Thus, under Section 237, although the power to appoint Inspectors

Thus, under Section 237, although the power to appoint Inspectors to conduct investigation and to act on the reports of the investigation rests with the Central Government, it can do so only if CLB expresses its opinion as regards existence of circumstances calling for investigations.

It is important to note that these three grounds limit the jurisdiction of the Central Government, and it has no general discretion to go on a fishing expedition to find evidence [Barium Chemicals Ltd. Vs. The Company Law Board (1966) 2 Compo L.J. 251]. Accordingly, in Bank of Madura Vs. HSL Industries Ltd. [1999] 98 Compo Cas. 795, CLB held that the failure of the company to register transfer of shares which were sub

sequently registered on intervention of CLB could not constitute a ground for order of investigation under Section 237(b).

Communication. Mere passing of an allotment resolution or entering

the lIame of applicant in the register of members is not sufficient [Readheshan r:”, Prhh Dava A.!.R 1936]. The allotment nlllst be communicated to the

persons making the application so that it is legally complete. Posting of allotment letter shall be taken as a valid communication even if the letter is lost in

transit [Household Fire Insurance Co. 1,’. Grant].

4. Absolute and Unconditional. The allotment must be absolute and unconditional and therefore shares must be allotted on terms and conditions ftated in

the application form. Any variation must be communicated and assented to by the allottee.

5. R(“ocation. An application for the allotment of shares C’1ll be withdrawn at any time before the offer is accepted. On the other hand, allotment may

also be withdrawn by the company l11Y time before its communication is complete as against the company (i.e.. before the letter of allotment is received

by the applicant). .

It is worth noting here that these general provisions governing the allotment of shares and debentures arc applicable to both public as well as private

companies.

Ef(ect of non-comldiance of General Pl’Ovisions. Ifthe above general

provisions are not complied with, the allotment is null and void.

The Companies Act dues not prescribe any restrictions as to the allotment of shares and debentures in the case of private companies. The Act however,

lays down certain restrictions regarding the allotment of shares and debentures by public companies. These restrictions can be

The Articles of Association must authorise the issue of such equity shares

(i) The Articles of Association must authorise the issue of such equity shares with differential rights (otherwise, articles will have to be amended first).

(ii) The approval of sharF-holders, for issuing such shares with differential rights shoul? be obtained in general meeting by passing an ordinary resolution.

(iii) Every conpany limite by shares can issue “equity shares with differential rights’ as to voting, dividend or otherwise only to the

extent of 25 per cent of total share capital issued.

(iv) The issuing companYI should have distributable profits for the preceding three years in terms of Sec 205, preceding the financial year in which such

shres are decided to be issued.

(v) The company has not defaulted in flling annual accounts and annual returns for three financia! ye.1rs inunediately preceding the financial year in which

it is decided to issue such shares.

(vi) The company has not failed to repay its deposits with interest on due dates or receem its debentures on due date or pay dividend.

(vii) The ordinary resolution referred to above must, inter-alia, provide for (a) the rate of voting right and (b) the rate of addi tional dividend which the equity

capital with differential voting rights shall CHery. The resolution shall also increase the autorised share capital of the company uls 94(1) and (2) in the

general meeting.

(viii) The company shall not convert its equity capital with voting rights into equity share capital with differential voting rights and viceversa.

(ix) The holders of equity shares with differential rights as to voting or dividend shall be entitled to bonus shares and right shares of the same class 2^nd

shall’ enjoy all rights as a member except with differential voting rights.

(x) The company has not been convicted of any offence under SEBI

It is here interesting to note that now a company can issue equity shares with full voting rights or equity shares with non-voting rights. Nor.voting equity

shares shall carry additional rate of dividend. These shares will be preferred by those who are not interested in attending meetings of the company and the

company has a good track record of paying good dividend.

promoters can avoid their liability by inserting for following

The promoters can avoid their liability by inserting for following
provisions in the pre-incorporation contract:
(a) If the company adopts the pre-incorporation contract by entering into a new contract incorporating the terms of pre-incorporation contract. they will be
absolved oftheir liability, and
(b) If the company does not enter into a new contract, either of the parties can set aside the contract.

general rule, two consenting parties are essential for fomation of a contract

As a general rule, two consenting parties are essential for fomation of a contract. A company, before incorporation, is non-existent and consequently
cannot enter into contracts. Further, even an agent cannot make contracts on its behalf for the same reason. As the company is a nonentity before
incorporation devoid of any contractual capacity, the preliminary contracts are also not binding on it. In other words, the company is not liable for the acts
of promoters done before its incorporation. The legal position with regard to pre-incorporation contracts is as follows:
1. A pre-incorporation contract never binds a company, since a person (legal or artificial) cannot contract before his or its existence, and the company
before incorporation has no legal existence. For example, in Re English & Colonial Produce Co. Ltd., a solicitor prepared the Memorandum of Association
and other documents, paid the registration fee and incurred incidental expenditure and got the company registered. This ',vas done by him at the instance
of certain persons. He claimed his remuneration together with expenses incurred by him from the company. Held, the company was not liable to pay even
though it had benefited out of his services because the services were rendered and expenses were incurred at a time when the company was not in
chisel Key.
2. The company cannot sue on pre-incorporation contracts i.e. it cannot take the benefit of a contract made on its behalf before its incorporation.
In Natal Land and Colonization Co. Ltd. Vs. Pauline Collie}" Syndicate (l904) A.C. 120], the company promised C, an agent of a syndicate yet to be
formed, to grant a lease of certain mining property for three years. After registration, the syndicate sued the Natal Company for specific performance of the

agreement to grant a lease. It was held that the syndicate was not entitled to claim the lease as it was not in existence when the contract was signed and
a company cannot obtain the benefit of a preincorpomtion contract unless a new contract is made with the company after its incorporation.
3. The company cannot ratifY Of adopt a pre-incorporation contract purported to have been made on its behalf even if it is for its benefit (Natal Land &
Colonisation Co. Ltd. Case). Ratification is possible only where an agent has contracted on behalf of a orincipal who is in existence and competent to
contract at the time of making of contract.
In short, we can say that a ompany prior to its incorporation cannot be liable for the preliminary contracts made by the promoters nor can it ratify them
simply for the reason that it was not in existence. The promoters will cont.oue to be personally liable for a pre-incorporation contract unless a new contract

embodying the terms of the old one is made afresh by the company after its incorporation Surendra & Co. f:,'. Punjah Tannery Co.).