors.
(2) Any suit, proceedings or other action may be taken by any person, group of persons or any association of persons who had incurred any loss as a result of the failure of the company to repay the deposits or part thereof or any interest thereon.