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Unit-I

Qs. Definition, Characteristics of company

Ans. Company” in the common usage refers to a voluntary association of individuals formed for
the purpose of attaining a common social or economic end. Strictly speaking, the term
“Company” has no technical or legal meaning. In the common law, a company is a juristic
personality or legal person separate from its members. Thus, it exists only in the contemplation
of law.

Meaning and Definition of Company:

Literary meaning of the word ‘company’ is an association of persons formed for common object.
A company is a voluntary association of persons recognised by law, having a distinctive name
and common seal, formed to carry on business for profit, with capital divisible into transferable
shares, limited liability, a corporate body and perpetual succession.

Definition of Company:

1. According to Justice James, “A company is an association of persons united for a common

object.”

2. According to Lord Lindley, “By a ‘company’ is meant an association of many persons who
contribute money or money’s worth to a common stock and employ it for some common
purpose. The common stock so contributed is denoted in money and is the capital of the
company. The persons who contribute it or to whom it belongs are members. The proportion of
capital to which each partner is entitled is his share.”

3. According to Kimball and Kimball, “A corporation is by nature an artificial person created

or authorised by the legal stature for some specific purpose.”

4. According to Prof. Haney, “A company is an artificial person created by law having a

separate entity with a perpetual succession and a common seal.”

5. In terms of the Companies Act, 2013 (Act No. 18 of 2013) a “company” means a company
incorporated under this Act or under any previous company law [Section 2(20)].

Case law

Saloman Vs. Saloman & Co. Ltd. (1895 - 99)

Facts- Saloman sold his business to a company named Saloman & Company Ltd., which he
formed. Saloman took 20,000 shares. The price paid by the company to Saloman was 30,000, but
instead of paying him, cash, the company gave him 20,000 fully paid shares of 1 each &10,000
in debentures. The company wound up & the assets of the company amounted to 6,000 only.
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Debts amounted to 10,000 due to Saloman & Secured by debentures and a further 7,000 due to
unsecured creditors. The unsecured creditors claimed that as Saloman & Co. Ltd., was really the
same person as Saloman, he could not owe money to himself and that they should be paid their
7,000 first.

Judgment-

a. A Company is a "legal person" or "legal entity" separate from and capable of surviving
beyond the lives of, its members.
b. The company is not in law the agent of the subscribers or Trustee for them.
c. Saloman was entitled to 6,000 as the company was an entirely separate person from
Saloman.
d. The unsecured creditors got nothing.

Lee Vs. Lee's Farming Co. Ltd. (1960)

Facts- Lee incorporated a company of which he was the managing director. In that capacity he
appointed himself as a pilot of the company. While on the business of the company he was lost
in a flying accident. His widow claimed compensation for personal injuries to her husband while
in the course of his employment. It was argued that no compensation was due because L & lee's
Air Farming Ltd. were the same person.

Judgment-

a. from being an employee of the company for the purpose of workmen's compensation L
was separate person from the company he formed and compensation was payable.
b. His widow recovered compensation under the Workmen's Compensation Act
c. A member of a company can contract with a company of which he is a shareholder.
d. The directors are not precluded legislation.

Characteristics of Company:

On the basis of definitions studied above, the following are the characteristics of a company:

1. An Artificial Person Created by Law:

A company is a creation of law, and is, sometimes called an artificial person. It does not take
birth like natural person but comes into existence through law. But a company enjoys all the
rights of a natural person. It has right to enter into contracts and own property. It can sue other
and can be sued. But it is an artificial person, so it cannot take oath, cannot be presented in court
and it cannot be divorced or married.

2. Separate Legal Entity:

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A company is an artificial person and has a legal entity quite distinct from its members. Being
separate legal entity, it bears its own name and acts under a corporate name; it has a seal of its
own; its assets are separate and distinct from those of its members.

Its members are its owners but they can be its creditors simultaneously as it has separate legal
entity. A shareholder cannot be held liable for the acts of the company even if he holds virtually
the entire share capital. The shareholders are not agents of the company and so they cannot bind
it by their acts.

3. Perpetual Succession:

The life of company is not related with the life of members. Law creates the company and
dissolve it. The death, insolvency or transfer of shares of members does not, in any way, affect
the existence of a company.

According to Tennyson-

“For men may come, men may go,

But I go on forever.”

In the case of company it may be said that members may come and members may go but the
company goes on. It is a legal person having come into being by law and only law can bring its
end and none else.

4. Common Seal:

On incorporation a company becomes legal entity with perpetual succession and a common seal.
The common seal of the company is of great importance. It acts as the official signature of the
company. As the company has no physical form, it cannot sign its name on a contract. The name
of the company must be engraved on the common seal. A document not bearing the common
seal of the company is not authentic and has no legal importance.

5. Limited Liability:

The limited liability is another important feature of the company. If anything goes wrong with
the company his risk is only to the extent of the amount of his shares and nothing more. If some
amount is uncalled upon a share, he is liable to pay it and not beyond that.

The creditors of a company cannot get their claims satisfied beyond the assets of the company.
The liability of members of a company ‘limited by guarantee’ is limited to the amount of
guarantee.

6. Transferability of Shares:
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A shareholder can transfer his shares to any person without the consent of other members. Under
Articles of Association, a company can put certain restriction on the transfer of shares but it
cannot altogether stop it. Private company can put more restrictions on the transferability of
shares.

7. Limitation of Work:

The field of work of a company is fixed by its charter. The Memorandum of Association. A
company cannot do anything beyond the powers defined in it. Its action is, therefore, limited. In
order to do the work beyond the memorandum of association, there is a need for its alteration.

8. Voluntary Association for Profits:

A company is a voluntary association of persons to earn profits. It is formed for the

accomplishment of some public good and whatsoever profit is divided among its shareholders. A
company cannot be formed to carry on an activity against the public policy and having no profit
motive.

9. Representative Management:

The shareholders of company are widely scattered. It is not possible for all the shareholders to
take part in the management. They leave their task to the representatives the Board of Directors
and the company is managed by Board of Directors.

10. Termination of Existence:

A company is created by law, carries on its affairs according to law and ultimately is affected by
law. Generally, the existence of a company is terminated by means of winding up.

Qs. Formation and Incorporation of Company: Various stages.

Ans. The stages of formation of companies are also known as process and procedure of
incorporation of a company.

1. Promotion Stage,
2. Registration or Incorporation Stage,
3. Capital Subscription Stage,
4. Commencement of Business Stage.

The 4 Stages of formation of a company are:-

1. Promotion Stage-

This is the first stage of Formation of a Company and the word promotion refers to the allocation
of various activities designed for a particular company or enterprise. At the time of this stage, the
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company needs a lot of things for the establishment like capital, property, business objects,
efficiency, and so on.

The persons, who initiate the particular business or company are known as promoters and any
promoter need will-power, capacity, diligence, courage, foresightedness, self-respect to start a
business and become successful.

Promotion of a company is the combination or sum total of all the activities related to the
incorporation of a company. The promotion stage includes various stages to fulfill the desired

(i) Discovery of an idea-

Discovery of an idea means finding or thinking about a particularly new idea for establishing the
new business. This step is a very important step to initiate or expand the new business because it
helps to provide the framework attitude of the new business.

(ii) Take action-

(a) Detailed Investigation-

After the time of initiation, the promoters reached the investigation stage for collecting the
particular source of data from the market.

(b) Assembly of necessary materials-

After the time of the investigation, now is the time to assemble the resources of the company and
keep it in a safe place and prepare it for your company’s formation.

2. Registration or Incorporation Stage-

This is the second stage of formation of a company and at this stage, it is compulsory to decide
the name, location, and legal documentation of the company. This stage is very important
because, in this stage, the companies transfer our legal documents to the registrar office at the
registrar of the company.

Procedures for Registration of a Company-

At the time of registration, there are various legal documents required for the incorporation of the
company. The documents are-

(i) Memorandum of Association-

Memorandum of Association (MoA) is a document that is seen as a very important document for
any company. This document is required at the time of the incorporation of any company. In this
document, the proper description of a seal of the company and its member’s names, address,
professions, signatures are the most necessary.
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If any company does not have its memorandum then it will not be allowed to do the registration.
As we know, the memorandum of the company is an important document which we also know as
the charter of the company and it also helps to identify the rights and procedures of the company.

Clauses or Contents of Memorandum of Association-

a. Name Clause,
b. Domicile Clause,
c. Objects Clause,
d. Liability Clause,
e. Capital Clause,
f. Subscription Clause.

(ii) Articles of Association-

Articles of Association (AoA) is another important document that is necessary for any company
to at the time of establishment. It also includes the internal and sub-internal rules of the
company, which are made for the fulfillment of the works explained in the memorandum
document of the company.

When a company is registered, then it is very important to have the Articles of Association, and
it is also very important to have the Memorandum of Association because these two reflect the
nature and scope of any company.

(iii) Other Agreements-

After both documents, the promoters of the company submit the other documents along with
MoA to the registrar office. So, the other agreements are:-

Promoters give the notice of the location of the authorized officer of the company.

Indicate proper knowledge and information about the directors,

Provide necessary signed articles to the registrar office from each director of the company with
their full address, name, and signatures also.

3. Capital Subscription Stage-

This is the third stage of Formation of a Company and in this stage, the promoters of the
company will decide the capital structure of their company because managing any company for
their capital is an important task.

The private company can deposit its capital from limited members by the company but the public
company has to observe with the varied legal rules for the collection of capital.
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After this, the question arises, from where to collect the capital? The answer is that The company
runs many advertisements around the public, issuing a prospectus for the public, and inform in
the share market for the collection of capital.

4. Commencement of Business Stage-

This is the fourth stage of Formation of a Company and it means, at this stage, the company gets
a legal approval certificate from the registrar office for the purpose of running a specific
company or business. When a company’s legal documents are verified by any registrar under
section 149(1) and section 149(2), then the company gets a legal certificate to run the business.

This legal certificate is also known as “Certificate of commencement of Business“.

I. After getting the certificate of incorporation:

II. A public company issues a prospectus of inviting the public to subscribe to its share
capital,
III. A minimum subscription is fixed, and
IV. The company is required to sell a minimum number of shares mentioned in the
prospectus.

After making the sale of the required number of shares a certificate is sent to the Registrar stating
this fact, along-with a letter from the banks, that it has received application money for such
shares.

The Registrar scrutinizes the documents. If he is satisfied, then issues a certificate known as
Certificate of Commencement of Business. This is the conclusive evidence of the
commencement of the business.

Qs. Lifting of Corporate Veil:

Ans. A company is a juristic person, but in reality it is a group of person who are the beneficial
owners of the property of the corporate body. Being an artificial person, it (company) cannot act
on its own, it can act only by natural persons. The doctrine of lifting the veil can be understood
as the identification of the company with its members.

Meaning of the Doctrine of Lifting the Corporate Veil

Lifting te corporate veil means disregarding the corporate personality and looking behind the real
person who are in the control of the company. In other words, where a fraudulent and dishonest
use is made of the legal entity, the individuals concerned will not be allowed to take shelter
behind the corporate personality. In this regards the court will break through the corporate veil.

Definition
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According to the definition of Black Law Dictionary," the piercing the corporate veil is the
judicial act of imposing liability on otherwise immune corporate officers, Directors and
shareholders for the corporation's wrongful acts."

Aristotle said, when one talks of lifting status of an entity corporate veil, one has in mind of a
process whereby the corporate is disregarded and the incorporation conferred by statute is
overridden other than the corporate entity an act of the entity.

An incorporated company has a legal entity distinct from its members from the date of its
incorporation. In England the legal personality of a company was recognized in 1867 but it was
firmly established in 1897 in the case of Saloman v. Saloman & Co. Ltd.

Saloman Vs. Saloman & Co. Ltd. (1895 - 99)

Facts- Saloman sold his business to a company named Saloman & Company Ltd., which he
formed. Saloman took 20,000 shares. The price paid by the company to Saloman was 30,000, but
instead of paying him, cash, the company gave him 20,000 fully paid shares of 1 each &10,000
in debentures. The company wound up & the assets of the company amounted to 6,000 only.
Debts amounted to 10,000 due to Saloman & Secured by debentures and a further 7,000 due to
unsecured creditors. The unsecured creditors claimed that as Saloman & Co. Ltd., was really the
same person as Saloman, he could not owe money to himself and that they should be paid their
7,000 first.

Judgment-

a. A Company is a "legal person" or "legal entity" separate from and capable of surviving
beyond the lives of, its members.
b. The company is not in law the agent of the subscribers or Trustee for them.
c. Saloman was entitled to 6,000 as the company was an entirely separate person from
Saloman.
d. The unsecured creditors got nothing.

Indian law

The most of the provisions of Indian company law were borrowed from English law, it more or
less resembles the English law. The Salomon's case has been the authority since in the decisions
of the doctrine of Indian company cases.

The Supreme Court in Tata Engineering Locomotive Co. Ltd. v. State of Bihar and
others,"the corporation in law is equal to natural person and has a legal entity of its own. The
entity of corporation is entirely separate from that of its shareholders; it bears its own names and
has seal of its own; its assets are separate and distinct from those of its members, the liability of
the members of the shareholders is limited to the capital invested by them, similarly, the
creditors of the members have no right to the assets of the corporation."
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In LIC of India v. Escorts Ltd, Justice O. Chinnapa Reddy had stressed that the corporate veil
should be lifted where the associated companies are inextricably connected as to be in reality,
part of one concern. After the Bhopal Gas leak disaster case, the lifting of corporate veil has been
escalated. Furthermore in state of UP v. Renusagar Power Company, the Supreme Court lifted
the veil and held that Hindal co, the holding company and its subsidiary, Renusagar must be
treated as the own source of generation of Hindalco and on that basis, Hindalco would be liable
to pay the electric duty.
After the decision of Renusager case, the doctrine has been considered in several cases.

Need of the Doctrine of Lifting the Corporate Veil

The theory of lifting the corporate veil becomes necessary when unscrupulous people started
using the corporate veil as an instrument to conceal fraud in company's affairs. Thus, it become
compulsory for the legislature and court to evolve and to lift the corporate veil and find out the
person behind the company, who are the actual beneficiaries of the corporate body.

In Andhra Pradesh State Road Transportation Case the Supreme Court pointed out that a
corporation has a separate legal entity is so firmly rooted in our notions derived from common
law that it is hardly necessary to deal with it elaborately.

The Companies Act, 2013

The Companies Act 2013, itself provides for circumstances, when corporate veil will be lifted
and the individual members or directors will be made liable for certain transactions.

I. Failure to return application money (Section-39)

In the case of issue of share by a company, whether to the public or by way of rights if, minimum
subscription as stated in the prospectus has not been received directors shall be personally liable
to return the money with interest, in case application money is not repaid within a prescribed
period.

II. Misrepresentation in prospectus (Section- 34 and 35)

In case of misrepresentation in a prospectus, every director, promoter and every other person
who authorize such issue of prospectus incurs liability towards those who subscribed for shares
on the faith of untrue statement.

III. Fraudulent Conduct (Section 339):

Where in the case of winding-up of a company it appears that any business of the company has
been carried on with intent to defraud creditors of the company or any other person, or for any
fraudulent purpose, those who are knowingly parties to such conduct of business may, if the
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Tribunal thinks it proper so to do, be made personally liable without any limitation as to liability
for all or any debts or other liabilities of the company.

Criminal liability for misstatements in prospectus

Where a prospectus, issued, circulated or distributed, includes any statement which is untrue or
misleading in form or context in which it is included or where any inclusion or omission of any
matter is likely to mislead, every person who authorities the issue of such prospectus shall be
liable under section 447.

Provided that nothing in this section shall apply to a person if he proves that such statement or
omission was immaterial or that he had reasonable grounds to believe, and did up to the time of
issue of the prospectus believe, that the statement was true or the inclusion or omission was
necessary.

Civil liability for misstatement in prospectus:

where a person has subscribed for securities of a company acting on any statement included, or
the inclusion or omission of any matter, in the prospectus which is misleading and has sustained
any loss or damage as a consequence thereof, the company and every person who-

I. is a director o the company at the time of the issue of the prospectus;

II. has authorized himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director;
III. is a promoter of the company;
IV. has authorized the issue of the prospectus, and
V. is an expert referred to in sub section (5) of section 26,

Shall, without prejudice to any punishment to which any person may be liable under section 36,
be liable to pay compensation to every person who has sustained such loss or damage.

IV. Miss description of Name:-

where an officer of any company signs on behalf of company any contract, bill of exchange,
cheque promissory note etc. such person shall be personally liable to the holder if the name of
the company is not mentioned or not properly mentioned.

Every person shall have its name printed on hundies, promissory notes, bill of exchange and such
other documents as may be prescribed.

If any default is made in complying with the requirements to this section, the company and every
officer who is in defaults shall be liable to a penalty of one thousand rupees for every day during
which the default continues but not exceeding one lakh rupees.
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Qs. Memorandum of Association, Articles of Association and their alteration

Ans. The Memorandum of Association or MOA of a company defines the constitution and
the scope of powers of the company. In simple words, the MOA is the foundation on which the
company is built. In this question, we will look at the laws and regulations that govern the MOA.
Also, we will understand the contents of the Memorandum of Association of a company.

Meaning

Memorandum of association is the charter of the company and defines the scope of its activities.
An article of association of the company is a document which regulates the internal management
of the company. Memorandum of association defines the relation of the company with the rights
of the members of the company interest and also establishes the relationship of the company with
the members.

Definition- Memorandum:

As per Section 2(56) of the Companies Act,2013 “memorandum” means the memorandum of
association of a company as originally framed or as altered from time to time in pursuance of
any previous company law or of this Act.

Object of registering a Memorandum of Association or MOA

I. The MOA of a company contains the object for which the company is formed. It
identifies the scope of its operations and determines the boundaries it cannot cross.
II. It is a public document according to Section 399 of the Companies Act, 2013. Hence, any
person who enters into a contract with the company is expected to have knowledge of the
MOA.
III. It contains details about the powers and rights of the company.
IV. Under no circumstance can the company depart from the provisions specified in
the memorandum. If it does so, then it would be ultra vires the company and void.

Format of Memorandum of Association (MOA)

According to Section 4 of the Companies Act, 2013, companies must draw the MOA in the form
given in Tables A-E in Schedule I of the Act. Here are the details of the forms:

Table A: Form for the memorandum of association of a company limited by shares.

Table B: Form for the memorandum of association of a company limited by guarantee and not
having a share capital.

Table C: Form for the memorandum of association of a company limited by guarantee and
having a share capital.
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Table D: Form for the memorandum of association of an unlimited company.

Table E: Form for the memorandum of association of an unlimited company and having share
capital.

Content of the MOA

The following information is mandatory in an MOA:

Name Clause

For a public limited company, the name of the company must have the word ‘Limited’ as the last
word For the private limited company, the name of the company must have the words ‘Private
Limited’ as the last words. This is not applicable to companies formed under Section 8 of the Act
who must include one of the following words, as applicable:

a. Foundation
b. Forum
c. Association
d. Federation
e. Chambers
f. Confederation
g. Council
h. Electoral Trust, etc.

Registered Office Clause

It must specify the State in which the registered office of the company will be situated.

Object Clause

It must specify the objects for which the company is being incorporated. Further, if a company
changes its activities which are not reflected in its name, then it can change its name within six
months of changing its activities. The company must comply with all name-change provisions.

Liability Clause

It should specify the liability of the members of the company, whether limited or unlimited.
Also, for a company limited by shares – it should specify if the liability of its members is limited
to any unpaid amount on the shares that they hold. For a company limited by guarantee – it
should specify the amount undertaken by each member to contribute to: The assets of the
company when it winds-up. This is provided that he is a member of the company when it winds-
up or the winding-up happens within one year of him ceasing to be a member. In the latter case,
the debts and liabilities considered would be those contracted before he ceases to be a member.
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The costs, charges, and expenses of winding up and the adjustment of the rights of the
contributors among themselves.

Capital Clause

This is valid only for companies having share capital. These companies must specify the amount
of Authorized capital divided into shares of fixed amounts. Further, it must state the names of
each member and the number of shares against their names.

Association Clause

The MOA must clearly specify the desire of the subscriber to form a company. This is the last
clause.

Provisions relating to alteration of Memorandum of Association

Alteration in the Memorandum of Association can be carried out only by a special resolution at
the Shareholders meeting. This is a complicated and lengthy procedure. So Memorandum must
be very carefully prepared at the beginning itself.

Provisions relating to alteration of Memorandum section 13 of company law 2013

The following are the provisions related to alteration in Name Clause, Objects Clause, Liability
Clause, Capital Clause and Subscription Clause.

1. Alteration of Name Clause in Memorandum of Association

A company may by passing a special resolution alter is name with the approval of the Central
Government. If the alteration involves change of the name to private limited or public limited,
permission of Central Government is not required. In case a company has been registered with a
name which resembles a name of an existing company, the Central Government may ask it to
change its name. In such case ordinary resolution is sufficient. The intimation of name change
should be given to the Registrar who will issue a fresh certificate of incorporation.

Alteration of Situation clause

1. In case registered office has to be shifted within the same city, town or village, a notice has to
given to the Registrar within thirty day of the change.

2. In case registered office has to be shifted from one town to another town or one village to
another village, a special resolution has to be passed.

3. A company can change its registered office from one State to another State for the following
reasons:

a. to carry on business more efficiently and economically;

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b. to achieve the important purpose of the company by sophisticated means;

c. to expand its operations in the current location;
d. to control any of the existing objects;
e. to sell whole or part of the business undertaking;
f. to amalgamate with other business or person.
g. In case, registered office has to be shifted from one State to another State, a special
resolution has to be passed and approval from the Company Law Board has to be
obtained by the company. The altered memorandum should be filed with the Registrar of
the State from which the company is shifting and also to the Registrar of the State to
which the company is shifted.

2. Alteration of Objects Clause in Memorandum of Association

A company can alter is objects clause by passing a special resolution. Alteration of objects clause
can be done for the following reasons:

a. For the purpose of carrying on its business more economically and efficiently.
b. For the purpose of obtaining the main business of the company by new and improved
means
c. For the purpose of enlarging or changing the local area of its operations.
d. For the purpose of carrying on some business, which may be conveniently or
advantageously combined with the existing business.
e. For the purpose of abandoning any of the objects specified in the memorandum.
f. For the purpose of selling the whole or any part of the undertaking.
g. For the purpose of amalgamating with any other company.

3. Alteration of Liability Clause in Memorandum of Association

The liability clause can be altered only when a public company is converted to a private
company.

4. Alteration of Capital Clause in Memorandum of Association

A company can alter its capital clause by passing an ordinary resolution in a general meeting.
Alteration of capital may relate to:

a. Sub division of shares

b. consolidation of shares
c. conversion of shares into stock and cancellation of unsubscribed capital.

Within thirty days of passing a resolution, the altered Articles and Memorandum have to be
submitted to the Registrar.

5. Alteration of subscription clause in Memorandum of Association

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The company can alter is subscription clause to make the liability of the directors appointed
subsequent to the alteration as unlimited.

Qs. Articles of Association and their alteration

Articles of Association is an important document of a Joint Stock Company. It contains the rules
and regulations or bye-laws of the company. They are related to the internal working or
management of the company. It plays a very important role in the affairs of a company. It deals
with the rights of the members of the company between themselves.

Meaning of AOA

the articles of a company shall contain the regulations for management of the company. The
articles of association of a company are its bye-laws or rules and regulations that govern the
management of its internal affairs and the conduct of its business. The articles play a very
important role in the affairs of a company. It deals with the rights of the members of the
company inter se. They are subordinate to and are controlled by the memorandum of association.

Definition

According to Section 2(5) of the Companies Act, 2013, ‘articles’ means the articles of
association of a company as originally framed or as altered from time to time or applied in
pursuance of any previous company law or of this Act.

Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1875) The articles play a part that is
subsidiary to the memorandum of association. They accept the memorandum of association as
the charter of incorporation of the company, and so accepting it, the articles proceed to define the
duties, rights and powers of the governing body as between themselves and the company at
large, and the mode and form in which business of the company is to be carried on, and the mode
and form in which changes in the internal regulations of the company may from time to time be
made… The memorandum, is as it were… the area beyond which the action of the company
cannot go; inside that area shareholders may make such regulations for the governance of the
company as they think fit”

Kinetic Engineering Ltd. v. Sadhana Gadia, (1992) 74 Com Cases 82 : (1992) 1 Comp LJ 62
(CLB), the CLB held that if any provision of the articles or the memorandum is contrary to any
provisions of any law, it will be invalid in to.

Naresh Chandra Sanyal v. The Calcutta Stock Exchange Association Ltd., AIR 1971 SC
422, (1971) 41 Com Cases 51]. The Articles of Association of a company are not ‘law’ and do
not have the force of law.

Statutory requirements
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The articles must be printed, divided into paragraphs, numbered consecutively, stamped
adequately, signed by each subscriber to the memorandum and duly witnessed and filed along
with the memorandum. The articles must not contain anything illegal or ultra vires the
memorandum, nor should it be contrary to the provisions of the Companies Act, 2013.

Contents of Articles of Association

The articles generally deal with the following

1. Classes of shares, their values and the rights attached to each of them.
2. Calls on shares, transfer of shares, forfeiture, conversion of shares and alteration of
capital.
3. Directors, their appointment, powers, duties etc.
4. Meetings and minutes, notices etc.
5. Accounts and Audit
6. Appointment of and remuneration to Auditors.
7. Voting, poll, proxy etc.
8. Dividends and Reserves
9. Procedure for winding up.
10. Borrowing powers of Board of Directors and managers etc.
11. Minimum subscription.
12. Rules regarding use and custody of common seal.
13. Rules and regulations regarding conversion of fully paid shares into stock.
14. Lien on shares.

Alteration of Articles of Association

The alteration of the Articles should not sanction anything illegal. They should be for the benefit
of the company. They should not lead to breach of contract with the third parties. The following
are the regulations regarding alteration of articles:

A company may alter its Articles with a special resolution. Due importance and care should be
given to ensure that the alteration of AoA does not conflict with the provisions of the
Memorandum of Association or the Companies Act. A copy of every special resolution altering
the Articles must be filed with the Registrar within 30 days of its passing.

1. The proposed alteration should not contravene the provisions of the Companies Act.
2. The proposed alteration should not contravene the provisions of the Memorandum of
Association.
3. The alteration should not propose anything that is illegal.
4. The alteration should be bonafide for the benefit of the company.
5. The proposed alteration should in no way increase the liability of existing members.
6. Alteration can be made only by a special resolution.
 17

7. Alteration can be done with retrospective effect.

8. The Court does not have any power to order alteration of the Articles of Association.

Qs. Doctrine of Ultra Vires

Ans. the doctrine of ultra vires applies to the memorandum of association of a company. the
memorandum of association contains the permitted range of activities in its objects clause and a
company cannot practice any other activity which is not defined under the scope of objectives
mentioned in the memorandum. any activity done out of the purview of the memorandum is
considered as an ultra vires activity. such activities are null or void and all ultra vires transactions
can never be subsequently ratified or validated, not even by the consent of the shareholders. this
rule is meant to protect the interests of the shareholders and creditors of the company

What is the doctrine of ultra-vires

it is a latin term made up of two words “ultra” which means beyond and “vires” meaning power
or authority. so we can say that anything which is beyond the authority or power is called ultra-
vires. in the context of the company, we can say that anything which is done by the company or
its directors which is beyond their legal authority or which was outside the scope of the object of
the company is ultra-vires.

Doctrine of ultra-vires

Memorandum of association is considered to be the constitution of the company. it sets out the
internal and external scope and area of company’s operation along with its objectives, powers,
scope. a company is authorized to do only that much which is within the scope of the powers
provided to it by the memorandum. a company can also do anything which is incidental to the
main objects provided by the memorandum. anything which is beyond the objects authorized by
the memorandum is an ultra-vires act.

Case law

eley v the positive government security life assurance company, limited, (1875-76) l.r. 1 ex.
d. 88 it was held that the articles are not a matter between the company and the plaintiff. they
may either bind the members or mandate the directors, but they do not create any contract
between plaintiff and the company.

the directors, &c., of the ashbury railway carriage and iron company (limited) v hector
riche, (1874-75) l.r. 7 h.l. 653. The objects of the company as per the memorandum of
association were to supply and sell some material which is required in the construction of the
railways. here the contract was for construction of railways which was not in the memorandum
of the company and thus, was contrary to them. as the contract was ultra-vires the memorandum,
it was held that it could not be ratified even by the assent of all the shareholders. if the sanction
had been granted by passing a resolution before entering into the contract, that would have been
 18

sufficient to make the contract intra-vires. however, in this situation, a sanction cannot be
granted with a retrospective effect as the contract was ultra-vires the memorandum.

Effects of doctrine of ultra vires

The effects or the consequences of the doctrine of ultra vires are –

Personal liability of the directors – the funds of the company can only be used for authorised
objectives. in case if any director makes an unauthorised payment, he will be compelled to
refund the money to the company. the director will be personally liable for any loss suffered by
the company due to him.

Ultra vires acquired property- if the money has been spent on purchasing ultra vires property,
the company will have the secured right over the property. if the property is legally and formally
transferred, it will become the asset of the corporation, even though the company was not
entitled to acquire such property.

Ultra vires contract- any contract by the company officials outside its scope is completely void
and it has no legal effect.

Ultra vires lending – when the company makes any ultra vires lending or when a person
borrows money from the company under an ultra vires contract, he can be sued by the company
to recover the amount. the promise to get back the money on the borrowed amount is not

Ultra vires tort- a company cannot be liable for any tort committed by its officers in connection
with the business outside its scope of objectives. if officers have performed a tort which is intra-
vires, the company will be held liable.

exceptions of doctrine of ultra vires following are the exceptions to the doctrine of ultra
vires –

I. if the company has made any ultra vires lending, it has the right to recover the amount
from the borrower.
II. if the company has acquired any property under ultra vires contract, the amount can be
recovered from company by the order of the court
III. if the director makes payment which is ultra vires the company, the director can be
compelled to refund the amount and he also has the right to be indemnified.
IV. an act which ultra vires the articles but intra vires the memorandum of the company, it
may be altered and included in the acts of the company.
V. an act which is intra vires the company but ultra vires the director, the director is liable
and but if it is out of the authority of the directors the company can ratify it in proper
form.
VI. if the act is ultra vires the company but it is done in an irregular manner, it can be
validated by the consent of the shareholders.
 19

Qs. Constructive Notice and Indoor Management

Ans. Section 399 of the Companies Act, 2013, specifies the rules and regulations governing the
inspection, production, and evidence of documents with the Registrar. In this article, we will
look at the doctrine of constructive notice, the doctrine of indoor management, and exceptions to
the indoor management rule.

Doctrine of Constructive Notice

Section 399 allows any person to electronically inspect, make a record, or get a copy/extracts of
any document of any company which the Registrar maintains. There is a fee applicable for the
same. The documents include the certificate of incorporation of the company. By now we know
that the Memorandum and Articles of Association are public documents. This section confers the
right of inspection to all.

Before any person deals with a company he must inspect its documents and establish conformity
with the provisions. However, even if a person fails to read them, the law assumes that he is
aware of the contents of the documents. Such an implied or presumed notice is called
Constructive Notice.

In simpler words, if a person enters into a contract which is beyond the powers of a company,
then he has no right under the said contract against the company. The Memorandum of
Association defines the powers of the company. Also, if the contract is beyond the authority of
the directors as defined in the Articles, the person has no rights.

Oakbank Oil Co. v. Crum (1882 8 A.C.65)-

I. -It has been held that anyone dealing with the Company is presumed not only to have
read the memorandum and Articles, but understood them properly.
II. -Thus, Memorandum and Articles of a company are presumed to be notice to the public.
III. Such a notice is called Constructive notice.

Doctrine of Indoor Management

The doctrine of indoor management is an exception to the earlier doctrine of constructive notice.
It is important to note that the doctrine of constructive notice does not allow outsiders to have
notice of the internal affairs of the company.

Hence, if an act is authorized by the Memorandum or Articles of Association, then the outsider
can assume that all detailed formalities are observed in doing the act. This is the Doctrine of
Indoor Management or the Turquand Rule. This is based on the landmark case between The
Royal British Bank and Turquand. In simple words, the doctrine of indoor management means
that a company’s indoor affairs are the company’s problem.
 20

Therefore, this rule of indoor management is important to people dealing with a company
through its directors or other persons. They can assume that the members of the company are
performing their acts within the scope of their apparent authority. Hence, if an act which is valid
under the Articles, is done in a particular manner, then the outsider dealing with the company can
assume that the director/other officers have worked within their authority.

Royal British Bank v. Turquand-

Turquand, a company, had a clause in its constitution that allowed the company to borrow
money once it had been approved and passed by resolution (decision) of the shareholders at a
general meeting. Turquand entered into a loan with the Royal British Bank and two of the co-
directors signed and attached the company seal to the loan agreement. Loan had not been
approved by the shareholders.
Company defaulted on their payments and the bank sought restitution. Company refused to repay
claiming that the directors had no right to enter into such an arrangement
It was held that – the Turquand was entitled to assume that the resolution was passed.

The Company was therefore bound by the rule. Doctrine is also popularly known as the
Turquand rule’.

Exceptions to the Doctrine of Indoor Management

1.Knowledge of irregularity-

The first and the most obvious restriction is that the rule has no application where the party
affected by an irregularity had actual notice of it. Knowledge of irregularity may arise from the
fact that the person contracting was himself a party to the inside procedure.

Howard v Patent Ivory-

The directors could not defend the issue of debentures to themselves because they should have
known that the extent to which they were lending money to the company required the assent of
the general meeting which they had not obtained. The principle is clear that a person who is
himself a part of the internal machinery cannot take advantage of irregularities.

2. Forgery-

Doctrine of indoor management does not apply to forgery because forgery is voidab- initio.

Ruben v. Great Fingall Consolidated-

The plaintiff was the transferee of a share certificate issued under the seal of the defendant
company. The certificate was issued by the company’s secretary, who had affixed the seal of the
company and forged the signatures of two directors. The plaintiff contended that whether the
signatures were genuine or forged was a part of internal management and, therefore, the
 21

company should be estopped from denying genuineness of document. But it was held that the
rule has never been extended to cover such a complete forgery.

Lord Loreburn said: It is quite true that persons dealing with limited liability companies are not
bound to inquire into their indoor management and will not be affected by irregularities of which
they have no notice. But this doctrine, which is well established, applies to irregularities which
otherwise might affect a genuine transaction. It cannot apply to a forgery.

3. Negligence on the part of the outsider-

Anand Bihari Lal vs. Dinshaw and Co.-

In this case the plaintiff accepted transfer of Company’s property from its accountant, the
transfer was held void.

Qs. Type of Company

Ans.

I. Types of Company on the basis of Incorporation

There are three ways in which companies may be incorporated.

1. Statutory Companies: These are constituted by a special Act of Parliament or State

Legislature. The provisions of the Companies Act, 2013 do not apply to them. Examples
of these types of companies are Reserve Bank of India, Life Insurance Corporation of
India, etc.
2. Registered Companies: The companies which are incorporated under the Companies Act,
2013 or under any previous company law, with ROC fall under this category.

II. Types of Company on the basis of Liability

Under this category there are three types of companies:

1. Unlimited Liability Companies: In this type of company, the members are liable for the
company’s debts in proportion to their respective interests in the company and their
liability is unlimited. Such companies may or may not have share capital. They may be
either a public company or a private company.
2. Companies limited by guarantee: A company that has the liability of its members
limited to such amount as the members may respectively undertake, by the memorandum,
to contribute to the assets of the company in the event of its being wound-up, is known as
a company limited by guarantee. The members of a guarantee company are, in effect,
placed in the position of guarantors of the company’s debts up to the agreed amount.
3. Companies limited by shares: A company that has the liability of its members limited
by the memorandum to the amount, if any, unpaid on the shares respectively held by
 22

them is termed as a company limited by shares. For example, a shareholder who has paid
`75 on a share of face value ` 100 can be called upon to pay the balance of `25 only.
Companies limited by shares are by far the most common and may be either public or
private.

III. Other Types of Company

I. Government Companies;
II. Foreign Companies;
III. Holding and Subsidiary Companies;
IV. Associate Companies/Joint Venture Companies
V. Investment Companies
VI. Producer Companies.
VII. Dormant Companies

Private Company

As per Section 2(68) of the Companies Act, 2013, “private company” means a company having a
minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be
prescribed, and which by its articles,—

I. restricts the right to transfer its shares;

II. except in the case of One Person Company, limits the number of its members to two
hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they
shall, for the purposes of this definition, be treated as a single member:

Provided further that the following persons shall not be included in the number of members;—

I. persons who are in the employment of the company; and

II. persons who, having been formerly in the employment of the company, were members of
the company while in that employment and have continued to be members after the
employment ceased, and
III. prohibits any invitation to the public to subscribe for any securities of the company; It
must be noted that it is only the number of members that is limited to two hundred. A
private company may issue debentures to any number of persons, the only condition
being that an invitation to the public to subscribe for debentures is prohibited.

The aforesaid definition of private limited company specifies the restrictions, limitations and
prohibitions, which must be expressly provided in the articles of association of a private limited
company.
 23

As per proviso to Section 14 (1), if a company being a private company alters its articles in such
a manner that they no longer include the restrictions and limitations which are required to be
included in the articles of a private company under this Act, such company shall, as from the
date of such alteration, cease to be a private company.

One Person Company (OPC)

With the implementation of the Companies Act, 2013, a single person could constitute a
Company, under the One Person Company (OPC) concept.

The Companies Act, 2013 has done away with redundant provisions of the previous Companies
Act,1956, and provides for a new entity in the form of one person company (OPC), while
empowering the Central Government to provide a simpler compliance regime for small
companies.

Prior to the new Companies Act, 2013 coming into effect, at least two shareholders were
required to start a company. But now the concept of One Person Company (OPC) would provide
tremendous opportunities for small businessmen and traders, including those working in areas
like handloom, handicrafts and pottery.

Public Company

By virtue of Section 2(71), a public company means a company which:

I. is not a private company;

II. has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as
may be prescribed.

Provided that a company which is a subsidiary of a company, not being a private company, shall
be deemed to be a public company for the purposes of this Act even where such subsidiary
company continues to be a private company in its articles

As per section 3 (1) (a), a public company may be formed for any lawful purpose by seven or
more persons, by subscribing their names or his name to a memorandum and complying with the
requirements of this Act in respect of registration.

As per section 58(2), the securities or other interest of any member in a public company shall be
freely transferable. However, any contract or arrangement between two or more persons in
respect of the transfer of securities shall be enforceable as a contract.

In the case of Western Maharashtra Development Corpn. Ltd. V. Bajaj Auto Ltd [2010]
154 Com Cases 593 (Bom).

It was held that the Companies Act, makes a clear distinction in regard to the transferability of
shares relating to private and public companies. By definition, a “private company” is a company
 24

which restricts the right to transfer its shares. In the case of a public company, the Act provides
that the shares or debentures and any interest therein, of a company, shall be freely transferable.

Government Companies

Section 2(45) defines a “Government Company” as any company in which not less than fifty one
per cent. Of the paid-up share capital is held by the Central Government, or by any State
Government or Governments, or partly by the Central Government and partly by one or more
State Governments, and includes a company which is a subsidiary company of such a
Government company.

Notwithstanding all the pervasive control of the Government, the Government company is
neither a Government department nor a Government establishment. [Hindustan Steel Works
Construction Co. Ltd. v. State of Kerala (1998) 2 CLJ 383].

When the Government engages itself in trading ventures, particularly as Government companies
under the company law, it does not do so as a State but it does so in essence as a company. A
Government company is not a department of the Government.

Foreign Companies

As per section 2(42), “foreign company” means any company or body corporate incorporated
outside India which—

I. has a place of business in India whether by itself or through an agent, physically or

through electronic mode; and
II. conducts any business activity in India in any other manner

Sections 379 to 393 of the Act deal with such companies. Section 380 of the Act lays down that
every foreign company which establishes a place of business in India must, within 30 days of the
establishment of such place of business, file with the Registrar of Companies for registration.

Holding and Subsidiary Company

On the basis of control, companies can be classified into holding, subsidiary and associate
companies.

Holding company

As per Section 2 (46), holding company, in relation to one or more other companies, means a
company of which such companies are subsidiary companies.

Subsidiary company

Section 2 (87) provides that subsidiary company or subsidiary, in relation to any other company
(that is to say the holding company), means a company in which the holding company—
 25

I. controls the composition of the Board of Directors; or

II. exercises or controls more than one-half of the total share capital either at its own or
together with one or more of its subsidiary companies:
III. Provided that such class or classes of holding companies, shall not have layers of
subsidiaries beyond the prescribed limit.

Associate Company

As per Section 2(6), “Associate company”, in relation to another company, means a company in
which that other company has a significant influence, but which is not a subsidiary company of
the company having such influence and includes a joint venture company.

Explanation to section 2(6) provides that “significant influence” means control of at least twenty
per cent. Of total share capital, or of business decisions under an agreement.

Investment Companies

As per explanation (a) to section 186, “investment company” means a company whose principal
business is the acquisition of shares, debentures or other securities.

An investment company is a company, the principal business of which consists of acquiring,

holding and dealing in shares and securities. The word ‘investment’, no doubt, suggests only the
acquisition and holding of shares and securities and thereby earning income by way of interest or
dividend etc.

Qs. Prospectus: Contents, Abridged Prospectus, Deemed Prospectus, Shelf Prospectus,

Statement in lieu of Prospectus.

Ans. whenever a public company is willing to invite the applications for its debentures or shares,
it is a mandate for it to issue prospectus. This requirement does not apply to private companies.
Every public company either issues a prospectus or file a statement in lieu of prospectus. This is
not mandatory for a private company. But when a private company converts from private to
public company, it must have to either file a prospectus if earlier issued or it has to file a
statement in lieu of prospectus.

Meaning of prospectus

A prospectus is a document issued by the company inviting the public and investors for the
subscription of its securities. A prospectus also helps in informing the investors about the risk of
investing in the company. A Prospectus is required to be issued only after the incorporation of
the company. These documents describe stocks, bonds and other types of securities offered by
the company. Mutual fund companies also provide a prospectus to prospective clients, which
include a report of the money’s strategies, the manager’s background, the fund’s fee structure
 26

and a fund’s financial statements. A prospectus is always accompanied by performance history

and financial information of the company.

Definition

Section 2(70) of the Act defines prospectus as, “A prospectus means any document described or
issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf
prospectus referred to in section 31 or any notice, circular, advertisement or other document
inviting offers from the public for the subscription or purchase of any securities of a body
corporate.”

Companies that are required to issue a prospectus

I. A public listed company who intends to offer shares or debentures can issue prospectus.
II. A private company is prohibited from inviting the public to subscribe to their shares and
thus cannot issue a prospectus. However, a private company which has converted itself
into a public company may issue a prospectus to offer shares to the public.

Essentials for a document to be called as a prospectus

For any document to considered as a prospectus, it should satisfy two conditions.

1. The document should invite the subscription to public share or debentures, or it should
invite deposits.
2. Such an invitation should be made to the public.
3. The invitation should be made by the company or on the behalf company.
4. The invitation should relate to shares, debentures or such other instruments.

Process for filing and issuing a prospectus

Application forms

As stated under section 33, the application form for the securities is issued only when they are
accompanied by a memorandum with all the features of prospectus referred to as an abridged
prospectus.

The exceptions to this rule are:

 When an application form is issued as an invitation to a person to enter into

underwriting agreement regarding securities.
 Application issued for the securities not offered to the public.

Contents
 27

For filing and issuing the prospectus of a public company, it must be signed and dated and
contain all the necessary information as stated under section 26 of the Companies Act, 2013:

1. Name and registered address of the office, its secretary, auditor, legal advisor, bankers,
trustees, etc.
2. Date of the opening and closing of the issue.
3. Statements of the Board of Directors about separate bank accounts where receipts of
issues are to be kept.
4. Statement of the Board of Directors about the details of utilization and non-utilisation
of receipts of previous issues.
5. Consent of the directors, auditors, bankers to the issue, expert opinions.
6. Authority for the issue and details of the resolution passed for it.
7. Procedure and time scheduled for the allotment and issue of securities.
8. The capital structure of the in the manner which may be prescribed.
9. The objective of a public offer.
10. The objective of the business and its location.
11. Particulars related to risk factors of the specific project, gestation period of the project,
any pending legal action and other important details related to the project.
12. Minimum subscription and what amount is payable on the premium.
13. Details of directors, their remuneration and extent of their interest in the company.
14. Reports for the purpose of financial information such as auditor’s report, report of
profit and loss of the five financial years, business and transaction reports, statement
of compliance with the provisions of the Act and any other report.

Filing of copy with the registrar

As stated under sub-section 4 of section26 of the Companies Act, 2013, the prospectus is not to
be issued by a company or on its behalf unless on or before the date of publication, a copy of the
prospectus is delivered to the registrar for registration.

The copy should be signed by every person whose name has been mentioned in the prospectus as
a director or proposed director or the assigned attorney on his behalf.

Delivery of copy of the prospectus to the registrar

As per section26 (6) of the Companies Act 2013, the prospectus should mention that its copy
has been delivered to the registrar on its face. The statement should also mention the document
submitted to the registrar along with the copy of the prospectus.

Registration of prospectus

Section26 (7) states about the registration of a prospectus by the registrar. According to this
section, when the registrar can register a prospectus when:
 28

1. It fulfils the requirements of this section, i.e., section 26 of the Companies Act, 2013;
and
2. It contains the consent of all the persons named in the prospectus in writing.

Issue of prospectus after registration

If a prospectus is not issued before 90 days from the date from which a copy was delivered
before the registrar, then it is considered to be invalid.

Various Categories of Prospectus

1. Statement in lieu of Prospectus:

A public company, which does not raise its capital by public issue, need not issue a prospectus.
In such a case a statement in lieu of prospectus must be filed with the Registrar 3 days before the
allotment of shares or debentures is made. It should be dated and signed by each director or
proposed director and should contain the same particulars as are required in case of prospectus
proper.

2. Deemed Prospectus:
A deemed prospectus has been stated under section 25(1) of the Companies Act, 2013.

When any company to offer securities for sale to the public, allots or agrees to allot securities,
the document will be considered as a deemed prospectus through which the offer is made to the
public for sale. The document is deemed to be a prospectus of a company for all purposes and all
the provision of content and liabilities of a prospectus will be applied upon it.

In the case of SEBI v. Kunnamkulam Paper Mills Ltd., it was held by the court that where a
rights issue is made to the existing members with a right to renounce in the favour of others, it
becomes a deemed prospectus if the number of such others exceeds fifty.

3. Abridged Prospectus [Sec. 2(1)] and 33: Abridged prospectus is a summary of prospects.
Abridged prospectus means a memorandum containing such salient features of a prospectus as
may be specified by the SEBI by making regulations in this behalf. No form of application for
the purchase of any of the securities of a company shall be issued unless such form is
accompanied by an abridged prospectus. A copy of the prospectus shall, on a request being made
by any person before the closing of the subscription list and the offer, be furnished to him.

4. Shelf Prospectus section 31 (validity of prospectus)

Shelf prospectus can be defined as a prospectus that has been issued by any public financial
institution, company or bank for one or more issues of securities or class of securities as
mentioned in the prospectus. When a shelf prospectus is issued then the issuer does not need to
issue a separate prospectus for each offering he can offer or sell securities without issuing any
 29

further prospectus. The provisions related to shelf prospectus has been discussed under section
31 of the Companies Act, 2013.

The regulations are to be provided by the Securities and Exchange Board of India for any class
or classes of companies that may file a shelf prospectus at the stage of the first offer of securities
to the registrar. The prospectus shall prescribe the validity period of the prospectus and it should
be not be exceeding one year. This period commences from the opening date of the first offer of
the securities. For any second or further offer, no separate prospectus is required. While filing for
a shelf prospectus, a company is required to file an information memorandum along with it.

5. Red herring prospectus

Red herring prospectus is the prospectus which lacks the complete particulars about the quantum
of the price of the securities. A company may issue a red herring prospectus prior to the issue of
prospectus when it is proposing to make an offer of securities.

This type of prospectus needs to be filed with the registrar at least three days prior to the opening
of the subscription list or the offer. The obligations carried by a red herring prospectus are same
as a prospectus. If there is any variation between a red herring prospectus and a prospectus then
it should be highlighted in the prospectus as variations.

When the offer of securities closes then the prospectus has to state the total capital raised either
raised by the way of debt or share capital. It also has to state the closing price of the securities.
Any other details which have not been included in the prospectus need to be registered with the
registrar and SEBI.

The applicant or subscriber has right under Section 60B (7) to withdraw the application on any
intimation of variation within 7 days of such intimation and the withdrawal should be
communicated in writing.

Misleading Prospectus or Mis-statement in prospectus:

A prospectus is said to be misleading or untrue in two following cases:
1. A statement included in a prospectus shall be deemed to be untrue, if the statement is
misleading in the form and context in which it is included.
2. Omission from prospectus of any matter to mislead the investors.

CRIMINAL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS (SECTION 34):

Where a prospectus, issued, circulated or distributed:
1. includes any statement which is untrue or misleading in form or context in which it is
included; or
2. where any inclusion or omission of any matter is likely to mislead;
 30

Every person who authorises the issue of such prospectus shall be liable under section 447 i.e.
fraud.

Defences available in this section are:

1. Person prove that statement or omission was immaterial;
2. Person has reasonable ground to believe and did believe that statement was true; or
3. Person has reasonable ground to believe and did believe that the inclusion or omission was
necessary.

CIVIL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS (SECTION 35):

Where a person has subscribed for securities of a company acting upon any misleading
statement, inclusion or omission and has sustained any loss or damage as its consequence, the
company and every person who:
1. is a director at the time of the issue of prospectus;
2. has named as director or as proposed director with his consent;
3. is a promoter of the company;
4. has authorised the issue of the prospectus; and
5. is an expert;
shall be liable to pay compensation to effected person. This civil liability shall be in addition to
the criminal liability under section 36. Where it is proved that a prospectus has been issued with
intent to defraud the applicants for the securities of a company or any other person or for any
fraudulent purpose, every person shall be personally responsible, without any limitation of
liability, for all or any of the losses or damages that may have been incurred by any person who
subscribed to the securities on the basis of such prospectus.

Defences under this section are:

1. he has withdrawn his consent or never give his consent;
2. the prospectus was issued without his knowledge or consent and when he become aware, gave
a reasonable public notice that prospectus was issued without his knowledge or consent.
 31

Unit-II
Qs. Share Capital: Types of shares, Issues and allotment of Shares, Share certificate and
Share warrant, Debt Capital: Debenture, Types and Characteristics, Charge: Fixed and
Floating.

Ans. To run the business of company, company need money and this generated by way of share.
Issue of Shares is the process in which companies allot new shares to shareholders. Shareholders can
be either individuals or corporate. The company follows the rules prescribed by Companies Act 2013
while issuing the shares. Issue of Prospectus, Receiving Applications, Allotment of Shares are three
basic steps of the procedure of issuing the shares. The process of creating new shares is known as
Allocation or allotment.

Meaning and Definition of Shares

A share is the interest of a shareholder in a definite portion of the capital.

Section 2 (46) of the Act defines a share as, “A share in the share capital of a company and
includes stock, except where a distinction between stock and shares is expressed or implied.”

According to Farewell J, “A share is the interest of a shareholder in the company, measured by

a sum of money, for the purpose of liability in the first place, and of interest in the second, but
also consisting of a series of mutual covenants entered into by all the shareholders inter se.”

A share of a company is one of the units into which the capital of a company is divided. So if the
total capital of a company is 5 lakhs, and such capital is divided into 5000 units of Rs 100/- each,
then this one unit of amount 100 is a share of the company.

Thus a share is the basis of ownership of the company. And the person who holds such shares
and is thus a member of the company is known as a shareholder.

A share is a personal estate capable of being transferred in the manner laid down in the articles of
the company. It is a movable property which can either be mortgaged or pledged. Share is
included in the definition of ‘goods’ under the provisions of the Sale of Goods Act, 1930. But
even so, shares are not goods in the ordinary sense of the word.

Kinds of Shares:
Before the Companies Act, 1956 was passed, a company limited by shares were allowed to issue
three types of shares:
(1) Preference shares
(2) Equity (ordinary) shares; and
(3) Deferred shares.
But the Companies Act, 2013, now permits the issue of only two types of share.
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A company limited by shares can issue only two types of shares, namely (a) equity shares, and
(b) preference shares. However, a private company which is not subsidiary of a public company
is exempted from this provision (Section 90). Thus, an independent private company can still
issue deferred shares along with equity and preference shares.

1. Preference Shares:

Preference shares are those shares which enjoy preferential rights both with respect to dividends
and with respect to repayment of capital either during the life-time or on winding up of the
company. They will have the first charge on the distributable amount of net profits. The dividend
on these shares is desirable in the Articles of the Company. ‘Preference Shares Capital’ is the
sum total of preference shares.

A preference share must satisfy the following two conditions:

I. It shall carry a preferential right as to the payment of dividend at a fixed rate.

II. In the event of winding up, there must be a preferential right to the payment of the paid-
up capital.

These are two dominant characteristics of preference shares.

A preference share may or may not carry such other rights as:

(a) A preferential right to any arrears of dividend;

(b) A right to share in surplus profits by way of additional dividend;

(c) A right to be paid a fixed premium specified in the memorandum; and

(d) A right to share in surplus assets in the event of a winding up, after all kinds of capital have
been repaid.

Kinds of Preference Shares:

Preference shares may be of the following types:
i. Cumulative preference shares:
The dividend payable on these shares goes on accumulating till it is fully paid off. All preference
shares are assumed to be cumulative, unless the contrary is stated in the Articles of the company.
 33

A cumulative preference share has a right to claim the fixed dividend only if it has sufficient
profits available for distribution.

ii. Non-cumulative preference shares:

In the case of non-cumulative preference shares, the dividend shall be payable only out of the
profits of the current year. If it is not paid in a particular year, it is lost and the arrears of
dividend cannot be carried forward. In other words, the unpaid dividends cannot be
accumulative.

iii. Participating preference shares:

Participating preference shares are not only entitled to a fixed rate of dividend, but also to a share
in the surplus profits which remain after the claims of the equity shareholder have been met. If
the articles are silent, all preference shares are deemed to be non-participating.

iv. Non-participating preference shares:

Non-participating preference shares are entitled to only a fixed rate of dividend and do not share
in the surplus which belongs to the equity shareholders.

v. Convertible preference shares:

The holders of these shares have a right to convert them into equity shares within a certain
period.

vi. Non-convertible preference shares:

The preference shares without a right of conversion into equity shares are known as non-
convertible preference shares.

vii. Redeemable preference shares:

A company limited by shares, if authorised by its articles, may issue preference shares which are
to be redeemed or repaid after a certain fixed period.

Section 80 of the Act lays down the necessary conditions for the redemption of such shares,
which are as follows:
(a) Such shares must be fully paid.

(b) Such-shares shall be redeemed out of distributable profits or out of the proceeds of a fresh
issue made for the purpose of redemption.
 34

(c) Any premium to be paid on redemption of such shares must be paid out of profits or out of
the share premium account.

(d) Where shares are so redeemed out of profits, a sum equal to the nominal value of the shares
redeemed must be transferred to the ‘Capital Redemption Reserve Account’. This amount shall
be treated as capital of the company and the provisions as regards reduction of capital shall
apply. The amount credited to the account cannot be paid out of the shareholders as dividend, but
it can be used to pay unissued shares to be issued as full paid bonus shares.

viii. Irredeemable preference shares:

Irredeemable preference shares constitute permanent capital of the company. These shares
cannot be refunded before the winding up of the company.

2. Ordinary or Equity Shares:

Equity shares mean all shares which are not preference shares. After satisfying the rights of
preference shares, the equity shares shall be entitled to share in the residual amount of
distributable net profits of the company. ‘Equity Shares Capital’ is the sum total of equity shares.

The dividend on equity shares is not fixed and it will be changing according to the magnitude of
available profit for distribution in the form of dividends. However, equity shareholders have
normal voting rights.

3. Deferred or Founders Shares:

There is another type of shares, which is known as Deferred Shares. In case of deferred shares
the right to participate in the distributable amount of net profits of a company is deferred or
postponed till after that of other classes of shares- preference and equity.

Sometimes, they are known as Management or Founders Shares. They are used to have
extraordinary voting rights and owners of such shares could easily enjoy controlling voice in the
management of the company. In times of prosperity of the company, they used to get huge
dividends. The face value of these shares used to be very low but their market price used to be
very high.

Allotment of share

Statutory restrictions on allotment

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1. Minimum subscription and application money [s.39] – When Shares are offered to the
public, the amount of minimum subscription has to be stated in the prospectus. No shares can be
allotted unless at least so much amount has been subscribed and the application money (which
must not be less than five percent, SEBI may prescribe different percentage) has been received in
by cheque or other instrument. An application for shares, if not accompanied by any such
payment, does not constitute a valid offer. If the minimum subscription has not been received
within 30 days of the issue of the prospectus, or such other period as may be prescribed by SEBI,
the amount received is to be returned within such time and manner as may be prescribed. [S. 39
(3)]

2. Shares to be dealt in on stock exchange [S. 40] – Every company intending to offer
shares or debentures to the public by the issue of a prospectus has to make an application before
the issue to any one or more of the recognized stock exchange for permission for the shares or
debentures to be dealt with at the exchange. This is known as listing. The name or names of the
stock exchange to which the application has been made must also be stated in the prospectus.
Where an appeal has been preferred under Section 22, Securities Contracts (Regulation) Act,
1956 against the refusal of a stock exchange, the allotment does not become void until the
dismissal of the appeal.

Over-subscribed portion of the money received must be sent back to the applicants within the
same specified period.

General principles as to allotment

1. Allotment by proper authority – In the first place, an allotment must be made by a

resolution of the Board of Directors. “Allotment is a duty primarily falling upon the directors”,
and this duty cannot be delegated except in accordance with the provisions of the articles.

2. Within reasonable time – Allotment must be made within reasonable period of time,
otherwise the application lapses. What is reasonable time depends upon the facts of the case. On
the expiry of reasonable time Section 6, Contract Act applies and the application must be deemed
to have been revoked.

3. Must be communicated – The allotment must be communicated to the applicant. Posting

of a properly addressed and stamped letter of allotment is sufficient communication even if the
letter is delayed or lost in the course of post. [SP Gaekwad v. Shantadevi Gaekwad, (2005) 11
SCC 314]

4. Absolute and unconditional – Allotment must be absolute and in accordance with the
terms and conditions of the application, if any.

Procedure of Issue of New Shares

1 Issue of Prospectus
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Before the issue of shares, comes the issue of the prospectus. The prospectus is like an invitation
to the public to subscribe to shares of the company. A prospectus contains all the information of
the company, its financial structure, previous year balance sheets and profit and Loss statements
etc.

It also states the manner in which the capital collected will be spent. When inviting deposits from
the public at large it is compulsory for a company to issue a prospectus or a document in lieu of a
prospectus.

2 Receiving Applications

When the prospectus is issued, prospective investors can now apply for shares. They must fill out
an application and deposit the requisite application money in the schedule bank mentioned in the
prospectus. The application process can stay open a maximum of 120 days. If in these 120 days
minimum subscription has not been reached, then this issue of shares will be cancelled. The
application money must be refunded to the investors within 130 days since issuing of the
prospectus.

3 Allotment of Shares

Once the minimum subscription has been reached, the shares can be allotted. Generally, there is
always oversubscription of shares, so the allotment is done on pro-rata bases. Letters of
Allotment are sent to those who have been allotted their shares. This results in a valid
contract between the company and the applicant, who will now be a part owner of the company.

If any applications were rejected, letters of regret are sent to the applicants. After the allotment,
the company can collect the share capital as it wishes, in one go or in installments.

Qs. Share certificate and Share warrant

Ans. A share certificate is a written document prepared by the company under its common seal
and sent to the members, containing the number of shares held by him/her and the amount paid
thereon. The document work as an evidence for the ownership of shares of the shareholder. It is
not exactly same as share warrant.

Technically, share warrant, is an instrument, which signifies that the holder of the instrument is
entitled to the shares mentioned in it. It a bearer document, which can be transferred by mere
delivery.

Many think that these two documents are one and the same thing, which is not true, there is a
fine line of difference between share certificate and share warrant which we have discussed in
this article.

Definition of Share Certificate section 46

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A share certificate is an instrument in writing, that is a legal proof of the ownership of the
number of shares stated in it. Every company, limited by shares, whether it is public or private
must issue the share certificate to its shareholders except in the case where the shares are held in
dematerialisation system. The share certificate contains the following details in it, they are:

I. Company name
II. Date of issue
III. Details of the member
IV. Shares held
V. Nominal value
VI. Paid up value
VII. Definite number.

The share certificate is issued by the company within 3 months of the allotment of shares to the
applicants, which is issued under the common seal of the company. Normally, the holder of the
share certificate is regarded as the member of the company.

Definition of Share Warrant section 114

A share warrant is a negotiable instrument, issued by the public limited company only against
fully paid up shares. It is also termed as a document of title because the holder of the share
warrant is entitled to the number of shares mentioned in it. There is no compulsion of the issue of
share warrants by the company. Although if the public company wants to issue share warrants,
then previous approval of the Central Government (CG) is required, along with that the issue of a
share warrant must be authorized in the articles of association of the company.

The holder of the share warrant can take a share certificate only if he surrenders the share
warrant and pays the required fee for the issue of share certificate. Thereafter, the company will
cancel the warrant and issue a new share certificate to him as well as the company will enter his
name as the member of the company, in the register of members, after which he will become a
member of the company.

Generally, the holder of the share warrant is not the member of the company, but if the articles of
association of the company provide it, then the bearer is deemed to be the member of the
company.

Key Differences Between Share Certificate and Share Warrant

The following are the major differences between Share Certificate and Share Warrant:

I. A share certificate is the documentary evidence which proves the possession of the
shares. A share warrant is the document of title which states that the holder of the
instrument is entitled to the shares.
 38

II. The issue of share certificate is compulsory for every company limited by shares but the
issue of a share warrant is not compulsory for every company.
III. A Share Certificate is issued against the shares, regardless of the fact that the shares are
fully paid up or partly paid up. Conversely, Share Warrant is issued by the public
company only against fully paid up shares.
IV. Share Certificate can be issued by both public and private companies, whereas Share
Warrant is issued only by the public limited company.
V. Share Certificate is to be issued within 3 months of the allotment of shares, but there is no
such time limit specified in the Companies Act for the issue of Share Warrant.
VI. A share certificate is not a negotiable instrument. As opposed to share warrant, is a
negotiable instrument.
VII. For the issue of a share warrant, prior approval of Central Government is a must. On the
other hand, Share Certificate does not require such type of approval.
VIII. A share certificate can be originally issued, but a share warrant cannot be issued
originally.

Qs. Debt Capital: Debenture, Types and Characteristics

Ans. The term debenture is derived from the Latin word “debere” which means to a money
owing. A company may increase part of its capital by obtaining loans. The short term capital is
mostly met by the company from the banks in the form of overdrafts and cash credits. The long
terms finance may be raised by issuing of debentures. A debenture thus is a long term finance
raised by a company through public borrowing.

A company can raise funds through the issue of debentures, which has a fixed rate of interest on
it. The debenture issued by a company is an acknowledgment that the company has borrowed an
amount of money from the public, which it promises to repay at a future date. Debenture holders
are, therefore, creditors of the company.

Meaning

If a company needs funds for extension and development purpose without increasing its share
capital, it can borrow from the general public by issuing certificates for a fixed period of time
and at a fixed rate of interest. Such a loan certificate is called a debenture. Debentures are offered
to the public for subscription in the same way as for issue of equity shares. Debenture is issued
under the common seal of the company acknowledging the receipt of money.

Definition

Section 2 (30) of the Companies Act, 2013 define inclusively debenture as "debenture" includes
debenture stock, bonds or any other instrument of a company evidencing a debt, whether
constituting a charge on the assets of the company or not.
 39

Features of Debentures:

The important features of debentures are as follows:

I. Debenture holders are the creditors of the company carrying a fixed rate of interest.
II. Debenture is redeemed after a fixed period of time.
III. Debentures may be either secured or unsecured.
IV. Interest payable on a debenture is a charge against profit and hence it is a tax deductible
expenditure.
V. Debenture holders do not enjoy any voting right.
VI. Interest on debenture is payable even if there is a loss.

Advantage of Debentures:

Following are some of the advantages of debentures:

I. Issue of debenture does not result in dilution of interest of equity shareholders as they do
not have right either to vote or take part in the management of the company.
II. Interest on debenture is a tax deductible expenditure and thus it saves income tax.
III. Cost of debenture is relatively lower than preference shares and equity shares.
IV. Issue of debentures is advantageous during times of inflation.
V. Interest on debenture is payable even if there is a loss, so debenture holders bear no risk.

Disadvantages of Debentures:

Following are the disadvantages of debentures:

I. Payment of interest on debenture is obligatory and hence it becomes burden if the

company incurs loss.
II. Debentures are issued to trade on equity but too much dependence on debentures
increases the financial risk of the company.
III. Redemption of debenture involves a larger amount of cash outflow.
IV. During depression, the profit of the company goes on declining and it becomes difficult
for the company to pay interest.

Types of Debentures

The definition of debentures under Companies Act, 2013 says companies cannot issue
debentures carrying voting rights. Apart from this, there are no other specific restrictions. Hence,
companies are free to issue many other types of debentures.

We can classify types of debentures in the following five categories: security, convertibility,
permeance, negotiability, and priority.

Let us discuss all types of debentures in detail.

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1. Types of Debentures on the basis of Security

In terms of security, a debenture may basically either carry some security or it might not. Thus,
debentures can be of two types here:

a) Secured Debentures: These debentures carry a charge on some assets of the issuing
company. In case the company fails to repay the debt, its assets will be sold off to pay creditors.

This security on debentures may be of two types: Fixed-charge or Floating charge. In the case of
a fixed charge, the security relates to a specific asset of the company. On the contrary, a floating
charge covers all assets of the company in general.

b) Unsecured Debentures: These debentures are very risky for investors. This is because they
do not carry any security or charge on the company’s assets. The company only promises to pay
the debt amount and interest. Its assets are not liable for attachment in case of its failure to repay.

2. Types of Debentures on the basis of Convertibility

In order to make their debentures attractive to investors, companies can make them convertible.
On grounds on convertibility, debentures may be of the following two types:

a) Convertible Debentures: These debentures convert into equity or preference shares after a
specific period of time. This conversion may be either compulsory or optional at the debenture
holder’s discretion. Further, it may be either fully convertible or partly convertible. In terms of
the value of the shares that debentures convert into, they may be at par or even at premium
or discount.

b) Non-convertible Debentures: On the contrary to convertible debentures, non-convertible

ones remain debentures. They are not convertible into shares.

3. Types of Debentures on the basis of Permanence

In terms of permanence and duration, debentures are of the following types:

a) Redeemable Debentures: These debentures are redeemable on a specified date. For example,
if a debenture’s maturity period is 5 years, it becomes redeemable on the expiry of 5 years. These
5 years will start from the date of issue of the debenture.

b) Irredeemable Debentures: Irredeemable debentures do not have a specific maturity date.

They last throughout a company’s lifetime. Thus, the company redeems them only when it faces
liquidation.

4. Types of Debentures on the basis of Negotiability

 41

The aspect of negotiability basically relates to transferability. This ground differentiates

debentures on the basis of whether they are freely transferable. It divides debentures on the
following two grounds:

a) Registered Debentures: As the name suggests, the details of these debenture holders are
registered in the company’s records. Only the debenture holders can redeem these debentures.
Hence, they are not freely transferable. They can be transferred only if relevant provisions of the
Companies Act, 2013 are fulfilled.

b) Bearer Debentures: Companies do not register details of debenture holders in this case. They
can be redeemed by the person owning them, without their identity being checked. This happens
because these debentures are freely transferable. Thus, anybody can sell and buy them from their
holders.

5. Types of Debentures on the basis of their Priority

Just like shares, companies rank debentures also in terms of priority. Investors prefer buying
instruments having priority because it helps them reduce their risks. Debentures can be of the
following two types in this case:

a) First Mortgage Debentures: As the name suggests, companies repay these debentures first.
Debenture-holders get their money before all others in their category.

b) Second Mortgage Debentures: These debentures are repaid only after the first mortgage
debentures are satisfied.

Qs. Charge: Fixed and Floating.

Ans. Companies borrow funds from banks, financial institutions and other companies in the form
of loans to fulfill their monetary requiements. The moneylender demands security against the
loan and so, the borrower creates a charge over the assets or lien on the property. In this context
fixed charge and floating charge are often discussed.

Charge refers to the collateral, given for securing the debt, by way of mortgage on the company’s
assets. There are two kinds of charge, fixed charge, and floating charge. The former is a charge
on the real asset of the company that is identifiable and ascertained when the charge is created.
Conversely, the latter is slightly different, which is created over the the assets circulatory in
nature, i.e. the charge is not attached to any definite property.

What is charge

The Companies Act, 2013 defines a Charge as an interest or lien created on the assets or property
of a Company or any of its undertaking as security and includes a mortgage U/s 2(16).
 42

In the earlier Act of 1956, the word “Mortgage” was not mentioned. Section 124 to section 145
of the companies act, 1956 dealt with charges. Under the Companies Act, 2013 section 77 to
section 87 deals with charges.

KINDS OF CHARGES:

The charges are of two kinds:

Fixed Charge: A charge which is identifiable with specific and clear asset/property at the time
of creation of charge. The Company cannot transfer such identified and defined property unless
the charge holder (creditor) is paid off his dues.

Floating Charge : It covers the floating and circulating nature of properties of a company, like
sundry debtors, stock in trade etc., The nature of the property charged may change from time to
time .The floating charge crystallizes into fixed charge if the Company crystallizes or the
undertaking ceases to be a going concern.

Definition of Fixed Charge

Fixed Charge is defined as a lien or mortgage created over specific and identifiable fixed assets
like land & building, plant & machinery, intangibles i.e. trademark, goodwill, copyright, patent
and so on against the loan. The charge covers all those assets that are not sold by the company
normally. It is created to secure the repayment of the debt.

In this type of arrangement, the unique feature is that after the creation of charge the lender has
full control over the collateral asset and the company (borrower) is left over with the possession
of the asset. Therefore, if the company wants to sell, transfer or dispose off the asset, then either
previous approval of the lender is to be taken, or it has to discharge all the dues first.

Definition of Floating Charge

The lien or mortgage which is not particular to any asset of the company is known as Floating
Charge. The charge is dynamic in nature in which the quantity and value of asset changes
periodically. It is used as a mechanism to secure the repayment of a loan. It covers the assets like
stock, debtors, vehicles not covered under fixed charge and so on.

In this type of arrangement the company (borrower) has the right to sell, transfer or dispose off
the asset, in the ordinary course of business. Hence, no prior permission of the lender is required
and also there is no obligation to pay off the dues first.

The conversion of floating charge into fixed charge is known as crystallization, as a result of it,
the security is no more floating security. It occurs when:

I. The company is about to wind up.

II. The company ceases to exist in future.
 43

III. The court appoints the receiver.

IV. The company defaulted on payment, and the lender has taken action against it to recover
the debts.

Key Differences Between Fixed Charge and Floating Charge

The following are the major differences between fixed charge and floating charge:

I. The charge that can be easily identified with a certain asset is known as Fixed Charge.
The charge which is created on assets that changes periodically is Floating Charge.
II. Fixed Charge is specific in nature. Unlike floating charge which is dynamic.
III. Registration of movable assets is voluntary, in the case of fixed charge. Conversely, when
there is a floating charge, the registration is compulsory irrespective of the asset type.
IV. The fixed charge is a legal charge while the floating charge is an impartial one.
V. Fixed Charge is given preference over floating charge.
VI. The fixed charge covers those assets that are specific, ascertainable and existing during
the creation of the charge. On the other hand floating charge, covers present or future
asset.
VII. When the asset is covered under fixed charge, the company cannot deal with the asset
until and unless the charge holder agrees for so. However, in the case of floating charge
the company can deal with the asset until the charge is converted to fixed charge.

Qs. Calls on shares

Ans. Reputed companies require the applicants to send the full value of the shares along with the
applications. This is because; the Companies Act does not prohibit companies to collect the
entire amount at the time of issue itself. But the usual practice of the companies is to collect a
certain percentage of the face value of the shares on application and allotment and the balance in
one or more installments known as calls.

Meaning and Definition of Calls

A call may be defined as a demand made by the company on its shareholders to pay a part or the
whole of the unpaid balance within a specified time. Lord Lindley says that the expression “Call”
denotes both the demand for money and also the sum demanded.

Definition:

According to section 49 of company act 2013 ”A call may be defined as "A demand made by the
company on its share holders to pay whole or part of the balance remaining unpaid on each share
at any time during the life time of a company".

For example : The price of a share is Rs.100/-. At the time of applying for shares, the investor
has to pay Rs.5/- of the nominal value of share i.e. Rs.5, so Rs.95/- is balance on each share. As
 44

and when the company needs money its asks its share holders to pay, suppose the company asks
its shareholders to pay per share, that is known as calls on shares.

The following points should be noted, in this context, so that the reader can understand
what a call really means.

1. Time for Making the Call: The call can be made at any time during the life time of the
company or during the course of winding up. During the life time, the call should be made by the
Board of Directors and during the course of winding up, it should be made by the liquidator.

2. Obligatory: Each shareholder is obliged to pay the amount of call as and when the call is
made. But, this liability arises only when the call is made and not before.

3. Debt Due: As soon as a call is made, the call amount shall become a debt due from the
shareholders to the company.

4. Consequences of Default: If a shareholder fails to pay the call amount, the company can
enforce payment of the amount together with interest or can forfeit the shares.

5. Calls and Other Payments: A call is different from other payments made by a shareholder.
The amounts paid on application and allotment are not calls. Similarly, if a company requires the
shareholders to pay the entire amount either on application or on allotment, it is not a call under
this Act.

Legal Provisions Relating to the Calls

The statutory provisions relating to the making of calls can be summed up as follows:

1. Call should Bona fide: The power to make call is generally in nature of a trust and so it can
be exercised bona fide and for the benefit of the company. It should not be made for private ends.
It means the directors or the liquidator can make the call only when there is a bona fide need for
funds.

2. Uniformity: The calls should be made on an uniform basis on all the shares falling under the
same class . If a call is made only on some shareholders of the same class but not on others or a
greater amount is demanded from some shareholders and a lesser amount from others of the
same class, the call is not valid.

3. Provisions of the Articles: The calls should be made strictly in accordance with the
provisions of the Articles. If this is not done, the call will be invalid.

Procedure for making Calls

 45

Generally, the procedure for making calls is incorporated in the Articles of most companies. If a
company has its own Articles, it should follow the provisions of its Articles. If not, the
regulations specified in Table A of the Act shall apply.

The following provisions of Table A can be noted at this stage.

1. The power to make calls generally vests in the Board of Directors.

2. The calls should be made by passing a resolution at the meeting of the Board.

3. The call money should not exceed 50% of the face value of the share at one time. However,
companies may have their own Articles and raise this limit.

4. There must be at least 30 days interval between two successive calls.

5. When a call is made a letter known as “Call Letter” or “Call Notice” should be sent to all the
shareholders of the same class.

6. The notice should also specify the amount of the call, place of payment etc. and should be sent
at least 14 days before the last date for payment.

7. The Board of directors has the power to revoke or postpone a call after it is made.

8. Joint shareholders are jointly and severally liable for payment of calls.

9. If a member fails to pay call money, he is liable to pay interest not exceeding the rate specified
in the Articles or terms of issue. The directors are free to waive the payment of interest.

10. If any member desires to pay the call money in advance, the directors may at their discretion
accept and pay interest not exceeding the rate specified in the Articles.

11. A defaulting member will not have any voting right till call money is paid by him.

Qs. Forfeiture and surrender of shares

Ans. Share forfeiture is the process by which the directors of a company cancel the power of a
shareholder if he does not pay his call money when the company demands for it. The company
will give 14 days' notice; after 14 days if the shareholder does not pay the company will forfeit
his shares and strike his name from the register of shareholders. The company will not repay the
funds received from the shareholder. In order to do a share forfeiture the Articles of
Association of the company should contain a provision for that.

What is forfeiture of shares?

Forfeiture of shares is a process where the company forfeits the shares of a member or
shareholder who fails to pay the call on shares or installments of the issue price of his shares
 46

within a certain period of time after they fall due. In other words, when the shareholder fails to
pay the full amount of share which he agreed to pay in installments the company can cancel his
shares.

For Example:

Suppose Mr. A buys 100 shares of a company but for the time being the company asks him to
pay only 50% of that amount. The company makes a deal with Mr. A that whenever needed, the
rest of the money will be asked for. Some months later when the company asks for the remaining
50% amount, Mr. A says that he is incapable of paying. The company gives him some more time
to pay but he still can't pay. The company seizes his shares and he no longer is a shareholder of
the company. He loses the 50% he had already paid. This seizure of shares is called share
forfeiture.

Legal Framework

When the shares are issued by the company, generally the shareholders are not asked to pay the
whole amount of share at once. It happens in installments. The company makes these calls on
shares when it requires further capital.

The company may call up the unpaid money from the shareholders when it is needed from time
to time. The boards of directors are required to pass a resolution for making a call on shares. The
articles of the company should contain the provisions regarding this call on shares and if nothing
is mentioned in the articles then Regulations 13-18 of table F of Schedule I of Companies Act,
2013, will apply.

Those provisions provide that

I. the amount called must be not more than one-fourth of the face value of share;
II. the dates of two consecutive calls must differ by at least a month;
III. a minimum of fourteen days’ notice must be given to members;
IV. the notice has to mention the time, place and amount of the call on shares.

Generally, the company will give 14 days’ notice to the shareholder and after 14 days if the
shareholder is not willing to pay the money due to the company will forfeit the shares of that
shareholder.

Procedure for forfeiture of shares

Forfeiture of shares is a serious step since it involves in depriving a person of his property as a
penalty of some act or omission. Accordingly, shares of members cannot be forfeited unless the
articles of the company confer such power on the directors. The forfeiture of a share should
happen only for the non-payment of the call on shares by the members and in accordance with
articles of the company. But forfeiture can also be made for any other reasons which are
 47

specified in the articles of the company. Companies normally have their own rules and
regulations regarding the forfeiture of shares and in case if those provisions are not present then
the Regulations 28-34 of Table F of Schedule 1 of Companies Act, 2013 will apply.

The following is the procedure:

In accordance with articles

Forfeiture of shares must be in accordance with the provisions contained in the articles of the
company to be treated as valid forfeiture. The power of forfeiture of shares must be
exercised bona fide and in the interest of the company. Thus, where the articles of the company
authorize the directors to forfeit the shares of a shareholder, who commences an action against
the company or the directors, by making a payment of the full amount of his shares, was held
that such a clause was invalid as it was against the rights of a shareholder [Hope v. International
Finance Society (1876) 4 Ch. D. 598]

Proper notice

A proper notice under the authority of board must be served on the defaulting shareholder. The
notice should mention that the shareholder has to pay the amount on a day specified which would
not be earlier than fourteen days from the date of notice served. This is provided under
Regulation 29 of Table F. the notice should also mention that in the event of non-payment, the
shares will be liable to be forfeited.

The objective of sending the notice is to give the defaulting shareholder an opportunity to pay the
call money, interest and any other expenses and hence notice should disclose enough information
with particulars to the shareholder.

“A proper notice is a condition precedent to the forfeiture of shares and even the slightest defect
in the notice will invalidate the forfeiture”. [Public Passenger Services Ltd. v. M.A. Khader
[1996]]

A notice sent for forfeiture by registered post was returned unserved, the forfeiture will be held
invalid” [Promiela Bansali v. Wearwell Cycle Co. Ltd. [1978] 48 Comp. Cas. 202 (Delhi).]

A notice sent to the holder of a partly paid share after his death is not a proper notice. Notice in
this kind of situations is to be sent to the legal heir [George Mathai Noorani v. Federal Bank
Ltd. [2007] 76 SCL 528 (CLB).]

Resolution for forfeiture

If the defaulting shareholder does not pay the amount within the specified period mentioned in
the notice properly served to him, the directors of the company may pass a resolution forfeiting
the shares under regulation 30 of Table F. in the absence of such resolution the forfeiture shall be
invalid unless the notice of forfeiture incorporates the resolution of forfeiture as well. For
 48

example, the notice may state that in the event of default the shares shall be deemed to have been
forfeited.

Effects of forfeiture

Cessation of membership

A person whose shares have been forfeited ceases to be a member in respect of forfeited shares.
This is provided under regulation 32(1) of Table F of schedule 1 of Companies Act, 2013.

Cessation of liability

The liability of a person whose shares have been forfeited comes to an end when the company
receives the payment in full of all such money in respect of shares forfeited. This is provided in
Regulation 32(2) of Table F.

However, notwithstanding the forfeiture of shares, shareholder remains liable to pay to the
company all money which, at the date of forfeiture, were payable by him to the company in
respect of forfeited shares. Thus, the liability of unpaid calls remains even after the forfeiture of
shares.

Liability as past member

The liability of a former shareholder remains as a liability of a past member to pay calls if
liquidation of the company takes place within one year of the forfeiture.

Forfeited shares become company’s property

The forfeited shares become the property of the company on forfeiture. Accordingly, these may
be re-issued or otherwise disposed of on such terms an in such manner which the board of
directors thinks fit. This provided under Regulation 31(1) of Table F.

In the same Regulation clause (2) provides that at any point of time before a sale or disposal of
forfeited shares the board may cancel the forfeiture of shares in terms as they think fit.

Surrender of shares:

The companies act does not provide for surrender of shares. Shares are said to be surrendered
when they are voluntarily given up. The articles of a company may authorize the directors to
accept surrender of shares. Surrender of shares is valid where it is done to relive the company
from going through the formality of forfeiture of shares and the shareholder is willing to
surrender the shares. A surrender and a forfeiture have practically the same effect, the only
difference being that the former is done with the assent of the shareholder while the latter is done
at the instance of the company.

Difference between Surrender and Forfeiture of Shares; Surrender of Shares; Forfeiture of Shares
 49

(1) Surrender of Shares:

Meaning: It is a voluntary return of shares by a member to the company.

Nature of Action: It is voluntary action by the share holder.

Reason: Surrender takes place due to the inability of a shareholder to pay the call money.

Initiative: Initiative is taken by share holder.

Time Required: Surrender requires limited time.

Effect: Surrender of shares does not affect the reputation of the shareholder, as it is his own
voluntary action.

(2) Forfeiture of Shares:

Meaning: It is compulsory termination of membership, due to non payment of call money on

due date.

Nature of Action: It is a compulsory action by the company.

Reason: Forfeiture takes place because of non-payment of call money on the due date.

Initiative: Company is taking the initiative.

Time Required: Forfeiture requires longer time.

Effect: Forfeiture affects the reputation of a share holder, as it is a penal action by the company.

Qs. Transfer and transmission of shares

Ans. One of the most important features of the securities is that they are transferable, which
facilitates the company in acquiring permanent capital and liquid investments to the
shareholders. Transfer of shares is a voluntary act of a member that takes place by way of
contract. It is not exactly same as transmission of shares, as the two differ in their meaning and
concept as well. The transmission of shares occurs due to the operation of law i.e. in case if the
member passes away or becomes insolvent/lunatic. Transfer of shares requires and instrument of
transfer, whereas no such instrument is required in the transmission of shares.

Definition of Transfer of Shares

Transfer of shares refers to the intentional transfer of title (rights as well as duties) to shares by
one person to another. There are two parties to transfer of shares, i.e. transferor and transferee.

The shares of the public company are freely transferable unless there is an express restriction
provided in the articles of association. However, the company can refuse the transfer of shares, if
 50

it has a valid reason for the same. In the case of a private company, there is a restriction on the
transfer of shares subject to certain exceptions.

Definition of Transmission of Shares

There are some cases when the transfer of shares occurs due to the operation of law, i.e. when
the registered shareholder is no more, or when he is insolvent or lunatic. Transmission of shares
also occurs when the shares are held by a company, and it is wound up.

The shares are transferred to the legal representative of the deceased and the official assignee of
the insolvent. The transmission is recorded by the company when the transferee gives the proof
of entitlement of shares.

Key Differences between Transfer and Transmission of Shares

The significant differences between transfer and transmission of shares are provided below:

I. When the shares are transferred by one party to another party, voluntarily, it is known as
transfer of shares. When the transfer of shares happens due to the operation of law, it is
referred to as transmission of shares.
II. Transfer of shares is done intentionally whereas death, bankruptcy and lunacy are the
reasons for transmission of shares.
III. The transfer of shares is initiated by the parties to transfer, i.e. transferor and transferee.
Unlike transmission of shares which is initiated by the legal representative of the
concerned member.
IV. Transferee pays an adequate consideration to the transferor for the transfer of shares. In
the case of transmission of shares, no consideration shall be paid.
V. Execution of valid transfer deed is necessary when there is the transfer of shares, but not
in the transmission of shares.
VI. When the transfer is completed, the liability of the transferor is over. On the other hand,
the original liability of shares exists.
VII. Stamp duty is payable on the market value of shares in case of transfer while in the
transmission of shares no stamp duty is to be paid.

Qs. Dividend

Every Company requires funds to operate its business successfully. Shareholders are an integral
part of every company where they raise funds and in the process of same become its
stakeholders. They have a control over the share of profits in proportion to the money they
invest. This share of profit by shareholders is termed as dividend.

Meaning
 51

The word “Dividend” has origin from the Latin word “Dividendum”. It means a thing to be
divided. Dividend means the portion of the profit received by the shareholders from the
company’s net profit, which is legally available for distribution among the members. Therefore,
dividend is a return on the share capital subscribed for and paid to its shareholders by a company.
Dividend defined under section 2(35) of the Companies Act, 2013, includes any interim
dividend.

Definition

Dividend: As per Section 2(35) of Companies Act, 2013 defines the term as including any
interim dividend.

I. Dividend is basically the share of profit distributed among shareholders.

II. Ordinary meaning of dividend is a share of profits, whether at a fixed rate or otherwise,
allocated to holders of shares in a company.
III. Dividend can be paid on Equity or preference shares both.

Types of dividends

Interim dividends and Final dividends

Interim dividend

The Act defines Dividend in terms of interim dividends which refer to the dividend declared by
company’s board during any time of the year before official closing of financial year and calling
of Annual General Meeting. According to the Act the company can declare interim dividend out
of profits accumulated of current or previous financial years. The provisions of the Act which are
generally for final dividend are applicable to interim dividends also.

Features of interim dividend

I. It is declared by board of directors in one financial year out of surplus generated in profit
and loss accounts and out of profits in which interim dividend is bound to be declared. It
has been held in Judgments that mere declaration by the directors in a general meeting
does not obligate them to pay dividends as the decision can be rescinded.
II. If the company registers loss before the stipulated declaration of dividends, it has to be
declared at an average rate calculated on the basis of dividends declared in previous 3
financial years.
III. It is deposited in a scheduled bank account within five days of the declaration. The same
is irrespective of intervening holidays.

Final dividends

The dividends declared by the company after closing of the financial year and approval of Board
of Directors in AGM. The term Dividend used except in the definition in Companies Act, 2013
 52

refers to final dividends only. Majority of the provisions for both Interim and Final are same but
there are some differentiated provisions for the Interim dividends in the Act. The liability on
default arises only in case of declaration of Final Dividend and not Interim dividend.

Declaration of dividends

Section 123 of Companies Act 2013 lays down guidelines for the conditions when the companies
are permitted to declare or pay dividends in a financial year:

Source of dividend:

Dividends can be declared out of –

1. It can be paid after providing for depreciation fund out of the profits of the current or previous
financial year.

2. It can also be paid out of the money which Central or State Governments provide against a
guarantee for the payment of dividend.

Transfer of reserves: The Company before declaring the dividends has to reserve the required
amount of cash to run the affairs of the company. These are the appropriate reserves of the
company to manage its affairs.

Declaration of dividends: If the company decides to declare dividend on the basis of profit
accumulated in the previous years, such declaration has to be made on the basis of prescribed
rules and the dividend paid has to be from free reserves only. The dividends can be declared only
after approval of board of directors generally done in a ‘general meeting’. There cannot be
any declaration of dividend unless the same is approved by Board and by General body of the
company.

Separate account for dividends: The amount of dividends has to be kept in a separate bank
account within 5 days from the date of declaration.

To be paid only in cash: The dividend has to be paid only in cash (includes payment by cash or
other electronic means) and is payable only to the registered shareholder himself or to his banker.
The objective of specifying payment in cash is to necessitate that some assets of the company
have flown out to the shareholder.

Failure of section 73&74: If a company fails to adhere to provisions in section 73 and 74 which
are related to borrowings from public and repayment of deposits, such company cannot declare
any dividend as long as failure continues.

Unpaid Dividend Account

 53

Sometimes, there may arise a situation that after declaration of dividend, the dividends remain
unpaid or unclaimed and the amount may be unused in the bank. The Act well defines
provisions in case such situation arises:

Transfer of unclaimed dividend: When the dividend has been declared by the company but has
not been claimed by the shareholder within thirty days, then within 7 days of expiry of period of
30 days (that is within 30-37 days of the declaration), the company has to transfer the unpaid
amount to the special account in the bank known as Unpaid Dividend Account. If the company
defaults on transferring the amount to unpaid dividend account within specified time period, the
company has to pay a set interest on the sum unpaid at 12 %per annum.

Notification of it on the website: After transferring money to unpaid dividend account, within
the period of ninety days, the company is required to prepare a statement containing names of,
addresses of (last known) and the amount of dividend to be paid to the shareholder and put the
same on its website and on any other website provided by central government for the same. The
person claiming the amount transferred has to apply to the company for payment of dividend. If
such claim is not paid in required time (generally 7 years), than the company is ‘relieved of the
responsibility of holding the shares or reflecting it in its list of shareholders.

Transfer of unpaid dividend to Investor Education and Protection Fund: The Act provides
for a fund which has to be established by central government. If any amount remains unclaimed
for more than 7 years has to be transferred to the company under this Investor Education and
Protection Fund and the declaration of same has to be made to the authority maintaining the
fund. Moreover the authority also has to issue a receipt as evidence of such transfer. But there
has to be a condition that the claimant can obtain it back from the fund whenever required by
him.

Penalty in case of default: The Company is liable to be penalised with fine extending from 5
lakh to 25 lakh and every particular officer responsible for it is to be punished individually with a
fine from one lakh to 5 lakhs.

Procedure of Declaration and Payment of Dividend

There has to be a well-defined procedure to be followed by companies to declare and pay

dividends which is follows:

Notification of Meeting of directors: Under section 173 of the Act, the matter related to
dividends has to be declared in a meeting of Board of Directors. The same has to be notified to
the directors concerned.

Hold required meetings – All the resolutions related to dividends have to be discussed and
passed in board meetings. The resolutions may include approving the annual accounts of loss and
profit; deciding the final amount of dividend; determining the date of book closure and
 54

approving the notice of AGM as the same has to be discussed and approved in annual general
meeting of the company.

Declaration of dividends– After careful consideration and approval of resolutions, the company
has to declare dividends after compulsorily abiding by provisions of section 123. It is not
mandatory for companies to declare dividends every year and ‘the board of directors has a
discretion to declare dividend…There is no company law…obliges a board of directors to use up
all its profits by declaring dividend.

Open bank account – related to dividends a separate bank account has to be opened for making
dividend payment and credit the total amount payable within five days of declaration.

Payment of dividend– The dividend has to be paid to the shareholders in cash within 30 days of
declaration. The company has to also comply with section 73 and 74 of the Act.

Processing of unpaid dividend – the company has to transfer the amount left in the dividend
account which has not been laimed to the unpaid dividend account under section 124? After 7
years same amount has to be transferred to Investor Education and Protection Fund if not
claimed.

Failure to distribute dividends

There arises a penalty if the company fails to comply with the provisions of the Act:

I. After the declaration of dividend the company has to pay it within 30 days from the date
of declaration. ‘It becomes a debt against the company and it is deemed to be receivable
by the members only in the year at which the members declared the dividend.’
II. If there is default then the directors are liable to be punished with imprisonment which
may extend to two years and with fine which won’t be less than Rs. 1000 per day which
might continue till the default continues with a simple interest of 18%.

Exceptions to default: no offence or default would have been committed in case of any of the
following:

I. If the dividend could not be paid by reason of operation of law.

II. If the shareholder has given some special directions for payment of dividend which could
not be complied and same has been communicated to him.
III. If there is a dispute regarding right to receive dividend and same delays it payment.
IV. If the dividend has been adjusted against any due of shareholder that he had to pay to the
company.
V. If the delay in payment was not due to the fault of the company.
 55

Unit-III

Qs. Directors: Appointment, Disqualification and Vacation & Removal, Powers and Legal
position.

Ans. On incorporation, a company becomes a legal artificial person but it cannot act by itself and
consequently it has to depend upon some human agency to act in its name. The members have no
inherent right to participate in the management of the company. A large sized company may
have its members running into lakhs, who are dispersed all over the country and they even lack
the expertise to manage the affairs of the company, which makes it impossible to give the
management of the company in their hands. Therefore a specialized body of persons called as
directors are appointed by the members to manage the affairs of the company. The directors must
act as a body without improper exclusion of any of the directors. The directors collectively
referred to as BOARD. The board is the managerial body constituted by the members to whom is
entrusted the whole management of the company. Board owes a duty to the members to exercise
care, skill and diligence in discharge of their functions.

Meaning and definition of director:

A person is considered as a director, if he does whatever a director does normally. Thus, where a
person performs the functions of a director, he will be treated as a director for the purposes of the
act, though he may be called by a different name and is not actually appointed on the board of
the company.

The Companies Act, 2013 does not contain an exhaustive definition of the term “director”.
Section 2 (34) of the Act prescribed that “director” means a director appointed to the Board of a
company. A director is a person appointed to perform the duties and functions of director of a
company in accordance with the provisions of the Companies Act, 2013

R.K. Dalmia and others v. The Delhi Administration it was held that "A director will be
personally liable on a company contract when he has accepted personal liability either expressly
or impliedly. Directors are the agents or the trustees of a Company."

Case of J.K. Industries v. Chief Inspector of Factories that the directors being in control of
the company's affairs cannot get rid of their managerial responsibility by nominating a person as
the occupier of the factory.

Gurudas Hazra v. P.K.Chowdhury that it was for the Director to show that the default on the
part of the company was not attributable to any breach of duty on his part.

The case of Peter J R Prabhu v. Asstt Commissioner of Commercial Taxes stated that apart
from any provisions of the taxing statute, arrears of the tax amount are not to be recovered from
the directors personally.
 56

Board of Directors

A company, though a legal entity in the eyes of law, is an artificial person, existing only in
contemplation of law. It has no physical existence. It has neither soul nor body of its own. As
such, it cannot act in its own person. It can do so only through some human agency. The persons
who are in charge of the management of the affairs of a company are termed as directors. They
are collectively known as Board of Directors or the Board. The directors are the brain of a
company. They occupy a pivotal position in the structure of the company. Directors take the
decision regarding the management of a company collectively in their meetings known as Board
Meetings or at the meetings of their committees constituted for certain specific purposes.

Section 2 (10) of the Companies Act, 2013 defined that “Board of Directors” or “Board”, in
relation to a company, means the collective body of the directors of the company.

Minimum/Maximum Number of Directors in a Company

Section 149(1) Section 149(1) of the Companies Act, 2013 requires that every company shall
have a minimum number of 3 directors in the case of a public company, two directors in the case
of a private company, and one director in the case of a One Person Company. A company can
appoint maximum 15 fifteen directors. A company may appoint more than fifteen directors after
passing a special resolution in general meeting and approval of Central Government is not
required. A period of one year has been provided to enable the companies to comply with this
requirement

Woman Director

Every listed company shall appoint at least one woman director within one year from the
commencement of the second proviso to Section 149(1) of the Act. Every other public company
having paid up share capital of Rs. 100 crores or more or turnover of Rs. 300 crore or more as on
the last date of latest audited financial statements, shall also appoint at least one woman director
within 1 years from the commencement of second proviso to Section 149(1) of the Act.

Appointment of directors – section 152

First Director The first directors of most of the companies are named in their articles. If they are
not so named in the articles of a company, then subscribers to the memorandum who are
individuals shall be deemed to be the first directors of the company until the directors are duly
appointed. In the case of a One Person Company, an individual being a member shall be deemed
to be its first director until the director(s) are duly appointed by the member in accordance with
the provisions of Section 152.

Appointment of Additional Director- Section 161 (1)

 57

The board of directors can appoint additional directors, if such power is conferred on them by the
articles of association. Such additional directors hold office only upto the date of next annual
general meeting or the last date on which the annual general meeting should have been held,
whichever is earlier. A person who fails to get appointed as a director in a general meeting
cannot be appointed as Additional Director.

Appointment of Alternate Director- Section 161 (2)

Section 161(2) of the Act allowed the followings:

I. The Board of Directors of a company must be authorised by its articles or by a resolution

passed by the company in general meeting for appointment of alternate director.
II. The person in whose place the Alternate Director is being appointed should be absent for
a period of not less than 3 months from India.
III. The person to be appointed as the Alternate Director shall be the person other than the
person holding any alternate directorship for any other Director in the Company.
IV. If it is proposed to appoint an Alternate Director to an Independent Director, it must be
ensured that the proposed appointee also satisfies the criteria for Independent Directors.
V. An alternate director shall not hold office for a period longer than that permissible to the
director in whose place he has been appointed and shall vacate the office if and when the
director in whose place he has been appointed returns to India.
VI. If the term of office of the original director is determined before he so returns to India,
any provision for the automatic reappointment of retiring directors in default of another
appointment shall apply to the original, and not to the alternate director.

Appointment of Directors by Nomination Section 161(3)

This new sub-section now provides for appointment of Nominee Directors. It states that subject
to the articles of a company, the Board may appoint any person as a director nominated by any
institution in pursuance of the provisions of any law for the time being in force or of any
agreement or by the Central Government or the State Government by virtue of its shareholding
in a Government Company.

Appointment of Directors in causal vacancy- Section 161 (4)

If any vacancy is caused by death or resignation of a director appointed by the shareholders in

General meeting, before expiry of his term, the Board of directors can appoint a director to fill up
such vacancy. The appointed director shall hold office only up to the term of the director in
whose place he is appointed.

Disqualifications for appointment of director - Section 164 (1)

A person shall not be eligible for appointment as a director of a company, if —

 58

a. he is of unsound mind and stands so declared by a competent court;

b. he is an undischarged insolvent;
c. he has applied to be adjudicated as an insolvent and his application is pending;
d. he has been convicted by a court of any offence, whether involving moral
turpitude or otherwise, and sentenced in respect thereof to imprisonment for not
less than six months and a period of five years has not elapsed from the date of
expiry of the sentence. If a person has been convicted of any offence and
sentenced in respect thereof to imprisonment for a period of seven years or more,
he shall not be eligible to be appointed as a director in any company;
e. an order disqualifying him for appointment as a director has been passed by a
court or Tribunal and the order is in force;
f. he has not paid any calls in respect of any shares of the company held by him,
whether alone or jointly with others, and six months have elapsed from the last
day fixed for the payment of the call;
g. he has been convicted of the offence dealing with related party transactions under
section 188 at any time during the last preceding five years; or
h. he has not got the DIN. An additional disqualification is provided in sub section
(2) of Section 164 relating to consequences of non filing of financial statements or
annual returns. Any person who is or has been director

Kinds Of Directors:

Under the Companies Act, 1956, the following kinds of directors are recognized:
Ordinary Directors

Ordinary directors are also referred to as simple directors who attends Board meeting of a
company and participate in the matters put before the Board. These directors are neither whole
time directors nor managing directors.

Whole-time/Executive Directors

Whole-time Director or Executive Director includes a director in the whole-time employment of

the company.

Additional Directors

Additional Directors are appointed by the Board between the two annual general meetings
subject to the provisions of the Articles of Association of a company. Additional directors shall
hold office only up to the date of the next annual general meeting of the company. Number of the
directors and additional directors together shall not exceed the maximum strength fixed for the
Board by the Articles.

Alternate Director
 59

An Alternate Director is a person appointed by the Board if so authorised by the Articles or by a

resolution passed by the company in the general meeting to act for a director called "the original
director" during his absence for a period of not less than three months from the State in which
meetings of the Board are ordinarily held. Generally, the alternate directors are appointed for a
person who is Non-resident Indian or for foreign collaborators of a company.

Professional Directors

Any director possessing professional qualifications and do not have any pecuniary interest in the
company are called as "Professional Directors". In big size companies, sometimes the Board
appoints professionals of different fields as directors to utilise their expertise in the management
of the company.

Nominee Directors

The banks and financial institutions which grant financial assistance to a company generally
impose a condition as to appointment of their representative on the Board of the concerned
company. These nominated persons are called as nominee directors.

Legal Position Of Directors:

It is difficult to define the exact legal position of the director of the company. The CompaniesAct
makes no effort to define their position. At various times they have been described by judges as
agents, trustees or managing partners.

Directors as agents:

The relationship between the company and the directors is that of principal and agent and the
general principles of agency will govern their relations. Consequently, where the directors enter
into contracts on behalf of the company, it is the company and not the directors who are liable
there under. But the directors will be personally liable only in the following cases:

I. Where a director acts in his own name.

II. Where a director contract on behalf of the company without using the words ‘Limited’ or
‘Private limited’ as a part of the name of a company.
III. Where a director enters into any agreement or contract in which it is not made clear as to
whether the director is signing in his personal capacity or as an agent of company.

Directors as trustees:

The office of a director is an office of trust. The directors stand in a fiduciary position towards
the company. They are the trustees of:

I. Company’s money and property: The property of the company must be applied for the
genuine purposes. If the property is misappropriated it would amount to breach of trust.
 60

II. The powers entrusted to them: The directors must exercise their powers bonafide and for
the benefit of the company. As a whole, not to promote their own personal or private
interests. They should not put themselves in a position where their duties and personal
interests may conflict.Where a director uses confidential information of the company for
his personal purposes, misappropriates or misuses the assets of the company, he becomes
accountable to the companyIf a director misuses his fiduciary position and makes a secret
profit, he is liable to pay it to the company.

Directors as officers of the company:

Amongst other persons, a director is also included in the definition of an ‘officer’ of the
company Whether or not a director is in the employment of the company, he shall always be
treated as an officer of the company.

Directors as ‘officers in default:

a) A Whole time director or managing director is always covered in the definition of officer in
default.

b) Where a company has no whole time director or managing director,or manager-A director
shall be treated as an officer in default if

I. he has been so specified by the board in this behalf.

II. no director is so specified by the board.

Rights/Powers and Duties of Directors under the Ordinance:

Section 86: Further issue of Capital:

The decision to increase the capital of the company by the issue of further shares lies with the
directors of such company. With respect to further issue of shares, if existing members decline or
do not subscribe to the offer of new shares, the directors have the power to allot and issue such
shares in such manner as they deem fit.

Directors (or an officer authorized by the directors) are to sign the circular which is to
accompany any offer of new shares under this section.

Section 159: Calling of Extraordinary General Meeting

An extra ordinary general meeting may be called at any time by the directors for consideration of
any matter requiring approval of the company in a general meeting.

Section 160: Presiding General Meeting:

The chairman of the Board of Directors presides as chairman at every general meeting of the
company. If there is no such chairman, or if at any meeting he is not present within fifteen
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minutes after the time appointed for holding the meeting, or is unwilling to act as chairman, any
one of the directors present may be elected to be chairman.

Section 174: First Directors

The first directors have the right to hold office until the election of directors in the first annual
general meeting.

Section 180: Casual Vacancy on the Board of Directors

Any casual vacancy in the Board of Directors of a company is filled up by the directors.

Section 191: Remuneration of the Directors:

The directors in general meeting determine the remuneration of a director for performing extra
services, including the holding of the office of chairman.

Section 195: Loans to Directors

The Directors of the company have the right to obtain loan from the company subject to
fulfillment of certain requirements.

Section 196: Powers of Directors with regard to managing the business of the company

The business of a company is managed by the directors, who may pay all expenses incurred in
promoting and registering the company, and may exercise all such powers of the company as are
not by this Ordinance, or by the articles, or by a special resolution, required to be exercised by
the company in general meeting.

The directors of a company exercise the following powers on behalf of the company, and do so
by means of a resolution passed at their meeting, namely:

I. to make calls on shareholders in respect of moneys unpaid on their shares;

II. to issue shares;
III. to issue debentures or any instrument in the nature of redeemable capital;
IV. to borrow moneys otherwise than on debentures;
V. to invest the funds of the company;
VI. to make loans;
VII. to authorize a director or the firm of which he is a partner or any partner of such firm or a
private company of which he is a member or director to enter into any contract with the
company for making sale, purchase or supply of goods or rendering services with the
company;
VIII. to approve annual or half-yearly or other periodical accounts as are required to be
circulated to the members;
IX. to approve bonus to employees;
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X. to incur capital expenditure on any single item or dispose of a fixed asset in accordance
with the limits as prescribed by the Commission from time to time;

Provided that the acceptance by a banking company in the ordinary course of its business of
deposit of money from the public repayable on demand or otherwise and withdrawable by
cheque, draft, order or otherwise, or placing of moneys on deposit by a banking company with
another banking companion such conditions as the directors may prescribe, shall not be deemed
to be a borrowing of money or, as the case may be, a making of loan by a banking company with
the meeting of this section;

I. to undertake obligations under leasing contracts exceeding one million rupees;

II. to declare interim dividend; and
III. having regard to such amount as may be determined to be material (as construed in
Generally Accepted Accounting Principles) by the Board-
IV. to write off bad debts, advances and receivables;
V. to write off inventories and other assets of the company; and
VI. to determine the terms of and the circumstances in which a law suit may be compromised
and a claim or right in favour of a company may be released, extinguished or
relinquished.

Section 198 and 200: Appointing CEO and determining Terms of his Appointment

The directors have the right to appoint an individual to be the Chief Executive of the company
and determine the terms and conditions of appointment of a Chief Executive, if required by the
company’s articles.

Section 202: Removal of CEO

The directors of a company by resolution passed by not less than three-fourths of the total
number of directors may remove a chief executive before the expiration of his term of office.

Section 230: Maintaining Books of Accounts

The directors can decide to maintain books of accounts at a place other than the registered office
of the company.

The directors, during business hours, have the right to inspect the books of accounts and other
books and papers of the company.

The directors shall from time to time determine whether and to what extent and at what time and
places and under what conditions or regulations the accounts and books or papers of the
company or any of them shall be open to the inspection of members.

Section 248: Recommendation of the Dividend:

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The dividend is always recommended by the Directors and declared by the company in general
meeting.

Section 252: Appointment of Auditor

The first auditors of a company are to be appointed by the directors within sixty days of the date
of incorporation of the company. The directors may fill in any causal vacancy in the office of
auditors. Moreover, the directors fix the remuneration of the auditors, where the auditors have
been appointed by them.

Section 494: Allotment of Shares for Inadequate Consideration

Any director may apply to the Court for a declaration that any shares have been allotted for
inadequate consideration.

Qs. Meetings: Meeting of Board of Directors, Meeting of shareholders

Ans. In common parlance, the word meeting means an act of coming face to face, coming in
company or coming together. The Oxford Dictionary defines a meeting as An assembly of
number of people for entertainment, discussion or the like. A meeting therefore, can be defined
as a lawful association, or assembly of two or more persons by previous notice for transacting
some business. The meeting must be validly summoned and convened. Such gatherings of the
members of companies are known as company meetings.

Meaning and Definition of Company Meeting:

The word “meeting” is not defined anywhere in the Companies Act. Ordinarily, a company may
be defined as gathering, assembling or coming together of two or more persons (by previous
notice or by mutual arrangement) for discussion and transaction of some lawful business.

A company meeting may be defined as a concurrence or coming together of at least a quorum of

members in order to transact either ordinary or special business of the company.

Some important definitions of meeting are given below:

In the case of Sharp vs. Dawes (1971), the meeting is defined as “An assembly of people for a
lawful purpose” or “the coming together of at least two persons for any lawful purpose.”

According to P.K. Ghosh “Any gathering, assembly or coming together of two or more persons
for the transaction of some lawful business of common concern is called meeting.”

According to K. Kishore, “A concurrence or coming together of at least a quorum of members

by previous notice or mutual agreement for transaction business for a common interest is
meeting.”
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Essentials of Company Meetings

The essential requirements of a company meeting can be summed up as follows:

1. Two or More Persons: To constitute a valid meeting, there must be two or more persons.
However, the articles of association may provide for a larger number of persons to constitute a
valid quorum.

2. Lawful Assembly: The gathering must be for conducting a lawful business. An unlawful
assembly shall not be a meeting in the eye of law.

3. Previous Notice: Previous notice is a condition precedent for a valid meeting. A meeting,
which is purely accidental and not summoned after a due notice, is not at all a valid meeting in
the eye of law.

4. To Transact a Business: The purpose of the meeting is to transact a business. If the meeting
has no definite object or summoned without any predetermined object, it is not a valid meeting.
Some business should be transacted in the meeting but no decision need be arrived in such
meeting.

Kinds of Company Meetings

The meetings of a company can be broadly classified into four kinds.

1. Meetings of the Shareholders.

2. Meetings of the Board of Directors and their Committees.

3. Meetings of the Debenture Holders.

4. Meetings of the Creditors.

1. Meeting of Board of Directors

Board meetings are meetings at the highest level, i.e. a meeting where board members or their
representatives are present. A company is not an actual entity but a legal one so it cannot take
actions and make decisions. The board of directors act as agents through which the company
takes actions as well as makes decisions.

Board Meetings

The board of directors is the supreme authority in a company and they have the powers to take
all major actions and decisions for the company. The board is also responsible for managing the
affairs of the whole company.
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For the effective functioning and management, it is imperative that board meetings be held at
frequent intervals. For this, Section 173 of Companies Act, 2013 provides –

In the case of a Public Limited Company, the first board meeting has to be held within the first
30 days, since the incorporation date. Additionally, a minimum of 4 board meetings must be held
in a span of one year. Also, there cannot be a gap of more than 120 days between two meetings.

In the case of small companies or one person company, at least two meetings must be conducted,
one in each half of the financial year. Additionally, the gap between the two meetings must be at
least 90 days. In a situation where the meeting is held at a short notice, at least one independent
director must be attending the meeting.

Notice of Board Meeting

The notice of Board Meeting refers to a document that is sent to all directors of the company.
This document informs the members about the venue, date, time, and agenda of the meeting. All
types of companies are required to give notice at least 7 days before the actual day of the
meeting.

Quorum for the Board Meeting

The quorum for the Board Meeting refers to the minimum number of members of the Board to
conduct a valid Board Meeting. According to Section 174 of Companies Act, 2013, the
minimum number of members of the board required for a meeting is 1/3rd of a total number of
directors.

At any rate, a minimum of two directors must be present. However, in the case of One Person
Company, the rules of Section 174, do not apply.

Participation in Board Meeting

All directors are encouraged to actively attend board meetings and in case that’s not possible at
least attend the meetings through a video conference. This is so that all directors can take part in
the decision-making process.

Requirements for Conducting a Valid Board Meeting

Right Convening Authority

The board meeting must be held under the direction of proper authority. Usually, the company
secretary (CS) is there to authorize the board meeting. In case the company secretary is
unavailable, the predetermined authorized person shall act as the authority to conduct the board
meeting.

Adequate Quorum
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The proper requirements of the quorum or the minimum number of Directors required to conduct
a Board meeting must be present for it to be considered a valid board meeting.

Proper Notice

Proper notice is one of the major requirements to be fulfilled when planning a board
meeting. Formal notice has to be served to all members before conducting a board meeting.

Proper Presiding Officer

The meeting must always be conducted in the presence of a chairman of the board.

Proper Agenda

Every board meeting has a set agenda that must be followed. The agenda refers to the topic of
discussion of the board meeting. No other business, which is not mentioned in the meeting must
be considered.

Meeting of the Share Holders

The meetings of the shareholders can be further classified into four kinds namely,

1. Statutory Meeting,
2. Annual General Meeting,
3. Extraordinary General Meeting, and
4. Class Meeting.

The chart given below gives a classification of company meetings.

1. Statutory Meeting

Every public company having share capital must convene a general meeting of shareholders
within a period of not less than one month and not more than six months after the date on which
it is authorised to commence its business. This is the first meeting of the shareholders of the
company and it is held once in the whole life of the company.

The following companies need not to hold statutory meeting:

a. Private company.
b. Company limited by Guarantee having no share capital.
c. Unlimited liability company.
d. A public company which was registered as a private company earlier.
e. A company which has been deemed as a public company under Sec. 43 A.

Notice of the Meeting:

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The directors are required to send a notice of the meeting to all the members of the company at
least 21 days before the date of the meeting stating that it is the ‘statutory meeting’ of the
company. If the notice convening this meeting does not name it as the “Statutory Meeting” it will
not Amount to compliance with the provisions of this section.

Objects of Statutory Meeting:

The statutory meeting is held to inform the shareholders about matters relating to incorporation,
allotment of share, the details of the contracts concluded by the company, etc. According to
Stephenson, “Statutory Meeting is convened in order to aord the shareholders an opportunity for
seeing what degree of success has attained the floatation of the company and in order that any
special matters requiring their approval may be laid before them.”

Statutory Report:

The directors are required to prepare and send a report called the ‘Statutory Report’ to every
member of the company at least 21 days before the date of the meeting. If the report is sent later
it shall be deemed to have been duly forwarded if it is so agreed to by a unanimous vote of the
members entitled to attend and vote at the meeting [Sec. 165 (2)]. A copy of this report should be
sent to the Registrar.

The statutory report must set out the following information:

(i) Shares allotted:

The total number of shares allotted distinguishing those allotted as fully or partly paid-up
otherwise than in cash and stating in case of shares partly paid-up the extent to which they are so
paid-up and in either case the consideration for which they have been allotted.

(ii) Cash received:

The total amount of cash received by the company in respect of all the shares allotted,
distinguished as aforesaid.

(iii) Abstract:

An abstract of the receipts of the company and of the payments made thereto, upto a date within
seven days of the date of the report, exhibiting under distinctive headings the receipts of the
company thereto from shares and debentures and other sources the payments thereto and
particulars concerning the balance remaining in hand and an account or estimate of the
preliminary expenses of the company, showing separately any commission, or discount paid or
to be paid on the issue or sale of shares or debentures.

(iv) Directors, auditors and other managerial personnel:

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The names, addresses and occupations of its directors and auditors and also of its manager and’
secretary, if any, and the changes which have occurred since the date of the incorporation.

(v) Contracts:

The particulars of any contract and the modification or the proposed modification of any contract
which is to be submitted for the approval of the members at the meeting.

(vi) Underwriting contract:

The extent to which the underwriting contract, if any, has not been carried out and the reason
therefore.

(vii) Arrears of calls:

The arrears, if any due on calls from any director and the manager.

(viii) Commission and brokerage:

The particulars of any commission or brokerage paid or to be paid to any director or to the
manager in connection with the issue or sale of shares or debentures of the company.

Certification of Report:

The statutory report must be certified as correct by not less than two directors; one of whom shall
be the managing director, if any The auditors of company then shall certify it as correct
regarding the shares allotted, cash received in respect of such shares and the receipts and
payment of the company. [Sec. 165(4)]

A certified copy of the statutory report shall be filed with the registrar for registration
immediately after the same has been sent to the members of the company.[Sec. 165(5)]

2. Annual General Meeting ( section 96 of company act 2013)

The Annual General Meeting is one of the important meetings of a company. It is usually held
once in a year. AGM should be conducted by both private and public ltd companies whether
limited by shares or by guarantee; having or not having a share capital. As the name suggests, the
meeting is to be held annually to transact the ordinary business of the company.

Business to be transacted:-

As per section 102(2) of the Companies Act, 2013, the following business es may be transacted
during AGM:-

1) Ordinary Business [Section 102(2)]

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i. Consideration of financial Statements and reports of board of directors and

Auditors.
ii. Declaration of any Dividend
iii. Appointment of directors in place of retiring one
iv. Appointment of and Fixation of the remuneration of the auditors.

2) Special Business [Section 102(b)], : Apart from the above businesses , the rest are deemed to
be a Special business , transacted during the AGM.

Annual General Meeting is compulsory if,

I. Business of the Company was taken over by Government.

II. Company did not function.
III. Accounts of the Company are not ready

Defaulting in holding Annual General Meeting:

If a Company not holding an Annual General Meeting as per Section 166 , or not complying with
any direction of the Central Government, then the Company and its every officer come in the
Category under section 168 of the Company Act ,2013 and punishable with fine which may
extend to Rs. 50000 and for regular basis it may extend to Rs.2500 for every day .[ Section 168]

3. Extra-ordinary General Meetings (EOGM) section 100

Statutory Meeting and Annual General Meetings are called the ordinary meetings of a company.
All other general meetings other than these two are called Extraordinary General Meetings. As
the very name suggests, these meetings are convened to deal with all the extraordinary matters,
which fall outside the usual business of the Annual General Meetings.

EOGMs are generally called for transacting some urgent or special business, which cannot be
postponed till the next Annual General Meeting. Every business transacted at these meetings is
called Special Business.

Who can Call for an EGM

The members/shareholders of a company can call for an extraordinary general meeting.

However, only certain members with a significant stake in the company are allowed to call for an
EGM. They are listed in the Companies Act,2013 as follows.

I. In the case of a company having a share capital, members holding not less than one-tenth
of such paid-up capital of the company that carry voting rights in regard to that matter as
on the date of depositing the requisition;
II. In the case of a company not having a share capital, members holding not less than one-
tenth of the total voting power in regard to that matter as at the date of deposit of the
requisition.
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III. EGM called by Board. Upon the receival of a valid requisition, the Board has a period of
21 days to call for an EGM. The EGM must be then held with 45 days from the day of
the EGM being called.
IV. EGM called by the requisitionists – In case the Board fails to call for an EGM, it can be
called for by the requisitionists themselves during a period of 3 months from the day the
requisition was deposited. If the EGM is held within this specified period of 3 months, it
can be adjourned to any day in the future after the 3 months.

Essentials of a Valid Requisition

The essentials of a valid requisition are listed down below as follows:

I. Specify the issue for which the meeting is called

II. Signed by requisitionists; and
III. Must be deposited at the company’s registered office.

Requirements for holding an EGM

A notice period of 21 days must be given to the members. However, there is an exception to this
rule. Where if 95% of the voting members consent, the EGM can be held at a shorter notice.

Quorum Required for EGM

Unless the company’s Articles state otherwise, the following number of members are required
for a quorum.

I. In the case of a public company: five members personally present; and

II. In the case of any other company: two members personally present.

This meeting may also be called to discuss the following:

I. Alteration of any clause of Memorandum of Association; or

II. Changes in the Articles of Association; or
III. Scheme of the reduction of share capital etc.

4. Class Meetings

Class meetings are those meetings, which are held by the shareholders of a particular class of
shares e.g. preference shareholders or debenture holders.

Class meetings are generally conducted when it is proposed to alter, vary or affect the rights of a
particular class of shareholders. Thus, for effecting such changes it is necessary that a separate
meeting of the holders of those shares is to be held and the matter is to be approved at the
meeting by a special resolution.
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Qs. Requisition of valid meetings

Ans. The following are the requisites for calling and conducting a valid general meeting:

1. Proper Authority:

The authority to call a general meeting is the board of directors of the company. The notice of
the meeting should be issued under their authority, granted at a duly constituted meeting of the
board or passing a resolution by circulation. A single director has no power to convene a
meeting. The secretary of the company has no authority to call a general meeting unless the
Board resolves and authorises him to do so.

In case the meeting of the Board of directors itself is unlawful e.g. where rightful directors are
prevented from attending the directors’ meeting, the decision taken by the Board at such meeting
to call the general meeting, shall also be unlawful.

Where, however, the meeting at which the directors decide to call a general meeting is not
properly constituted (e.g. there is some defect in the appointment or qualification of the
directors), and the Board acts bona fide, a general meeting called in pursuance of a resolution
passed at such directors’ meeting, is not necessarily invalid.

However, under certain circumstances, the requisitionists, the Central Government or the
Company Law Board (the Tribunal after its constitution) may call a general meeting in case of
default by the directors.

2. Notice:

Notice to whom? Notice of every general meeting should be given to the following persons:

a. Every member of the company.

b. Every person entitled to a share in consequence of the death or insolvency of a
member.
c. Auditor or auditors of the company [Sec. 172 (2)].

Deliberate omission to give notice to a single member may invalidate the meeting. However, an
accidental omission to give notice to or non-receipt of it, by a member will not invalidate the
meeting [Sec. 172 (3)].

Length of Notice:

A proper notice in writing to every member of the company is required by law for the holding of
every valid meeting. Notice must be given even though a member has waived his right to have
notice. It must disclose the purpose for which the meeting is called. It must be given at least 21
clear days before the date of the meeting.
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In calculating 21 days, the date of receipt of notice and the date of the meeting should be
excluded [Sec. 171 (1)]. Articles may provide for a notice longer than 21 days, but not shorter
than 21 days. The notice shall be deemed to have been received by a member at the expiry of 48
hours from the time of posting [Sec. 53 (2) (b)].

A general meeting may be called at a shorter notice, if,

a. In the case of an annual general meeting, all members entitled to vote thereat
agree;
b. In the case of any other meeting (a) if the company has a share capital, members
holding 95% of the paid-up share capital carrying voting rights exercisable at the
meeting agree, (b) if the company does not have a share capital, members holding
at least 95% of the total voting power exercisable at the meeting agree.

The consent of the members for shorter notice may be obtained either at the meeting or before
the meeting. It may also be obtained after the meeting and the post consent will validate the
resolution originally passed without sufficient notice. It is usual to obtain it by asking the
shareholders to sign a form of consent.

Service of Notice:

Company may serve notice on the members either personally or by prepaid post or by
advertisement in the newspaper. It must be properly addressed. Service of notice’ by
advertisement shall be deemed to be complete the day when the advertisement appears in the
newspaper on both resident and non-resident members.

Explanatory statement need not be advertised, but the fact that the same has been sent to the
members through post shall be mentioned in the advertisement. In case of joint- holding of
shares, notice to first named shareholder would be sufficient.

When the meeting is adjourned for 30 days or more and the new business is to be transacted at
the adjourned meeting, a fresh notice has to be given.

Contents of the notice

The notice must contain the following particulars:

I. It should specify the name of the meeting, the place, day and hour of the meeting and the
meeting to be valid must be held at the place and time specified. Annual General Meeting
should be held on a working day during business hours. However, a meeting may
continue beyond business hours. Extraordinary general meeting can be held on any day
including a holiday and not necessarily during working hours.
II. It should also specify the nature of the business to be conducted at the meeting. Section
173 puts business into two categories:
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(a) General business:

In case of annual general meeting, all business relating to : (i) the consideration of annual
accounts, (ii) the declaration of a dividend, (iii) the appointment of directors in place of those
retiring, and (iv) the appointment of, and the fixing of remuneration of the auditors, are
considered as general business.

(b) Special business:

Any other business at an annual general meeting and all businesses in case of any other meeting
are regarded as special business. If special business is to be transacted at a general meeting, an
‘explanatory statement’ giving all the material facts of the item of special business including the
particulars of interest, if any, of every director or other managerial personnel, must be annexed to
the notice.

Agenda:

Agenda gives guidance and information as to the business to be discussed and transacted in the
meeting. It sets out the chronological sequence in which the various items of business shall be
taken up in the meeting for discussion. The sequence should not be changed unless agreed to by
the members present. Routine items should be put first and debatable items later. Similar items
should be placed closer to each other.

Agenda is prepared by the Secretary in consultation with the Chairman or the Managing
Director. Agenda must be clear and complete. A company may be restrained from transacting
that business which is not mentioned in the agenda.

3. Place of the Meeting:

Annual General Meeting. The annual general meeting is to be held by a public company at its
registered office or at some other place in the same city, town or village where the registered
office of the company is situated. However, the Central Government has the power to grant
exemption to any company from this provision.

A private company can hold its annual general meeting at any other place if:

I. It has fixed the place of the meeting by the articles; or

II. It has fixed the place of the meeting by a resolution agreed by all the members.

A company registered under section 25 of the Companies Act can hold the annual general
meeting at any place. In case of a Government company, meeting can be held at any other place
with the approval of the Ministry of Corporate Affairs.

4. Quorum:
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Minimum number of members required to constitute a valid meeting and to transact business
therein is called ‘quorum’. No meeting can be valid without quorum. Any resolution passed at a
meeting without quorum shall be invalid. Quorum is to be fixed by the Articles of Association.
But unless the articles provide for a large number, 5 persons personally present in the case of a
public company and 2 members personally present in the case of private company shall be the
quorum for a meeting of a company. [Section 174 (2)]. Thus, articles cannot provide a smaller
quorum than what has been provided in section 174 (1). Besides that, for the purpose of quorum,
only members present in person and not by proxy are counted.

If within half an hour from the time appointed for holding a meeting of the company, a quorum
is not present, the meeting, if called on the requisition of members, shall stand dissolved [Sec.
174 (3)]. In any other case, the meeting shall stand adjourned to the same day in the next week,
at the same time and place, or to such other day and at such other time and place as the Board
may determine [Sec. 174 (4)].

Can a single Member Constitute a Valid Meeting?

Ordinarily, a single member present cannot form a quorum, as a single member cannot constitute
a meeting. This is because meeting prima facie means coming together of two or more than two
persons. The Companies Act also uses the expression “members” which shows that more than
one member is expected to be present.

5. Chairman:

A general meeting of the company is to be presided over by a chairman who regulates and
supervises the proper conduct of the business at a meeting. He decides all incidental questions
arising in the course of the proceedings of the meeting. Chairman should act bonafide and in the
best interest of the company as a whole. Articles usually provide the mode of appointment of the
chairman of a meeting. If the articles do not provide otherwise, the members personally present
at the meeting shall elect one of themselves to be the chairman thereof on a show of hands [Sec.
175 (2)].

If a poll is demanded on the election of the chairman, it must be taken forthwith and the
chairman elected on a show of hands can exercise all the powers in this connection [Sec. 175
(2)]. If some other person is elected chairman as a result of the poll, he shall be the chairman for
the rest of the meeting [Sec. 175 (3)].

Articles 50, 51 and 52 of Table A provides on the appointment of a chairman:

I. 50. The chairman, if any, of the Board shall preside over as chairman at every general
meeting of the company.
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II. 51. If there is no such chairman, or if he is not present within fifteen minutes after the
time appointed for holding the meeting, or is unwilling to act as chairman of the meeting,
the directors present shall elect one of their members to be the chairman of the meeting.
III. 52. If at any meeting no director is willing to act as chairman or if no director is present
within fifteen minutes after the time appointed for holding the meeting, the members
present shall choose one of their members to be the chairman of the meeting.

Chairman of the original meeting shall be the chairman of the adjourned meeting also unless
validly removed. The chairman of a meeting may be appointed by the Company Law
Board/Tribunal in cases where there are differences among the shareholders, and a peaceful
meeting under the chairmanship of a person appointed by either group is impossible.

Powers of a Chairman:

1. The chairman has prima facie authority to decide all questions which arise at a meeting and
which require decision at the time.

2. The entry in the minute’s book of the chairman’s decision is evidence of the decision of the
meeting.

3. The chairman has a right to decide priority amongst speakers, to demand poll, to exercise
casting vote, to expel an unruly member and he may, with the support of the majority, apply
closure to a discussion after it has been reasonably debated.

4. He can adjourn a meeting when it is impossible, by reason of disorder or other like causes, to
conduct the meeting and complete business.

Casting Vote:

Articles of Association may give an additional or second vote to the chairman of the company,
over and above his right to vote as an ordinary member. In the case of a tie, i.e. equality of votes,
chairman may use the casting vote to decide the matter in one way or the other.

Duties of a Chairman:

The chairman must take care to see that proper discipline is maintained at the meeting, that the
proceedings are conducted in a proper manner, that proper opportunity is given to the members
to express their views, that the voting is fair, and that the proceedings of the meeting are properly
and correctly recorded in the minutes book.

The chairman should act bona fide according to his best ability and judgment and without any
prejudices. He should see that the meeting is duly convened and properly held.

6. Proxy:
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The term proxy has two meanings:

I. A personal representative of the member at a meeting i.e. the person authorised to act or
vote for another at a meeting of the company, and
II. The instrument by which a person is appointed to act for another at a meeting of the
company, since a representative can be appointed only in writing.

The following are the provisions of the Companies Act regarding appointment and rights of
proxy:

I. Law entitles every member of a company to appoint a person as his proxy to attend and
vote at company meeting instead of himself [Sec. 176 (2)]. However, a member of a
company having no share capital does not have this right unless its articles provide
otherwise [Sec. 176 (4)].
II. A member of a private company is not entitled to appoint more than one proxy to attend
on the same occasion unless its articles provide otherwise. But a member of a public
company may appoint more than one proxy i.e., he may appoint one proxy in respect of
certain shares held by him and a different proxy for other shares held by him.
III. Any person can be appointed as a proxy whether he is a member of the company or not.
In case the proxy is not a member of the company, he shall have no right to speak at the
general meeting unless the articles otherwise provide. There is, however, no provision
preventing a proxy putting questions in writing and sending the same to the chairman for
answer.
IV. A proxy is ordinarily entitled to vote only on a poll. But he may vote on voting by show
of hands if the articles provide. Besides that, he may demand or join in demanding a poll
[Sec. 176 (1) (n)]. However, he shall have no right to inspect proxy forms or the minutes
of the meeting.
V. Proxy must be appointed by an instrument in writing, duly stamped and signed by the
member of the company. A blank but stamped proxy is valid and may be completed by
the person authorised to do so.
VI. Every notice of a meeting must appropriately mention that a member is entitled to
appoint a proxy and that the proxy need not be a member [Sec. 176 (2)]. A company
cannot send invitation to members to appoint any one or more persons as proxies.
VII. A proxy is revocable. It can be revoked at any time. Death of the shareholder appointing
a proxy will, in the absence of provisions in the Articles revoke the authority of the
proxy. Shareholder may himself attend and vote in the meeting. Vote tendered by the
proxy in such a case will not be accepted because the need for exercising the proxy had
never arisen. Proxy in this case shall stand revoked impliedly.
VIII. The relationship between the member and the proxy is that of principal and agent. A
minor member has no capacity to appoint a proxy. He can act only through his guardian.
However, a minor can be appointed a proxy.
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7. Voting at General Meeting:

The decisions at the meetings are taken by way of passing the resolutions. Every proposed
resolution is discussed by the members of the company. Members have the right to move
amendments to the proposed resolutions provided the amendments are germane to the proposed
resolution.

After a proposed resolution has been discussed it is put to vote. Every member has a right to vote
on such resolutions. Shareholders may exercise their voting rights in their best interests with
complete freedom.

They are allowed to vote even if their interest is in conflict with the interest of the company. A
director may vote in the shareholders’ meeting even though his interest in the subject matter is
opposed to the interest of the company. Only members whose names appear in the Register of
Members shall have the right to vote.

Share warrant holders, executor of a deceased member, receiver of an insolvent member cannot
exercise any right to vote, unless registered as a member. However, a person who becomes a
member between the date of original meeting and the adjourned meeting may vote at the
adjourned meeting. Members who were not present at the time of voting by show of hands may
vote at a poll.

A company cannot prohibit any member from exercising his voting right on the ground that he
has not held his shares or other interests in the company for any specified period before the
meeting or on any other ground (Sec. 182).

However, the articles may provide that a member shall not be entitled to exercise any voting
rights, in respect of any shares registered in his name on which he has not paid all calls or other
sums presently payable by him or in regard to which the company has exercised any right of lien
(Sec. 181).

The preference shareholders have right to vote only on such resolutions which directly affect
them; and when their dividends are in arrears for a specified number of years [Sec. 87(2)].

Voting may be either by a show of hands or by a poll.

Qs. Majority Powers and Minority Rights,

Ans. In the corporate world, all democratic decisions and management of a company are made
with the majority rule which is deemed to be fair and justified. Majority power has great
importance in the working of a company and the “Courts will not generally intervene at the
instance of the shareholder in matters of internal administration. Courts will not interfere with
the management of a company by its Board of Directors so long as they are acting within the
powers conferred on them under the articles of the company.`
 78

It follows that the majority of the members enjoy the supreme authority to exercise the powers of
the company and generally to control its affairs and the minority shareholders have to concede to
the majority decision. This, however, may lead to a possibility that the members having majority
vote may tend to be oppressive towards the minority shareholders misusing their majority
strength. Because of this reason, it has been said that “the protection of the minority shareholders
within the domain of corporate activity constitutes one of the most difficult problems facing
modern company law. The aim must be to strike a balance between effective control of the
company and the interests of the small individual shareholders. To overcome this problem faced
by the minority, the Companies Act, 2013 came up with the solution to tackle the problems
which are usually faced by the minority shareholders.

Rights of shareholders

I. Recognition of basic shareholder rights

II. Shareholders have the right to participate in decisions concerning fundamental corporate
changes
III. Voting rights of shareholders
IV. Disclosure of disproportionate voting rights of certain shareholders to obtain a degree of
control
V. Markets for corporate control should be allowed to function
VI. Shareholders should consider the costs and benefits of exercising their voting rights.

Powers of majority

According to section 47 of the companies act, 2013, holding any equity shares shall have a right
to vote in respect of such capital on every resolution placed before the company. Member’s right
to vote is recognized as the right of property and the shareholder may exercise it as he thinks fit
according to his interest and choice. This rule is modified in certain cases. A special resolution
requires a majority of 3/4th of those votes at the meeting. Therefore, where the act or the articles
require a special resolution for any purpose, a 3/4th majority is necessary and a simple majority
is not enough. The resolution of a majority of shareholders passed at a duly convened and held
general meeting, upon any question with which the company is legally competent to deal, is
binding upon the minority and consequently upon the company.

The principle of non-interference (rule in foss v. harbottle)

The principle that the will of the majority should prevail over the will of the minority in matters
of internal administration of the company was founded in the case of Foss v. Harbottle which is
today known as the rule in Foss v. Harbottle. According to this principle, the courts will not,
interfere at the instance of the shareholders, in the management of a company it’s direct so long
as they are acting within the powers conferred on them by the articles of the company. The rule
states that “the proper plaintiff in an action in respect of a wrong done to the company or
association of persons is prima facie the company or association itself. The court will not
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interfere in the internal affairs of a company at the instance of the minority if the irregularities
complained of could be legally done or rectified by the majority.

The restrictive character of the Rule in Foss v. Harbottle has led to the creation of statutory
remedies for minority shareholders. The most impressive thing about this is the permission to go
to the court for prevention of oppression or mismanagement. The minority shareholders are
protected under:

The common law

The provision of the companies act, 2013 are as follows:

Recognition of the separate legal personality of the company: If a company has suffered
some injury and not the individual members, it is the company itself that should seek to redress.

Need to preserve right of the majority to decide: The principle in Foss v. Harbottle preserves
the right of the majority to decide how the affairs of the company shall be conducted. It is fair
that the wishes of the majority should prevail.

Multiplicity of futile suits avoided: If every individual member were permitted to sue anyone
who had injured the company through a breach of duty, there could be as many suits as there are
shareholders. Legal proceedings would never cease, and there would be enormous wastage of
time and money.

Litigation at the suit of a minority futile if the majority does not wish it: If the irregularity
complained of is one which can be subsequently ratified by the majority it is futile to have
litigation about it except with the consent of the majority in a general meeting.

Exceptions to rule

The hardship and injustice that arise from the strict application of the rule on minority
shareholders, various exceptions were recognized under which the rule may be excluded in its
application. The four established exceptions to the rule at common law and the two exceptions in
decided cases.

Ultra vires

In the first place, the powers of the majority of members are subject to the provisions of the
company’s memorandum or articles. A company, therefore, cannot legally authorized or ratify
any act which being outside the ambit of the memorandum, is ultra vires the company – such acts
being illegal, there can be no question of the transaction being confirmed by any majority and a
shareholder is entitled to bring an action against the company and its officers in respect of such
matters.

Acts Requiring Special Resolution

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Generally, the decisions on internal affairs of the company are taken by passing an ordinary
resolution at the general meeting. But there are certain acts which can be done only by passing
special resolution. Therefore if the majority purports to do any such act by passing the ordinary
resolution as opposed to the special resolution required by the law, any member or members can
bring an action to restrain the majority. Accordingly, the rule does not prevent an individual
member from suing if the irregular act in respect of which he is suing is one which could validly
be done or sanctioned not by a simple majority of the members of the association, but only by
some special majority. This exception also covers a breach of any particular procedure laid down
in articles or constitution or rules of the organization.

Invasion of Personal Rights

the rule in Foss v. Harbottle is concerned with corporate rights-that is, the rule applies only to
cases arising as a result of the invasion of the rights of a company, in other words, any matter
relied upon by a defendant as constituting a cause of action to which the rule applies must be one
which properly belongs to the general body of members of the company in question as opposed
to a cause of action which some individual member could assert in his own right. The rule would
not apply to individual members who can establish that their personal rights, as distinct from
those of the union.

Fraud on the Company or on the Minority

This appears to be the most important exception. At common law, fraud would include
dishonesty and deceit. “any act which may amount to an infraction of fair dealing; or abuse of
confidence or unconsciously conduct, or abuse of power as between a trustee and his
shareholders in the management of a company”. To succeed, plaintiff must proof (a) fraud on the
minority and (b) that the wrongdoers are in control of the company and this prevents the
company itself from bringing action in its own name.

Qs. Prevention of Oppression and Mismanagement.

Ans. Chapter XVI of the Companies Act, 2013 deals with the provisions relating to prevention
of oppression and mismanagement of a company. Oppression and mismanagement of a company
mean that the affairs of the company are being conducted in a manner that is oppressive and
biased towards the minority shareholders or any member or members of the company. To
prevent the same, there are provisions for the prevention and mismanagement of a company.

Meaning of oppression and Mismanagement

The word oppression in common parlance refers to a situation or an act or instance of oppressing
or subjecting to cruel or unjust impositions or restraints.
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According to Lord Keith,” Oppression means, lack of morality and fair dealings in the affairs of
the company which may be prejudicial to some members of the company

The term mismanagement refers to the process or practise of managing ineptly, incompetently,
or dishonestly.

However it is to be noted that the terms are not defined under the companies act and is left to
the discretion of the court to decide on the facts of the case whether there is oppression or
mismanagement of minority or not.

Instances which can be termed as mismanagement

1. Preventing directors from functioning

2. Violations of statutory provisions

3. Violations of provisions of MOA & AOA of the company

4. Misuse of funds etc

Application to tribunal for relief in cases of oppression, etc

According to section 241, any member of the company who complains that the affairs of the
company are being conducted in a manner that is prejudicial to public interest or in a manner
prejudicial or oppressive to him or any material change that is being brought about by, or in the
interests of, any creditors, including debenture holders or any class shareholders of the company
etc. that would materially affect the management of the company and would make its affairs
prejudicial to public interests or any of its member or class of members, may make an
application to the tribunal in accordance with the provisions of section 244 of the Act.

The central government may also make an application to the tribunal for its orders where it
thinks that the affairs of the company are prejudicial to public interest.

Right to apply under section 241

According to section 244 of the Act, the following people can apply for the orders from the
tribunal-

I. In the case of a company having share capital of not less than one hundred members of
the company or not less than one-tenth of the total number of its members, whichever is
less, or any member or members holding not less than one- tenth of the issued share
capital of the company, subject to the condition that the applicant or applicants has or
have paid all calls, and other sums due on his or their shares.
II. In the case of a company not having a share capital, not less than one- fifth of the total
number of its members.
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III. Section 245 of the act talks about class action suits, wherein the class of members having
a similar cause of action can file an application before the tribunal to seek necessary
orders.

Powers of Tribunal Companies Act, 2013 Sec 242.

When application filled under Sec 241

I. That the company’s affairs have been or are being conducted in a manner prejudicial or
oppressive to any member or members.
II. That to wind up the company would unfairly prejudice such member or members. The
Tribunal may, with a view to bringing to an end the matters complained of, make such
order as it thinks fit.

Without prejudice to the generality of the powers under sub-section (1)

a. The regulation of the conduct of affairs of the company in future;

b. The purchase of shares or interests of any members of the company by other members
thereof or by the company;
c. In the case of a purchase of its shares by the company as aforesaid, the consequent
reduction of its share capital;
d. Restrictions on the transfer or allotment of the shares of the company;
e. the termination, setting aside or modification, of any agreement, howsoever arrived at,
between the company and the managing director, any other director or manager, upon
such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in
the circumstances of the case;
f. The termination, setting aside or modification of any agreement between the company
and any person other than those referred to in clause (e)

Interim Order (Section 242, Sub – Section 4):

The Tribunal may, on the application of any party to the proceeding, make any interim order
which it thinks fit for regulating the conduct of the company’s affairs upon such terms and
conditions as appear to it to be just and equitable. Section 242 provides for specific kinds of
orders that can be passed. Few of them are as follows:

a. Regulation of conduct of affairs

b. Purchase of shares of members by other members/ company
c. Consequential reduction on capital
d. Termination or modification of contract with managing director, manager or director
e. Termination of contract/ arrangement with other parties.
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Penalty Provision in the Companies Act, 2013

Sec 229. The Penalty for furnishing a false statement, mutilation, destruction of documents.

Where a person who is required to provide an explanation or make a statement during the course
of inspection, inquiry or investigation, or an officer or another employee of a company or other
body corporate which is also under investigation,

(a) Destroys, mutilates or falsifies, or conceals or tampers or unauthorized removes, or is a

party to the destruction, mutilation or falsification or concealment or tampering or unauthorized
removal of, documents relating to the property, assets or affairs of the company or the body
corporate;

(b) Makes, or is a party to the making of, a false entry in any document concerning the
company or body corporate; or

(c) Provides an explanation which is false or which he knows to be false, he shall be

punishable for fraud in the manner as provided in section 447.

Qs. Winding up: Meaning and Methods

The entire procedure for bringing a lawful end to life of company is divided into two stages.
These two stages are winding up and dissolution. Winding up of company is defined as a process
by which the life of a company is brought to an end and its property administered for benefit of
its members and creditors. It is the last stage, putting an end to life of a company. The main
purpose of winding up is to realize the assets and make the payments of company’s debts fairly.
Thus, winding up is the process by which management of a company’s affairs is taken out of its
directors, its assets are realized by a liquidator and its debts are discharged out of proceeds of
realization.

Meaning of Winding Up:

Winding up is a means by which the dissolution of a company is brought about and its assets are
realised and applied in the payment of its debts. After satisfaction of the debts, the remaining
balance, if any, is paid back to the members in proportion to the contribution made by them to
the capital of the company.

Definition

As per Section 2(94A) of the Companies Act, 2013, “winding up” means winding up under this
Act or liquidation under the Insolvency and Bankruptcy Code, 2016.
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Under the Companies Act, 2013, winding up applications could be made on account of “inability
to pay debts”. The expression “inability to pay debts” has been interpreted by Andhra Pradesh
High Court in the case of Reliance Infocomm Limited v. Sheetal Refineries Private
Limited, to mean a situation where a company is commercially insolvent, i.e. the existing and
provable assets would be insufficient to meet the existing liabilities.

Meaning of Dissolution of a Company:

A company is said to be dissolved when it ceases to exist as a corporate entity. On dissolution,

the company’s name shall be struck off by the Registrar from the Register of Companies and he
shall also get this fact published in the Official Gazette. The dissolution, thus puts an end to the
existence of the company.

Difference between Dissolution & Winding Up of a Company:

S. No. Winding Up Dissolution

1. Winding up is one of the methods Dissolution is the end result of winding

by which dissolution of a company up.
is brought about.

2. Legal entity of the company Dissolution brings about an end to the

continues at the commencement of legal entity of the company
the winding up.

3. A company may be allowed to Company ceases to exist on its dissolution.

continue its business as far it is
necessary for the beneficial
winding up of the company

Winding up under companies act, 2013

There are two modes of winding up under the Companies Act, 2013 provides for the provisions
relating to commencement of winding up.

1. Winding up by Tribunal
2. Voluntary winding up

1. Winding up by Tribunal

National Company Law Tribunal can be initiated by an application by way of petition for
winding up order.
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a. It should be resorted to only when other means of healing an ailing company are of
absolutely no avail.
b. Remedies are provided by the statute on matters concerning the management and running
of the company.
c. It is primarily the NCLT which has jurisdiction to wind up companies under the
Companies Act, 2013.
d. There must be strong reasons to order winding up as it is a last resort to be adopted.

Grounds on which a Company may be wound up by the Tribunal

Under Section 271[1], a company may be wound up by the tribunal if-

I. Company is unable to pay the debts;

II. If the company has, by special resolution, resolved that the company be wound up by the
Tribunal;
III. If the company has acted against the interests of sovereignty and integrity of India, the
security of the State, friendly relations with foreign States, public order;
IV. If the Tribunal has ordered the winding up of the company under Chapter XIX;
V. If on an application made by the Registrar or any other person authorized by the Central
Government by notification under this Act, the tribunal is of opinion that affairs of the
company have been conducted in a fraudulent manner or the company was formed for
fraudulent or unlawful purpose or the persons concerned in formation misfeasance or
misconduct in connection therewith and that it is proper that company be wound up;
VI. If the company has made default in filing with the Registrar its financial statements or
annual returns for immediately preceding five consecutive financial years;
VII. If the tribunal is of the opinion that it is just and equitable that the company should be
wound up.

Inability to pay debts – A company is deemed to be unable to pay the debts under Section 271
(2) of the Companies Act, 2013 if a creditor to whom company has to pay an amount exceeding
Rs. 1 lakh has served a notice at the registered office of the company by registered post or
otherwise, which requires the company to pay the due amount and the company has failed to pay
the sum within 21 days or If any execution or other process issued by decree of court or order in
creditor’s favour is returned unsatisfied in whole or in part or if the tribunal is satisfied that the
company is unable to pay its debts and the Tribunal shall take into account the contingent and
prospective liabilities of the company while determining whether the company is unable to pay
its debts.

Who may file petition for winding up

A petition for winding up may be presented by any of the following persons under Section 272
of The Companies Act, 2013-
 86

I. The company; or
II. Any creditor or creditors, including any contingent or prospective creditor or creditors; or
III. Any contributory; or
IV. All or any of the above three specified parties; or
V. The Registrar; or
VI. Any person authorised by Central Government in this behalf;
VII. By the Central Government or State Government in case of Company acting aginst the
interest of sovereignty and integrity of India.
VIII. As per Section 272 of the Companies Act, 2013, within the meaning of creditor comes a
secured creditor, holder of debentures, trustee for holder of debentures.
IX. A contributory can present the petition of winding up of company even if he may be
holder of fully paid up shares or that company may have no assets or no surplus to
distribute among shareholders after the satisfaction of its liabilities and some shares were
originally allotted to him or have been held by him and registered in his name for 6
months during immediately preceding 18 months before commencement of winding up.

A petition for winding up shall be admitted by the Tribunal only if it is accompanied by

statement of affairs in such form and in such manner as may be prescribed.

Under this section, a copy of the petition shall also be filed with the Registrar who shall submit
his views to the Tribunal within 60 days of receipt of petition.

Powers & Functions of the Tribunal

Order to file objections along with statement of affairs within 30 days

As per Section 274 of the Companies Act, 2013 on the filing of petition for winding up by any
person other than the company, if the tribunal is satisfied, it shall direct the company by an order
to file objections along with statement of affairs within 30 days, which could get extended by
another 30 days in special circumstances.

Appointment of Liquidator

As per Section 275 of the Companies Act, 2013 an official liquidator or a liquidator from panel
shall be appointed by the Tribunal at the time of passing of winding up order. A panel consisting
of CS/CS/Advocates and other notified professionals with at least 10 years experience in
company matters is maintained by the Central Government.

As per Section 281 of the Companies Act, 2013, a report shall be submitted by Liquidator within
60 days to the Tribunal, containing details such as-

I. Nature and details of assets of company with their location and value;
II. amount of capital issued, subscribed & paid up;
III. the existing and contingent liabilities of the company including names and other details;
 87

IV. the debts due to company and names, address;

V. list of contributories with amount details; details of trademark, intellectual properties, if
owned by company;
VI. details of contracts, joint ventures and collaborations, if any;
VII. details of holding and subsidiary company, if any; details of legal cases filed by or
against the company;
VIII. any information which the tribunal may direct or liquidator may consider necessary.

On consideration of the report of Liquidator, Tribunal shall fix the time limit within which entire
proceedings shall be completed and company be dissolved. The Tribunal may also order a sale of
Company as a going concern or its assets or part thereo. After passing of winding up order by the
Tribunal, the Tribunal shall settle list of contributories, cause rectification of register of members
in all cases where required and shall cause assets of the company to be applied to discharge its
liability.

Voluntary Winding up

In voluntary winding up, Company and its creditors settle their affairs without going to Court.
One or more liquidators are appointed by company in general meeting for purpose of winding
up. A voluntary winding up commences from date of passing of resolution for voluntary winding
up, a petition is presented for winding up by the Court. Section 304 deals with the circumstances
in which a company may be wound up voluntarily.

The winding up of a company can also be done voluntarily by the members of the Company, if:

I. If the company passes a special resolution for winding up of the Company.

II. The company in general meeting passes a resolution requiring the company to be wound
up voluntarily as a result of the expiry of the period of its duration, if any, fixed by its
articles of association or on the occurrence of any event in respect of which the articles of
association provide that the company should be dissolved.

Steps for Voluntary Winding up of a Company

The following are the steps for initiating a voluntary winding up of a Company:

Step 1: Convene a Board Meeting with two Directors or by a majority of Directors. Pass a
resolution with a declaration by the Directors that they have made an enquiry into the affairs of
the Company and that, having done so, they have formed the opinion that the company has no
debts or that it will be able to pay its debts in full from the proceeds of the assets sold in
voluntary winding up of the company. Also, fix a date, place, and time agenda for a General
Meeting of the Company after five weeks of this Board Meeting.

Step 2: Issue notices in writing calling for the General Meeting of the Company proposing the
resolutions, with suitable explanatory statement.
 88

Step 3: In the General Meeting, pass the ordinary resolution for winding up of the company by
ordinary majority or special resolution by 3/4 majority. The winding up of the company shall
commence from the date of passing of this resolution.

Step 4: On the same day or the next day of passing of resolution of winding up of the Company,
conduct a meeting of the Creditors. If two thirds in value of creditors of the company are of the
opinion that it is in the interest of all parties to wind up the company, then the company can be
wound up voluntarily. If the company cannot meet all its liabilities on winding up, then the
Company must be wound up by a Tribunal.

Step 5: Within 10 days of passing of resolution for winding up of company, file a notice with the
Registrar for appointment of liquidator.

Step 6: Within 14 days of passing of resolution for winding up of company, give a notice of the
resolution in the Official Gazette and also advertise in a newspaper with circulation in the district
where the registered office is present.

Step 7: Within 30 days of General Meeting for winding up of company, file certified copies of
the ordinary or special resolution passed in the General Meeting for winding up of the company.

Step 8: Wind up affairs of the company and prepare the liquidators account of the winding up of
the company and get the same audited.

Step 9: Call for final General Meeting of the Company.

Step 10: Pass a special resolution for disposal of the books and papers of the company when the
affairs of the company are completely wound up and it is about to be dissolved.

Step 11: Within two weeks of final General Meeting of the Company, file a copy of the accounts
and file an application to the Tribunal for passing an order for dissolution of the company.

Step 12: If the Tribunal is satisfied, the Tribunal shall pass an order dissolving the company
within 60 days of receiving the application.

Step 13: The company liquidator would then file a copy of the order with the Registrar.

Step 14: The Registrar, on receiving the copy of the order passed by the Tribunal then publishes
a notice in the Official Gazette that the company is dissolved.
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Unit-IV

Qs. SEBI Act, 1992

Ans The Securities and Exchange Board of India (SEBI) was officially appointed as the
authority for regulating the financial markets in India on 12th April 1988. It was initially
established as a non-statutory body, i.e. it had no control over anything but later in 1992, it was
declared an autonomous body with statutory powers. SEBI plays an important role in regulating
the securities market of India. Thereby it is important to know the purpose and objective of
SEBI.

Why was SEBI formed?

At the end of the 1970s and during 1980s, capital markets were emerging as the new sensation
among the individuals of India. Many malpractices started taking place such as unofficial self-
styled merchant bankers, unofficial private placements, rigging of prices, non-adherence of
provisions of the Companies Act, violation of rules and regulations of stock exchanges, delay in
delivery of shares, price rigging, etc.

Due to these malpractices, people started losing confidence in the stock market. The government
felt a sudden need to set up an authority to regulate the working and reduce these malpractices.
As a result, the Government came up with the establishment of SEBI.

The Organisational Structure of SEBI:

1. SEBI is working as a corporate sector.
2. Its activities are divided into five departments. Each department is headed by an
executive director.
3. The head office of SEBI is in Mumbai and it has branch office in Kolkata, Chennai and
Delhi.
4. SEBI has formed two advisory committees to deal with primary and secondary markets.
5. These committees consist of market players, investors associations and eminent persons.
Role of SEBI

SEBI acts as a watchdog for all the capital market participants and its main purpose is to provide
such an environment for the financial market enthusiasts that facilitate efficient and smooth
working of the securities market.

To make this happen, it ensures that the three main participants of the financial market are taken
care of, i.e. issuers of securities, investor, and financial intermediaries.

Issuers of securities

These are entities in the corporate field that raise funds from various sources in the market. SEBI
makes sure that they get a healthy and transparent environment for their needs.
 90

Investor

Investors are the ones who keep the markets active. SEBI is responsible for maintaining an
environment that is free from malpractices to restore the confidence of general public who invest
their hard earned money in the markets.

Financial Intermediaries

These are the people who act as middlemen between the issuers and investors. They make the
financial transactions smooth and safe.

Objectives of SEBI

Following are the main objectives of SEBI:

1. Protection :

To guide, educate, and to protect the rights and interests of the investors.

2. Competitive and Professional:

To make the intermediaries like merchant bankers, brokers etc. competitive and professional by
regulating their activities and developing a code of conduct.

3. Prevention of Malpractices:

To prevent trading malpractices.

4. Balancing :

To establish a balance between statutory regulation and self-regulation by the securities industry.

5. Orderly Functioning:

To promote orderly functioning of the stock exchange and securities industry by regulating them.

Organizational Structure of SEBI:

The SEBI Board consist of nine members-

I. One Chairman appointed by the Government of India

II. Two members who are officers from Union Finance Ministry
III. One member from Reserve Bank of India
IV. Five members appointed by the Union Government of India.

Functions of SEBI

We can classify the functions of SEBI in three categories:-

 91

1. Protective functions
2. Developmental functions
3. Regulatory functions.

1. Protective Functions:

As the name suggests, the main focus of this function of SEBI is to protect the interest of
investor and security of their investment

As protective functions SEBI performs following functions:

a) SEBI checks Price Rigging:

Price Rigging means some people manipulate the prices of securities for inflation or depressing
the market price of securities. SEBI prohibits such practice to avoid fraud and cheating which
can happen to any investor.

b) SEBI prohibits Insider trading:

Any person which is connected with the company such as directors, promoters, workers etc are
called Insider. Due to working in the company they have sensitive information which affects the
prices of the securities.Such information is not available to people at large but Insider gets this
key full knowledge by working in such company. Insider can use this information for their
personal benefits or make the profit from it, such process is known as Insider Trading.

For Example – Managers or Directors of a company may know that company will issue Bonus
shares to its shareholders at the particular time and they purchase shares from market to make a
profit with bonus issue.

SEBI always restricts these types of practices when Insider is buying securities of the company
and take strict action to avoid this in future.

c) SEBI prohibits fraudulent and Unfair Trade Practices:

SEBI always restricts the companies which make misleading statements which are likely to
induce the sale or purchase of securities by any other person.

d) SEBI some times educate the investors so that become able to evaluate the securities and
always invest in profitable securities.

e) SEBI issues guidelines to protect the interest of debenture holders.

f) SEBI is empowered to investigate cases of insider trading and has provision for stiff fine and
imprisonment.

g) SEBI has stopped the practice of allotment of preferential shares unrelated to market prices.
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h) SEBI has stopped the practice of making a preferential allotment of shares unrelated to market
prices.

2. Developmental Functions:

Under developmental categories following functions are performed by SEBI:

(i) SEBI promotes training of intermediaries of the securities market.

(ii) SEBI tries to promote activities of stock exchange by adopting a flexible and adoptable
approach in following way:

a. SEBI has permitted internet trading through registered stock brokers.

b. SEBI has made underwriting optional to reduce the cost of issue.
c. An Even initial public offer of primary market is permitted through the stock exchange.

3. Regulatory Functions:

These functions are performed by SEBI to regulate the business in stock exchange. To regulate
the activities of stock exchange following functions are performed:

I. SEBI has framed rules and regulations and a code of conduct to regulate the
intermediaries such as merchant bankers, brokers, underwriters, etc.
II. These intermediaries have been brought under the regulatory purview and private
placement has been made more restrictive.
III. SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer
agents, trustees, merchant bankers and all those who are associated with stock exchange
in any manner.
IV. SEBI registers and regulates the working of mutual funds etc.
V. SEBI regulates takeover of the companies.
VI. SEBI conducts inquiries and audit of stock exchanges.

Appellate Tribunal

The Central Government may, by notification establish an Appellate Tribunal known as

Securities Appellate Tribunal to exercise the jurisdiction, powers and authority conferred on such
tribunal under the SEBI Act, 1992 or any other law for time being in force. The Central
Government has set up a Tribunal at Mumbai.

Securities Appellate Tribunal is a statutory body established under the provisions of Section 15K
of the Securities and Exchange Board of India Act, 1992 to hear and to dispose appeals against
orders passed by the Securities and Exchange board of India or by an adjudicating officer under
the Act.

Composition of SAT
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SAT consists of-

I. A Presiding Officer &

II. Two other members
III. Appointment

Presiding Officer

The Presiding officer of SAT shall be appointed by the Central Government in consultation with
the Chief Justice of India or his nominee.

Members

The two members of SAT shall be appointed by the Central Government.

Qualifications

Presiding Officer

I. A sitting or retired judge of the supreme court or

II. A sitting or retired Chief Justice of the High Court or
III. A sitting or retired Judge of a High court, who has completed atleast 7 years of service as
a Judge in a High Court.

Members

I. He is a person of ability, integrity and standing and

II. He has shown capacity in dealing with problems relating to securities market and has
qualification and experience of corporate law, Securities laws, Finance, economics or
accountancy.

Tenure

Presiding Officer

Earlier of the two

I. 5 years at a time or re appointment or

II. 68 years

Members

Earlier of the two

I. 5 years at a time or re appointment or

II. 62 years
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Powers of SAT

The SAT shall have, for the purpose of discharging their functions under this Act, the same
powers as are vested in a civil court under the code of civil procedure 1908 while trying a suit, in
respect of the following matters namely

I. Summoning and enforcing the attendance of any person and examine him on oath
II. Requiring the discovery and production of documents
III. Receiving evidence on affidavits
IV. Issuing commissions for the examination of witnesses or documents
V. Reviewing its decisions
VI. Dismissing an application for default or deciding it ex-parte
VII. Setting aside any order or dismissal of any applicable for default or any order passed by it
ex-parte
VIII. Any other matter which may be prescribed

Appeal to SAT

I. Any person aggrieved

II. by an order of SEBI made, under this act , or
III. by an order made by an adjudicating officer under this act, may prefer an appeal to a SAT
having jurisdiction in the matter.

Timelimit

I. Every appeal shall be filed within 45 days from the date on which a copy of the order
made by SEBI or the adjudicating officer is received by him and accompanied by such
form and fees as may be prescribed.
II. The SAT may entertain an appeal after the expiry of the said period of 45 days if it is
satisfied that there was sufficient cause for not filing it within that period.
III. The appeal shall be made in 3 copies, with additional copies for each additional Appeal
shall be signed by the authorized person.
IV. On receipt of the appeal, the SAT may, after giving the parties to the appeal an
opportunity of being heard, pass such order thereon as it thinks fit, confirming, modifying
or setting aside the order appealed against and such appeal shall be disposed within 6
months from the date of receipt of the appeal.

How to appear before SAT

Appearance before SAT may be either in person or through authorized person being a Chartered
Accountant, Company Secretary, Cost Accountant or Legal Practitioner.

Appeal against the order of SAT

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Any person aggrieved by any decision or order of the SAT can file an appeal to the Supreme
Court. The appeal can be filed only on a question of law. The appeal shall be filied within 60
days from the date of receiving a copy of the decision or order of SAT. The supreme court may
allow a further period of 60 days for making an appeal, if it is satisfied that the applicant was
prevented by sufficient cause from filing the appeal within the first 60 days.

Civil court not to have Jurisdiction

No civil court shall have Jurisdiction to entertain any suit or proceedings in respect of any matter
which an Adjudicating Officer appointed under this act or a SAT constituted under this act is
empowered by or under this act to determine and

No injunction shall be granted by any court or other authority in respect of any action taken or to
be taken in pursuance of any power conferred by or under this act.

Qs. Limited Liability Partnership: Overview

Ans. A Limited Liability Partnership or LLP is an alternative corporate business form which
offers the benefits of limited liability to the partners at low compliance costs. It also allows the
partners to organize their internal structure like a traditional partnership. A limited liability
partnership is a legal entity, liable for the full extent of its assets. The liability of the partners,
however, is limited. Hence, LLP is a hybrid between a company and a partnership.

Salient Features of LLP

LLP is a body corporate

According to Section 3 of the Limited Liability Partnership Act (LLP Act), 2008, an LLP is a
body corporate formed and incorporated under the Act. It is a legal entity separate from its
partners.

Perpetual Succession

Unlike a partnership firm, a limited liability partnership can continue its existence even after the
retirement, insanity, insolvency or even death of one or more partners. Further, it can enter into
contracts and hold property in its name.

Separate Legal Entity

It is a separate legal entity. Further, it is completely liable for its assets. Also, the liability of the
partners is limited to their contribution in the LLP. Hence, the creditors of the limited liability
partnership are not the creditors of individual partners.

Mutual Agency
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Another difference between an LLP and a partnership firm is that independent or unauthorized
actions of one partner do not make the other partners liable. All partners are agents of the LLP
and the actions of one partner do not bind the others.

LLP Agreement

The rights and duties of all partners are governed by an agreement between them. Also, the
partners can devise the agreement as per their choice. If such an agreement is not made, then the
Act governs the mutual rights and duties of all partners.

Artificial Legal Person

For all legal purposes, an LLP is an artificial legal person. It is created by a legal process and has
all the rights of an individual. It is invisible, intangible and immortal but not fictitious since it
exists.

Common Seal

If the partners decide, the LLP can have a common seal [Section 14(c)]. It is not mandatory
though. However, if it decides to have a seal, then it is necessary that the seal remains under the
custody of a responsible official. Further, the common seal can be affixed only in the presence of
at least two designated partners of the LLP.

Limited Liability

According to Section 26 of the Act, every partner is an agent of the LLP for the purpose of the
business of the entity. However, he is not an agent of other partners. Further, the liability of each
partner is limited to his agreed contribution in the Limited Liability Partnership.

Minimum and Maximum Number of Partners

Every Limited Liability Partnership must have at least two partners and at least two individuals
as designated partners. At any time, at least one designated partner should be resident in India.
There is no maximum limit on the number of maximum partners in the entity.

Management of Business

The partners of the Limited Liability Partnership can manage its business. However, only the
designated partners are responsible for legal compliances.

Business for Profit Only

A Limited Liability Partnership cannot be formed for charitable or non-profit purposes. It is

essential that the entity is formed to carry on a lawful business with a view to earning a profit.

Advantages of LLP
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I. Separate legal entity: An LLP is a separate legal entity. This means that it has assets in its
own name and can sue and be sued. Furthermore, one partner is not responsible or liable
for another partner’s misconduct or negligence.
II. No owner/manager distinction: An LLP has partners, who own and manage the business.
This is different from a private limited company, whose directors may be different from
shareholders. For this reason, VCs do not invest in the LLP structure.
III. Flexible agreement: The partners are free to draft the agreement as they please, with
regard to their rights and duties.
IV. Limited liability: The liability of the partners is limited to the extent of his/her
contribution to the LLP. Unless fraud has been detected, the personal assets of the partner
are protected from any liability of the LLP.
V. Fewer compliance requirements: An LLP is much easier and cheaper to run than a private
limited company as there are just three compliances per year. On the other hand, a private
limited company has a lot of compliances to fulfil and conduct an audit of its books.
VI. Easy to wind-up: Not only is it easy to start, it’s also easier to wind-up an LLP, as
compared to a private limited company. While it still takes two to three months to
complete this process, it can take over a year to close a private limited company.

Disadvantages of a Limited Liability Partnership

I. Inclusion of Indian Citizen as a Partner – An NRI/Foreign national who wants to

incorporate an LLP in India shall have at least one partner who is an Indian citizen. Two
foreign partners cannot form an LLP without having one resident Indian partner along
with them.
II. Transfer of Ownership -If a partner wants to transfer his/her ownership rights then he/she
has to obtain the consent of all the partners.
III. Filing of various returns - Public disclosure is the main disadvantage of an LLP. An LLP
must file Annual Statement of Accounts & Solvency and Annual Return with the
Registrar each year. Income Tax Return must also be filed to the Income tax department
for the LLP.
IV. Number of partners –A limited liability partnership must have at least two members. If
one member chooses to leave the partnership, the LLP may have to be dissolved.
V. Non- recognition - LLPs are limited by state regulations due to which they are not given
due recognition in every state as a business structure.
VI. Huge penalties –The cost of non-compliance of procedural matters such as late filing of
e-forms is very high which would lead to huge sum of penalties owing to Rs.100 for
every day till the time the offence of late filing continues.

Qs. Depository System

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Introduction of Depository system gives way for dematerialization of shares. A Depository is an

organization which holds the securities of a shareholder in electronic form at the request of the
shareholder.

The development of Information technology has paved the way for many innovative things in the
stock exchange. The stocks scam which shook the stock market during the 1990s also made the
government to take preventive measures to avoid the recurrence of such scams. All these resulted
in the introduction of a new type of stock trade called dematerialization.

What is Dematerialization:

Dematerialization on the other hand is a process wherein the shares, after being handed over to
the depository will be used at the time of sale or transfer of the shares from one shareholder to
another. Since the physical transfer of share / stock does not occur, it is called Scripless transfer
or scripless trade.

Under dematerialization of shares, physical transfer of shares is avoided and the transactions take
place through the electronic media. This saves time and stationery and also prevents the loss of
documents in transit.

Functioning of Depository System

The depository system will not only maintain the accounts of the shareholder but will also
undertake to collect dividends, bonus shares, etc., on behalf of the shareholder. Periodically, the
shareholders will be informed of their holdings by a Depository agent through a statement of
accounts. Any sale or purchase of shares will take place through the Depository. The use of
electronic system in the transfer of shares is an important aspect of Depository system.

Structure of Depository System

1. Central Depository
2. Share Registrar Transfer Agent
3. Clearing and Settlement Corporation
4. Depository Participant

Central Depository

Central depository is an organization with which all the shares, belonging to the shareholders are
kept and the electronic system takes care of them.

Share Registrar:

Share Registrar is an authority who controls the issue of securities. Along with this, the transfer
agent arranges for the transfer of securities in the case of buying or selling of securities.
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Clearing and Settlement Corporation:

This agency settles the transfer of funds between the seller and buyer.

Depository Participant (D.P):

He is like a share broker and he trades as per the instructions of the shareholder in and outside
the stock exchange.

An ID Account number is given by the Depository Participant (D.P) to every shareholder when
he/she opens an account for dematerializing the securities. D.P is a representative in the
depository system on behalf of the shareholder and he only intimates to the shareholder
periodically the securities account held by the customer. As per SEBI regulations, financial
institutions, banks, stockbrokers, etc., can be Depository Participants.

Procedure in the Depository system

When the shares are handed over to the depository system, the shares get immobilized as they
are no more with the shareholder in physical form.

Notification by Stock Exchange

The stock exchange concerned where the shares are listed will come out with a notification for
the dematerialization of shares.

Dematerialization Form

The shareholder will obtain the Dematerialisation request form from the Depository Participant.
This form will contain details about the name of the company, folio number and the distinctive
number of the shares which are given for dematerialization. The form will be signed by either the
single owner if it is held so or by joint owners, when they are held jointly.

Registering of shares

When the D.P hands over the securities to the depository, the securities will be sent to Share
Registrar who will register the depository name and the particulars of shares. But, before doing
this, the ownership of the securities should be verified with the company and hence, this
procedure will take some time.

In case the signature in the requisition form does not tally with the specimen signature held by
the company, then the request for dematerialization will be rejected as it amounts to bad
delivery.

Crediting the investor account

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In the last stage, the Depository will inform the D.P the details of shares registered in the name
of the shareholder concerned. On this basis, the D.P will send the Statement of Account, to the
customer shareholder.

We have so far discussed about the sale and purchase of securities in the secondary market. But
when a shareholder applies for a company security in the primary market, he will mention his ID
Account number in the application form.

Trading of Shares in a Depository system

When a seller agrees to sell certain securities to the buyer, the seller will fill up a form known as
‘Delivery Instructions form’.

This form will contain details about the number of shares to be sold and the account number of
the shareholder with the Depository Participant. In fact, some Depository participants even print
this form with the ID Account number and name of the client.

There are two types of Delivery Instructions forms. They are

I. Off-market trade and

II. Market trade.

Off market trade will not be routed through the stock exchange. It may be a transfer among the
family members. Market trades are those which are traded in the market.

The seller signs the form and hands it over to his depository participant through the broker who
has effected the transaction. The depository participant will then send it to the Depository. The
Depository on receipt of this request, will debit the free balance of the seller and credit the
available balance of the buyer.

The available balance of the buyer will be converted into free balance once payment for the
transaction is effected. When once the buyer has free balance, he has a right to transfer or sell to
any other person.

Benefits of Depository system:

a. Depository system takes hold of all securities in the country listed in that
particular stock exchange.
b. Introduction of electronic system enables speedy transactions and accuracy.
c. In a depository system, the security holders can sell and buy securities by which
liquidity is brought to the securities.
d. Blank transfers are avoided and holding of shares in Benami names is also
prevented.
e. Registration and stamp charges for the sale of securities could be easily collected
by the government which was evaded under the previous system.
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f. Depository promotes more activity in the capital market as trading in genuine

share. is ensured under Depository system.
g. Depository avoids use of stationery and prevents delay in registration of transfers.
h. Dividend and interest on securities are properly distributed through this system
and in the case of convertible debentures, on the due date, the securities are
converted into company shares.
i. Depository acts as collateral security for the raising of 1oans from any financial
institution.