Lab Chapter-4-1

MBA Ist Semester – (AUC) (Legal Aspects of Business) 4.
Major Principles of
Chapter 4 Company Law
4.1. COMPANIES ACT, 2013
4.1.1. Introduction
The Indian parliament has passed the Companies Bill 2013 on 8 August 2013. The bill has received President’s
assent on 29 August, making it a law, replacing the old regulations that govern the corporate in the country. It
would come into force from date(s) as may be notified by Central Government.
The 2013 Act replaces the Companies Act, 1956. It incorporates certain important provisions to facilitate ease
of doing business in India. The 1956 act was passed in the first decade of free India; the business landscape has
changed radically in the last 60 years.
The existing Companies Act, 1956 has been amended atleast 25 times in the past 57 years, with many of its
provisions found to be out dated and inadequate. The passage of the bill, which is spread across nearly 30
Sections and over 300 pages, was widely welcomed by stakeholders, including industry bodies, political leaders
and consultants.
The next step is to finalise the Rules and define the procedural aspects of this Act. The Ministry of Corporate
Affairs has put the draft rules for public comments. The draft rules are available at the website of Ministry at
www.mca.gov.in. The relevant portions of the Act will be notified, in a step by step manner, along with the
rules applicable.
Corporate Affairs Minister Sachin Pilot had earlier said that the government plans to adopt a transparent and
interactive process to finalise a detailed set of rules to be adopted under the new Companies Bill.
The new Act comprises of 29 chapters, 470 Sections and 7 Schedules as against 658 sections and 14 Schedules
in the Companies Act, 1956. In 470 Sections the word “as may be prescribed” has been used at around 336
places.
The Act extents the whole of India and different provisions of the Act will be applicable on such date(s) as the
Central Government, by notification in the Official Gazette, may appoint and different dates may be appointed
for different provisions of the Act.
4.1.2. Definitions under Companies Act, 2013

1) Financial Statement [Section 2(40)]: Financial Statement in relation to a company includes:
i) A balance sheet as at the end of the financial year;
ii) A profit and loss account, or in the case of a company carrying on any activity not for profit, an income
and expenditure account for the financial year;
iii) Cash flow statement for the financial year;
iv) A statement of changes in equity, if applicable; and
v) Any explanatory note annexed thereto or forming part of, any document referred to in sub-clause (i) to
sub-clause (iv).
It is provided that the financial statement, with respect to one person company, small company and dormant
company, may not include the cash flow statement.
MBA Ist Semester – (AUC) (Legal Aspects of Business) 4.2
2) Key Managerial Personnel [Section 2(51)]: Key Managerial Personnel in relation to a company, means:
i) The chief executive officer or the managing director or the manager;
ii) The company secretary;
iii) The whole-time director;
iv) The chief financial officer; and
v) Such other officer as may be prescribed.
3) Promoter[Section 2(69)] : It means a person:
a) Who has been named as such in a prospectus or is identified by the company in the annual return
referred to in section 92; or
b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder,
director or otherwise; or
c) In accordance with whose advice, directions or instructions the Board of Directors of the company is
accustomed to act.
It is provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional
capacity.
4) Small Company [Section 2(85)]: It means a company, other than a public company:
i) Paid-up share capital of which does not exceed fifty lac rupees or such higher amount as may be
prescribed which shall not be more than five crore rupees; or
ii) Turnover of which as per its last profit and loss account does not exceed two crore rupees or such
higher amount as may be prescribed which shall not be more than twenty crore rupees.
Provided that nothing in this Clause shall apply to:

i) A holding company or a subsidiary company;
ii) A company registered under section 8; or
iii) A company or body corporate governed by any special act.
5) Dormant Company [Section 455]: The 2013 Act states that a company can be classified as dormant when
it is formed and registered under this 2013 Act for a future project or to hold an asset or intellectual
property and has no significant accounting transaction.
Such a company or an inactive one may apply to the ROC in such manner as may be prescribed for
obtaining the status of a dormant company.
4.1.3. Important Provisions of Companies Act, 2013

Important provisions are as follows:
1) Classification and Registration: It includes:
i) Concept of One Person Company (OPC limited) introduced;
ii) Concept of Small Companies have been introduced which shall be subjected to a lesser stringent
regulatory framework;
iii) Provision for Conversion of Companies already registered has been introduced;
iv) Registration process has been made faster and compatible with e-governance;
v) For the first time, articles may contain provisions for entrenchment;
vi) A declaration, in the prescribed form, required to be filed with the Registrar at the time of registration
of a company that all the requirements of the Act in respect of registration and matters precedent or
incidental thereto have been complied with, will be required to signed by both – a person named in the
articles as a director, manager or secretary of the company as well as by an advocate, a chartered
accountant, cost accountant or company secretary in practice, who is engaged in the formation of the
company.
2) Registered Office: It includes:
i) A company shall, on and from the 15th day of its incorporation and at all times thereafter have a
registered office capable of receiving and acknowledging all communications and notices as may be
addressed to it.
ii) Company is required to furnish to the Registrar verification of its registered office within 30 days of its
incorporation in the prescribed manner.
iii) Where a company has changed its name(s) during the last two years, it shall paint or affix or print,
along with its name, the former name or names so changed during the last two years.
iv) Notice of change, verified in the manner prescribed, shall be given to the Registrar, within 15 days of
the change, who shall record the same.
3) Commencement of Business: A company having a share capital shall not commence business or exercise
any borrowing powers unless a declaration is filed with Registrar by a director verified in the manner as
may be prescribed that:
i) Every subscriber to the memorandum has paid the value of shares agreed to be taken by him;
ii) Paid-up capital is not less than `5 lac in the case of public company and one lac in case of a private
company.
iii) The company has filed with the Registrar the verification of its registered office.
4) Registration of Charges: Companies Act, 2013 requires the company to register the particulars of every
charge created by it on its property or assets or any of its undertaking including pledge.
5) Annual Return: Every company shall prepare a return in the prescribed form containing the particulars as
they stood on the close of the financial year. Annual Return is required to be signed by:
i) A Director and the Company Secretary, or where there is no Company Secretary, by a Company
Secretary in whole-time practice.
ii) It means that now in respect of all the companies (except one person companies and small companies),
whether private or public, listed or unlisted, the annual return has to be signed by either a company
secretary in employment or by a company secretary in practice, i.e., where no Company Secretary is
appointed by the company, the Annual Return is compulsorily required to be signed by the Company
Secretary in practice.
iii) In addition to the above, the Annual Return, filed by a listed company or by a company having such
paid-up capital and turnover as may be prescribed, shall be certified by a company secretary in practice
that the annual return discloses the facts correctly and adequately and that the Company has complied
with all the provisions of the Act.
iv) It means, in case of a listed company and other prescribed companies, even if the Annual Return is
signed by the Company Secretary in employment, it is further required to be certified by the Company
Secretary in whole-time practice.
v) In relation to a one person company and small company, the Annual Return is required to be signed by
the Company Secretary, or where there is no Company Secretary, by one director of the company.
vi) Every listed company shall file a return in the prescribed form with the Registrar with respect to change
in the number of shares held by promoters and top ten shareholders of such company, within fifteen
days of such change.
6) Place of Keeping Registers: The new Act permits a company to keep its registers or copies of returns at
any other place other than the registered office in India (not necessarily within the city, village or town in
which the registered office is situated) if following conditions are fulfilled:
i) More than 10% of the total members entered in the register of members reside at that place;
ii) The keeping of registers or copies at that place is approved by a special resolution passed by the
members in the general meeting; and
iii) The Registrar has been given a copy of the proposed special resolution in advance;
7) General Meeting: Provisions related to general meeting are as follows:
i) Every Annual General Meeting (AGM) shall be called during business hours, i.e. between 9 A.M. to 6
P.M. on any day that is not a National Holiday.
ii) The Concept of Statutory Meeting has been omitted.
iii) First AGM is required to be held within 9 months from the end of the first financial year.
iv) A general meeting of a company may be called by giving not less than clear twenty-one days’ notice
either in writing or through electronic mode in such manner as may be prescribed;
v) To encourage wider participation of shareholders at General Meetings, the Central Government may
prescribe the class or classes of companies in which a member may exercise their vote at meetings by
electronic means.
vi) One person companies have been given the option to dispense with the requirement of holding an
AGM.
vii) Every listed company shall prepare a Report on each Annual General Meeting including confirmation
to the effect that the meeting was convened, held and conducted as per the provisions of the Act and the
Rules made there under. A copy of the report shall be filed with the Registrar within 30 days of the
conclusion of the AGM.
viii) Quorum of the public company has been increased from 5 to 30 members personally present
depending upon the number of members as under:
a) Upto 1000 members = 5 members personally present
b) 1001 to 5000 members = 15 members personally present
c) More than 5000 members = 30 members personally present
8) Corporate Social Responsibility: Every company having net worth of rupees five hundred crore or more,
or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any
financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three
or more directors, out of which at least one director shall be an independent director. The Board’s report
shall disclose the composition of the Corporate Social Responsibility Committee. Every company satisfying
any of the above criteria has to mandatorily spend 2% of the average net profits of the 3 immediately
preceding financial years on Corporate Social Responsibility.
9) Auditors: Every company has to appoint, at the first Annual General Meeting, individual or a firm (firm
shall include LLP) as an auditor who shall hold office till the conclusion of sixth Annual General Meeting
and thereafter till the conclusion of every sixth AGM. Accordingly, the appointment of auditors is to be
made for 5 years. The appointment is subject to the ratification of the members at every annual general
meeting.
Listed and certain other prescribed classes of companies cannot reappoint:
i) An individual as auditor for more than one term of five consecutive years;
ii) An audit firm as auditor for more than two terms of five consecutive years:
All notices of, and other communications relating to, any general meeting shall be forwarded to the auditor
of the company, and the auditor shall attend either by himself or through his authorised representative, who
shall also be qualified to be an auditor, any general meeting and shall have right to be heard at such meeting
on any part of the business which concerns him as the auditor.
10) Cost Audit: The previous approval of Central Government is no longer required for appointment of Cost
Auditor as section 148 of the Act has dispenses with this requirement. Remuneration of the Cost Auditor
also will be decided by the members.
11) Directors: Provisions related to director are as follows:
i) The Board shall consist of individuals as directors.
ii) Maximum 15 directors. Company may appoint more than 15 directors after passing special resolution in
this regard.
iii) Such class or classes of companies as may be prescribed shall have a woman director.
iv) Every company shall have at least one of the directors who has stayed in India for 182 days or more in
the previous calendar year.
v) Every listed company shall have atleast 1/3rd independent directors.
vi) An independent director shall hold office for a term upto five consecutive years on the Board of a
company, but shall be eligible for reappointment on passing of a special resolution by the company and
disclosure of such appointment in the Board’s report. No independent director shall hold office for
more than two consecutive terms, but such independent director shall be eligible for appointment after
the expiration of three years of ceasing to become an independent director.
vii) Every person proposed to be appointed as a director by the company in general meeting or otherwise,
shall furnish his Director Identification Number (DIN) and a declaration that he is not disqualified to
become a director under this Act.
viii) Consent is to be filed within 30 days and the director shall act as director only after filing of such
consent.
ix) A person who is not a retiring director be eligible for appointment to the office of a director at any
general meeting, if he, or some member intending to propose him as a director, has, not less than
fourteen days before the meeting, left at the registered office of the company, a notice in writing
under his hand signifying his candidature as a director or, as the case may be, the intention of such
member to propose him as a candidate for that office, along with the deposit of one lac rupees or
such higher amount as may be prescribed which shall be refunded to such person or, as the case
may be, to the member, if the person proposed gets elected as a director or gets more than twenty-
five per cent, of total valid votes cast either on show of hands or on poll on such resolution.
x) No person shall hold office as a director, including any alternate directorship, in more than twenty
companies at the same time. Provided that the maximum number of public companies in which a person
can be appointed as a director shall not exceed ten. The members of a company may, by special
resolution, specify any lesser number of companies in which a director of the company may act as
directors.
xi) The provisions of qualification shares have been omitted.
12) Independent Director: Independent Director means a director other than a managing director or a whole-
time director or a nominee director:
i) Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and
experience;
ii) a) Who is or was not a promoter of the company or its holding, subsidiary or associate
company;
b) Who is not related to promoters or directors in the company, its holding, subsidiary or associate
company;
iii) Who has or had no pecuniary relationship with the company, its holding, subsidiary or associate
company, or their promoters, or directors, during the two immediately preceding financial years or
during the current financial year;
iv) None of whose relatives has or had pecuniary relationship or transaction with the company, its holding,
subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more of
its gross turnover or total income or fifty lac rupees or such higher amount as may be prescribed,
whichever is lower, during the two immediately preceding financial years or during the current
financial year;
v) Who, neither himself nor any of his relatives:
a) Holds or has held the position of a key managerial personnel or is or has been employee of the
company or its holding, subsidiary or associate company in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed;
b) Is or has been an employee or proprietor or a partner, in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed, of:
• A firm of auditors or company secretaries in practice or cost auditors of the company or its
holding, subsidiary or associate company; or
• Any legal or a consulting firm that has or had any transaction with the company, its holding,
subsidiary or associate company amounting to ten per cent. or more of the gross turnover of
such firm;
c) Holds together with his relatives two per cent. or more of the total voting power of the company; or
d) Is a Chief Executive or Director, by whatever name called, of any non-profit organisation that
receives twenty-five per cent. or more of its receipts from the company, any of its promoters,
directors or its holding, subsidiary or associate company or that holds two per cent or more of the
total voting power of the company; or
vi) Who possesses such other qualifications as may be prescribed.

13) Meeting of the Board: Provisions related to board meeting are as follows:
i) Every Company shall hold first meeting of its Board of Directors within 30 days of its incorporation;
ii) Four meetings of the Board of Directors should be hold every year in such a manner that not more than
120 days shall intervene between 2 consecutive board meetings;
iii) The participation of directors in a meeting of the Board may be either in person or through
videoconferencing or other audio-visual means, as may be prescribed, which are capable of recording
and recognising the participation of the directors and of recording and storing the proceedings of such
meetings along with date and time;
iv) Not less than 7 days notice is to be given for board meeting which may be given electronically;
v) Participation of directors through video conferencing shall also be counted for the purpose of quorum;
vi) Prohibition on insider trading on directors and key managerial personnel;
14) Managerial Personnel: Provisions related to managerial persons are as follows:
i) No company shall appoint or re-appoint any person as its managing director, whole-time director or
manager for a term exceeding five years at a time;
ii) Most of the provisions of schedule XIII of earlier Companies Act, 1956 have been incorporated in this
Chapter;
iii) No person shall be appointed as MD as well as Chairperson at a same time except articles provides
otherwise;
iv) Every company belonging to such class or classes of companies as may be prescribed shall have the
following whole-time key managerial personnel:
a) Managing director, or Chief Executive Officer or manager and in their absence, a whole-time
director;
b) Company secretary; and
c) Chief Financial Officer
Every whole-time key managerial personnel of a company shall be appointed by means of a resolution of
the Board containing the terms and conditions of the appointment including the remuneration. If the office
of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by the
Board at a meeting of the Board within a period of six months from the date of such vacancy.
15) Company Secretary and Secretarial Audit: Provisions related to Company Secretary and Secretarial
Audit are as follows:
i) Every listed company and a company belonging to other class of companies as may be prescribed shall
annex with its Board’s report, a secretarial audit report, given by a company secretary in practice, in
such form as may be prescribed.
ii) Functions of Company Secretary have been prescribed which includes:
a) To report to the Board about compliance with the provisions of this Act, the rules made there under
and other laws applicable to the company;
b) To ensure that the company complies with the applicable secretarial standards; and
c) To discharge such other duties as may be prescribed.
16) Compromises, Arrangements and Amalgamations: Important provisions related to compromises,
arrangements and amalgamations are as follows:
i) No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the
company’s auditor has been filed with the Tribunal to the effect that the accounting treatment, if any,
proposed in the scheme of compromise or arrangement is in conformity with the accounting standards
prescribed.
ii) Separate provisions have been provided for the merger or amalgamation between two small companies
or between a holding company and a wholly owned subsidiary company.
iii) Provision for cross border amalgamations between Indian Companies and companies incorporated in
the jurisdictions of such countries as may be notified from time to time by the Central Government.
iv) Specific provision for purchase of minority shares in case an acquirer or person acting in concert with
the acquirer become holder of 90% or more of the issued capital of the company, either directly or by
virtue of any amalgamation, share exchange, conversion of securities or any other reason.
17) Winding-Up: Various provisions related to winding-up are as follows:
i) Only two modes of winding-up:
a) By Tribunal; and
b) Voluntary;
ii) Powers of courts have been shifted to Tribunal;
iii) Certain new grounds for winding up have been introduced and some has been omitted;
iv) Circumstances in which company may be wound up by Tribunal:
a) If the company is unable to pay its debts;
b) If the company has, by special resolution, resolved that the company be wound up by the Tribunal;
c) If the company has acted against the interests of the sovereignty and integrity of India, the security
of the State, friendly relations with foreign States, public order, decency or morality;
d) If on an application made by the Registrar or any other person authorised by the Central
Government by notification under this Act, the Tribunal is of the opinion that the affairs of the
company have been conducted in a fraudulent manner or the company was formed for fraudulent
and unlawful purpose or the persons concerned in the formation or management of its affairs have
been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that
the company be wound-up;
e) If the company has made a default in filing with the Registrar its financial statements or annual
returns for immediately preceding five consecutive financial years; or
f) If the Tribunal is of the opinion that it is just and equitable that the company should be wound-up.
18) Restructuring and Liquidation: The entire rehabilitation and liquidation process has been made time
bound. It includes:
i) Winding-up is to be resorted to only when revival is not feasible.
ii) The Tribunal may appoint an interim administrator or a company administrator from the panel of
Company Secretaries, CAs, CWAs, etc. maintained by the Central Government.
iii) The Company Administrator shall prepare a scheme of revival and rehabilitation.
iv) If revival scheme is not approved by the creditors, the Tribunal shall order for winding up of the
company.
19) National Company Law Tribunal: The Central Government shall, by notification, constitute, with effect
from such date as may be specified therein, a Tribunal to be known as the National Company Law Tribunal
consisting of a President and such number of Judicial and Technical members, as the Central Government
may deem necessary, to be appointed by it by notification, to exercise and discharge such powers and
functions as are, or may be, conferred on it by or under this Act or any other law for the time being in force.
4.1.4. Amendments as per Companies Act, 2013

The 2013 Act states that the first annual general meeting should be held within nine months from the date of
closing of the first financial year of the company [Section 96(1) of 2013 Act], whereas the 1956 Act requires
the first annual general meeting to be held within 18 months from the date of incorporation.
Currently, the 1956 Act does not define business hours, which the 2013 Act now defines as between 9 am and 6
pm. The 2013 Act states that annual general meeting cannot be held on a national holiday whereas the annual
general meeting cannot be held on a public holiday as per the existing provisions of Section 166(2) of the 1956
Act [Section 96(2) of 2013 Act].
In order to call an annual general meeting at shorter notice, the 2013 Act requires consent of 95% of the
members as against the current requirement in the 1956 Act which requires consent of all the members [Section
101(1) of 2013 Act].
The 2013 Act states that besides director and manager, the nature of concern or interest of every director,
manager, any other key managerial personnel and relatives of such director, manager or any other key
managerial personnel in each item of special business will also need to be mentioned in the notice of the
meeting [Section 102(1) of 2013 Act]. Also, the threshold of disclosure of share holding interest in the company
to which the business relates of every promoter, director, manager and key managerial personnel has been
reduced from 20% to 2% [Section 102(2) of 2013 Act].
The 2013 Act states that in case of a public company, the quorum will depend on number of members as on the
date of meeting. The required quorum is as follows:
1) Five members if number of members is not more than one thousand.
2) Fifteen members if number of members is more than one thousand but upto five thousand.
3) Thirty members if number of members is more than five thousand [Section 103(1) of 2013 Act].
A limit has been introduced on the number of members which a proxy can represent. The 2013 Act has
introduced a dual limit in terms of number of members, which is prescribed as 50 members and also sets a limit
in terms of number of shares holding in the aggregate not more than 10% of the total share capital of the
company carrying voting rights [Section 105(1) of 2013 Act].
Further, it is relevant to note that private companies cannot impose restrictions on voting rights of members
other than due to unpaid calls or sums or lien [Section 106(1) of 2013 Act]. Listed companies will be required
to file with the ROC a report in the manner prescribed in the rules on each annual general meeting including a
confirmation that the meeting was convened, held and conducted as per the provisions of the 2013 Act and the
relevant rules [Section 121 of 2013 Act].
4.2. COMPANY
4.2.1. Meaning and Definition of a Company

In the ordinary common parlance, a company means a group of persons associated to achieve some
common objective. In other words, company may be defined as a voluntary association for profit with capital
divisible into transferable shares with limited liability, having a corporate body and common seal. An “existing
company” means a company formed and registered under any of the former Companies Act.
According to the Indian Companies Act, 1956, “A company is a company formed and registered under this
Act or an existing company”.
According to Prof. Haney, “A company is an artificial person created by law, having separate entity, with a
perpetual succession and common seal”.
According to Chief Justice Marshall, “A corporation is an artificial being, invisible, intangible existing only
in contemplation of the law. Being a mere creation of law, it possesses only the properties which the charter of
its creation confers upon it, either expressly or as incidental to its very existence”.
According to Lindley, L. J., “A company is an association of many persons who contribute money or money’s
worth to a common stock, and employ it in some common trade or business (i.e., for a common purpose), and
who share the profit or loss (as the case may be) arising therefrom”. 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
member is entitled is his share. Shares are always transferable although the right to transfer them is often more
or less restricted. 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
member is entitled is his share. Shares are always transferable although the right to transfer them is often more
or less restricted.
4.2.2. Nature of Companies

Nature of companies is as follows:
Nature of Companies
Incorporated Association
Artificial Person
Separate Legal Entity
Limited Liability
Perpetual Existence
Common Seal
Capacity to Sue
Separate Property
Transferability of Shares
1) Incorporated Association: A company must be incorporated or registered under the Companies Act.
Minimum members required for the purpose is 7, in case of a public company, and 2, in case of a
private company [Section 12]. It may also be mentioned that as per Section 11, an association of more than
10 persons, in case of banking business, and 20 in case of any other business, if not registered as a company
under the Companies Act, or under any other law for the time being in force, becomes an illegal
association.
2) Artificial Person: A company is created with the sanction of law and is not itself a human being, it is,
therefore, called artificial; and since it is clothed with certain rights and obligations, it is called a person. A
company is accordingly an artificial person. Negatively speaking, it is not a natural person. It exists in the
eyes of the law and cannot act on its own. It has to act through a Board of Directors elected by shareholders.
It was rightly pointed out in Bates V Standard Land Co. that – “The Board of Directors are the brains and
the only brains of the company, which is the body and the company can and does act only through them”.
But for many purposes, a company is a legal person like a natural person. It has the right to acquire and
dispose of the property, to enter into contract with third parties in its own name, and can sue and be sued in
its own name.
3) Separate Legal Entity: By incorporation under the act, the company is vested with a corporate personality,
which is distinct from its members who compose it. The enterprise acquires its own entity and become
impersonalised. Thus, a company can own a property and deal with it, as it likes. No one can claim any
ownership rights in the assets of the company.
A company is at law a different person altogether from the subscribers and though it may be that after
incorporation the business is precisely the same as it was before, and the same persons are managers, and
the same hands receive the profits, the company is at law not the agent of the subscribers or trustee for
them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the
manner provided in the Act.
Facts of the famous Salomon’s case were as follows:
Salomon carried on business as a leather merchant. He sold his business for a sum of £30,000 to a
company formed by him alongwith his wife, a daughter and four sons. The purchase consideration was
satisfied by allotment of 20,000 shares of £1 each and issue of debentures worth £10,000 secured by
floating charge on the company’s assets in favour of Mr. Salomon. All the other shareholders subscribed
for one share of £1 each. Mr. Salomon was also the managing director of the company. The company
almost immediately ran into difficulties and eventually became insolvent and winding up commenced. At the
time of winding up, the total assets of the company amounted to £6,050; its liabilities were £10,000 secured
by the debentures issued to Mr. Salomon and £8,000 owing to unsecured trade creditors. The unsecured
sundry creditors claimed the whole of the company’s assets, viz., £6,050 on the ground that the company
was a mere alias or agent for Salomon.
The contention of the trade creditors could not be maintained, because the company being in law a person
quite distinct from its members, could not be regarded as an “alias” or agent or trustee for Salomon. Also
the company’s assets must be applied in payment of the debentures as a secured creditor is entitled to
payment out of the assets on which his debt is secured in priority to unsecured creditors.
4) Limited Liability: A company may be a company limited by shares or a company limited by guarantee. In
a company limited by shares, the liability of members is limited to the unpaid value of the shares. For
example, if the face value of a share in a company is `10 and a member has already paid 7 per share, he can
be called upon to pay not more than `3 per share during the lifetime of the company. In a company limited
by guarantee, the liability of members is limited to such amount as the members may undertake to
contribute to the assets of the company, in the event of its being wound-up.
5) Perpetual Existence: A company being an artificial person cannot be incapacitated by illness and it does
not have an allotted span of life. The death, insolvency or retirement of its members leaves the company
unaffected. Members may come and go but the company can go forever. The saying “King is dead, long
live the King” very aptly applies to the company form of organisation. Prof. Grover in his book on
Modern Company Law says that “A company continues to exist even if all the members are dead. During
the war, all the members of one private company, while in general meeting, were killed by a bomb. But, the
company survived. Not even a hydrogen bomb could destroy it.”
6) Common Seal: A company being an artificial person is not bestowed with a body of natural being.
Therefore, it has to work through its Directors, officers and other employees. But, it can be held bound by
only those documents which bear its signature. Common seal is the official signature of a company.
7) Capacity to Sue: A company can sue and can be sued in its corporate name. It enters into contracts in its
own name.
8) Separate Property: Since a company is a legal entity distinct from its members, it is capable of owning,
enjoying and disposing of property in its own name. Members cannot claim to be owners of the company’s
property during the existence of the company. The capital and assets of the company are contributed by its
shareholders, but still they are not the joint owners of its property. The company is the real person in which
all its property is vested and by which it is controlled, managed and disposed off.
In the case of Macaure versus Northern Assurance Co Ltd, ‘Macaure’ held all except one share of a
timber company. He held also advanced substantial amount to the company. He insured the company’s
timber in his personal name. On timber being destroyed by fire his claim was rejected for want of insurable
interest. The court applying principle of separate legal entity held, the insurance company was not liable.
9) Transferability of Shares: Since business is separate from its members in a company form of organisation,
it facilitates the transfer of member’s interests. The shares of a company are transferable in the manner
provided in the Articles of the company (Section 82). However, in a private company, certain restrictions
are placed on such transfer of shares but the right to transfer is not taken away absolutely.
4.2.3. Types of Companies

Companies can be categorised on the following basis:
Types of Companies
Based on Based on Based on Basis on Basis on

Incorporation Liability No. of Members Control Ownership
─ Chartered ─ Limited ─ Private ─ Holding ─ Government
Companies Companies Company Company Company
─ Statutory ─ Unlimited ─ Public ─ Subsidiary ─ Foreign
Companies Companies Company Company Company
─ Registered ─ One Man
Companies
1) Classification of Companies Based on Incorporation: Based on incorporation, the companies can be

divided into following:
i) Chartered Companies: These companies are those which are incorporated by a Royal Charter. The
companies like East India Company were formed by the Royal Charter. The scope of activities of such
companies is laid down in the charter of incorporation. This type of companies does not exist in India.
ii) Statutory Companies: These companies are incorporated by a Special Act passed by the Parliament,
i.e., Central or State Legislature. For example, Reserve Bank of India, State Bank of India, Industrial
Finance Corporation, Life Insurance Corporation, Unit Trust of India, and State Trading Corporation
are some statutory companies. Such companies do not have any Memorandum or Articles of
Association. These are mostly concerned with public utilities, e.g., railways, tramways, gas and
electricity companies, and enterprises of national importance.
iii) Registered Companies: These companies are formed and registered under the Companies Act of 1956,
or were registered under any of the earlier Companies Acts.
2) Classification of Companies Based on Liability: Based on liability, the companies can be divided into
following:
i) Limited Liability Companies: The companies limited by liability are classified into following:
a) Companies Limited by Shares: A limited company is one in which the liability of the members is
limited, by its Memorandum of Association, to the amount, if any, unpaid on the shares held by
them. The shareholders cannot be called upon to pay more than the amount remaining unpaid on his
shares. His personal assets cannot be called upon for the payment of the liabilities of the company.
b) Companies Limited by Guarantee: In a company limited by guarantee the liability of the
members is limited by the Memorandum to such an amount as the members may respectively
undertake to contribute to the assets of the company in the event of it being wound up.
c) Companies Limited by Shares as well as Guarantee: This is a hybrid form of company which
combines elements of the guarantee and share of the company. Every member of such a company is
subject to a twofold liability, i.e., the guarantee which may become effective from the winding up
of the company and the liability to pay up the nominal amount of his share which may become
effective during the lifetime of the company or at the time of winding up.
ii) Unlimited Companies: The liability of the shareholders of these types of companies is unlimited, in
the sense that the members of the companies are liable to the full extent to meet the obligations of the
company. However, it is to be noted that the company being a separate entity is only liable, not the
members, to its creditors. In the event of winding up, the liquidator may call upon the members to
contribute to the assets of the company without limitation of their liability for the payment of debts of
the company.
3) Classification of Companies Based on Number of Members: Based on the number of member,
companies can be divided into following:
i) Private Company: A private limited company as defined by Section 3(1) (iii) of the Companies Act is
a company which is having a minimum paid-up capital of `1 lac or such higher paid-up capital as
prescribed by its Articles, and which:
a) Restricts the right to transfer its shares, if any.
b) Limits the members to 50.
c) Prohibits any invitation to the public to subscribe for any shares or debentures of the company.
d) Prohibits any invitation or acceptance of deposits from person other than its members, directors or
relatives.
But as per companies act, 2013, maximum limit of members of private company increases to 200.
ii) Public Company: The main characteristics of a public company as defined by Section 3(1) (iv) of the
Companies Act are:
a) One which is not a private company.
b) In which the number of shareholders is not restricted.
c) This can invite the public to subscribe its shares and where the shares are freely transferable.
d) Has a minimum paid-up capital of `5 lac or such higher paid-up capital as may be prescribed.
However, it is to be noted that the basic characteristics of a private company in terms of Section 3(1) (iii) do
not get altered just because it is a subsidiary of a public company in view of the fiction that it is a public
company in terms of Section 3(1) (iv) (c) of the Act. [Hillerest Realty Sdn. Bhd. versus Hotel Queen Road
(P) Ltd. /2006 71 SCL 41].
4) Classification of Companies Based on Control: Based on control, companies can be classified as
follows:
i) Holding Company: A holding company is a company which holds more than 50% of issued share
capital, or more than 50% of the voting power, or has power to appoint or control the composition of
directors of other company.
The other company is known as subsidiary company. Section 4(4) of the Companies Act provides
provisions regarding holding and subsidiary companies.
ii) Subsidiary Company: A company is deemed to be a subsidiary of another in the following cases:
a) If the holding company controls the composition of its Board of Directors.
b) That the other company exercises or controls more than half of the total voting power and holds
more than half the nominal value of its equity share capital.
c) If it is a subsidiary of a third company which itself is a subsidiary of the controlling company.
5) Classification of Companies Based on Ownership: Based on the ownership, companies can be classified
as under:
i) Government Company: These are companies in which the Central and or the State Government hold
not less than 51 per cent of the share capital.
ii) Foreign Company: Section 519 of the Companies Act defines a foreign company as one which is
incorporated outside India after the commencement of Companies Act and has established a place of
business within India.
iii) One Man Company: This is a company in which one man holds practically the whole of the share
capital of the company, and in order to meet the statutory requirement of the minimum number of
members, some dummy members who are mostly his relations or friends hold one or two shares each.
(Salomon versus Salomon & Co. Ltd.)
4.3. FORMATION OF A COMPANY

4.3.1. Introduction
A company is a separate legal entity which is formed and registered under the Companies Act. It may be noted
that before a company is actually formed (i.e., formed and registered under the Companies Act), certain
persons, who wish to form a company, come together with a view to carry on some business for the purpose of
earning profits.
Any 7 or more persons (2 or more in case of a private company) associated for any lawful purpose may form an
incorporated company with or without limited liability. They shall subscribe their names to a Memorandum of
Association and also comply with other formalities in respect of registration (Section 12). A company so
formed may be – a company limited by shares, or a company limited by guarantee, or an unlimited company.
4.3.2. Objectives of Forming a Company

A company is generally formed to fulfil one of the following objectives:
1) An existing business carried on by a firm may have to be converted into a company with a view to limit the
liability of members and to raise further capital from the public. The former partners remain in the company
taking shares of the company in exchange of their interest in the firm and very often they may act as
promoters and also take the main part in the management of the new corporation.
2) An independent company maybe formed to acquire an existing business, the owners of which are paid off
their interest in money.
3) A group of persons may desire to carry on a new business and they may form a new company.
4) A group of persons may form a private company or a syndicate to exploit a patent or a device without
having to call in large numbers of other people as members.
4.3.3. Stages in Formation of a Company

Joint Stock Company is a legal entity. It has to follow legal procedures for its formation. The law does not
interfere in the establishment of sole proprietorship and partnership. These forms of business organisation may
and may not be registered. The company is formed, brought-up and even wound-up after following legal
formalities. In the formation of a Company the various stages are involved are as follows:
Stages in Formation of a Company
Incorporation
Promotion or Registration Capital Subscription Commencement
or Floatation of Business
− Discovery of − Memorandum − Permission from − Copy of prospectus

idea − Articles SEBI − Return of
− Detailed − List of directors − Appointment of allotment
investigation brokers, agents, − Minimum
− Consent of
− Assembling underwriters, etc. subscription
directors
− Incorporation − Undertaking to
− Issue of prospectus − Qualification
take-up − Application for shares
qualification listing − Permission for
shares − Allotment listing
− Statutory − Statutory
declaration declaration
4.3.4. Promotion of Company

It is the first and foremost stage of company formation. According to Gerestenberg, “Promotion of the
company is the discovering of business opportunities and the subsequent organisation of funds, property, and
management ability into business concern for the purpose of making profit therefrom”.
It has been discussed earlier that the company is an artificial person, so it requires someone to conceive an idea
of the company and decide about its form, size, type, and structure. Those who make a decision about these
aspects are known as promoters.
1.3.4.1. Meaning & Definition of Promoters

The Companies Act, 1956 does not define the term Promoter hence there is no statutory definition of the term
promoter, although the term is used expressly in Sections 62, 69, 76, 478 and 519 of the Companies Act, 1956.
According to Lord Justice Brown, “The term promoter is not a term of law but of business, usefully
summing-up in a single commercial word a number of business operations, familiar to the commercial world by
which a company is brought into existence”.
According to Justice Lindley, “The term promoter involves the idea of exertion for the purposes of getting-up
and starting a company”.
A promoter is an individual, a firm, a company, an institution, or even a Government department, who

conceives the idea of exploiting a business opportunity, examining the idea whether it is worth working,
arranges men, money, material, and machines and forming a profitable enterprise. The promoter identifies
business opportunities, makes detailed investigation, assembles factors of production, analyses its prospectus,
make financial arrangement, combine them into profitable business venture, and initiates steps to form a
company.
The business opportunities may be:

1) The idea of exploiting certain untapped natural resources,
2) An invention,
3) Novel selling techniques,

4) Manufacturing a product by new methods,
5) Introducing product with new uses,
6) Introducing new type of packaging,
7) Capitalising a trading or commercial possibility.
1.3.4.2. Legal Position of Promoter

The ‘Promoter’ is neither an agent nor a trustee of the company before its formation. He is not an agent because
there is no principal, and he is not a trustee, as there is no cestui que trust in existence. He stands in a fiduciary
relation (relation of trust and confidence) towards the company. This relation of trust and confidence requires
the promoter to make a full disclosure of all material facts relating to the formation of the company. He should
act honestly, and should not make any secret profit at the expense of the company he promotes.
Consequently, the promoter of a company is accountable to it for all the money secretly obtained by him from it
as if the relationship of principal and agent or of trustee had really existed between him and the company when
the money was so obtained. Moreover, his dealings with the proposed company should be open and fair.
The positions and powers of the promoter become clear from the following observations:
“The promoters stand undoubtedly in a fiduciary position. They have, in their hand, the creation and moulding
of the company. They have the powers of defining how and when, and in what shape and under what
supervision company shall start into existence and begin to act as trading corporation.”
1.3.4.3. Functions and Duties of Promoter

Functions and duties of promoter are as follows:
Function and Duties of Promoter
Ideation
Preliminary Investigation
Arranging Resources/
Factors of Production Arranging Finance
Preparing Preliminary
Preliminary Contracts
Documents
Naming the Company Appointing Bankers,

Brokers, Solicitors, and
Underwriters
Obtaining Licence
1) Ideation: It is the basis for every important activity. In this way, ideation is the first and foremost function
of the Promoter. He must have an idea about the form, size, nature, and object of the proposed company.
2) Preliminary Investigation: The promoter has to investigate that what sort of facilities are available at the
place of establishing company. The promoter has to satisfy that the required piece of land, efficient
workers, transportation and communication facilities and raw material, etc., is available or not.
3) Arranging Resources/Factors of Production: The promoter has to make arrangement of sufficient funds.
Though the company obtains its capital by issue of shares and debentures but the promoter has to make
payment of certain expenses before the amount is received from issue of shares. As such the promoter has
to use his own resources. He may contact banks, financial institutions, and underwriters.
4) Arranging Finance: If the promoter is satisfied after preliminary investigation that the idea is worth
implementing and there is sufficient opportunity for profit, he contacts different persons and experts and
enters into several deals regarding purchases of land, plant, machines, etc.
5) Preparing Preliminary Documents: The promoter has to prepare important documents because these
documents are compulsorily required for obtaining certificate of incorporation and commencement of
business. The company requires Memorandum of Association to define its objectives and activities, Articles
of Association for its day to day working and prospectus for inviting people to subscribe for its shares and
debentures.
6) Preliminary Contracts: These contracts are made by the promoters before the incorporation of the company
with different parties in the interest of the company. The promoter is personally liable for these contracts. This
company after its incorporation generally approves these contracts. If these contracts are not approved by the
company, the promoter will be personally liable for these contracts. This is why; the promoter has to be very
cautious in making contracts.
7) Naming the Company: The promoter has to decide the name of the company. He should ensure that the
name of the company should not be the same name or very identical name of an existing company.
8) Appointing Bankers, Brokers, Solicitors, and Underwriters: The promoter has to make these
appointments, which are required to be approved by the company.
9) Obtaining Licence: The promoter should obtain the requisite licence for the business, if necessary.
1.3.4.4. Liability and Rights of Promoter

If any profit made out of a transaction to which the company is a party is not disclosed by a promoter, the
company can follow one of the following two courses:
1) It may sue the promoter for an account of profit not disclosed by him and recover the same with interest; or
2) It may set aside the transaction or contract with the promoter, i.e., it may restore the property to him and
recover its money.
In addition to one of the above remedies, the company may also sue the promoter for damages caused to it
because of his fraud or breach of duty.
Other liabilities of a promoter as provided in the Companies Act, 1956 are listed as follows:
1) Section 62 of the Companies Act, 1956 provides that a promoter may be made liable to the original allottee
of shares for the mis-statements contained in the prospectus. It also provides certain grounds on which a
promoter can avoid his liability.
2) Similarly, Section 63 of the Companies Act, 1956 provides for the criminal liability for such untrue
statements in the prospectus and the promoter may also be imprisoned for a term which may extend to two
years or may be punished with fine upto 5,000 rupees.
3) Section 56 of the Companies Act, 1956 lays-down matters to be stated and reports to be set-out in
prospectus. A promoter may also be held liable by shareholders for non-compliance of this section.
4) Sections 478 and 519 of the Companies Act, 1956 further provides where fraud has been alleged by the
liquidator against a promoter, the court may order for his public examination.
5) Section 543 of the Companies Act, 1956 provides that in the course of the winding-up of the company, on
an application made by the official liquidator, the Court may make a promoter liable for misfeasance or
breach of trust.
Where there is more than one promoter, they are jointly and severally liable and if one of the co-promoters is
sued and damages are recovered from him, he can claim contribution from the other co-promoters. In case of
the death of a promoter his estate remains liable, and upon the insolvency of a promoter the company is entitled
to prove its claim in the insolvency proceedings.
1.3.4.5. Importance of Promoter

Every corporate enterprise owes its existence to the promoter. It is the result of the planning and organising
ability of the promoter. The enterprise visualises the light of the day due to determination, foresightedness, and
sustained efforts of the promoter. According to Dr. Hoagland, “A successful promoter is a creator of wealth
and an economic prophet”.
The promoter not only forms the mental picture of the enterprise that is actually non-existent but also visualises
the problems it might face after coming into existence. The promoter ensures that the unborn entity should be
smooth and easygoing, when it is promoted.
4.3.5. Incorporation/Registration of Company

Incorporation is the second stage of the company’s formation. It is the registration of the company as a body
corporate under the Companies Act, 1956. An incorporated association receives recognition as a legal entity
separate from its members. Once incorporated, an association has all the powers of an individual and is legally
able to do things in its own name, such as own land, sign a lease, sue or be sued and to continue regardless of
changes in membership. Incorporation has to follow certain provisions as per the legal requirements, which are
explained below.
1.3.5.1. Mode of Forming Incorporated Company (Section 12)

1) Any seven or more persons, or where the company to be formed will be a private company, any two or
more persons, associated for any lawful purpose may, by subscribing their names to a memorandum of
association and otherwise complying with the requirements of this Act in respect of registration, form an
incorporated company, with or without limited liability.
2) Such a company may be either :
i) A company having the liability of its members limited by the memorandum to the amount, if any,
unpaid on the shares respectively held by them (in this Act termed “a company limited by shares”);
ii) A company having the liability of its members limited by the memorandum 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 (in this Act termed “a company limited by guarantee”); or
iii) A company not having any limit on the liability of its members (in this Act termed “an unlimited
company”).
1.3.5.2. Availability and Approval of the Name

A company is identified by the name with which it is registered. The Memorandum of Association of a
company should, according to Section 13 of the Act, state the name of the company. The promoters should
decide upon atleast 5 suitable names apart from one main name, in the order of preference to afford flexibility
to the Registrar to ascertain the availability.
Section 20 states that a company cannot be registered by a name, which in the opinion of the Central
Government is undesirable. Therefore, it is advisable that promoters find out the availability of the proposed
name of the company from the Registrar of Companies. For the purpose, three names in order of priority should
be filed. These names should conform to the guidelines issued by the Department of Company Affairs in this
regard.
1.3.5.3. Documents to be Filed with Registrar

Then the following documents duly stamped together with the necessary fees are to be filed with the Registrar
for incorporation:
1) Memorandum of Association: It is an important document of the company. It defines the objects of the
company and establishes its relationship with the outside world. It contains name, capital, objectives,
situation, liability, and association clauses of the company.
2) Articles of Association: It is the bylaws of the company concerning its internal management. It is
popularly known as ‘Doctrine of Internal Management’. It must be signed by subscribers to the
Memorandum.
3) Notice: As per Section 146 of the Companies Act, notice regarding the situation of the office of the company
must be served. This may be done within 30 days of registration also, if it cannot be filed at the time of
registration.
4) Agreements: As per the provisions of Section 33 of Indian Companies Act, the copy of the agreement if
any, which the company proposes to, enter into with any individual, firm, or company should be filed.
5) Return (In Duplicate) Containing the Particulars of First Directors of the Company: The return giving the
particulars of Directors, etc., can also be filed within 30 days of their appointment. It is required for all
companies so that at the Registrar’s office any one can know about the Directors, etc., of any company.
6) List of Directors: The list of the Directors with their names, addresses, and other details has to be
submitted with the Registrar of Companies.
7) Written Consent of the Directors: The proposed Directors of the company must express their written
consent that they have no objection in working as the Director of the company. It is necessary that the
Director must subscribe for qualification shares.
8) Statutory Declaration: It is necessary for the incorporation of the company that a statutory declaration must
be signed by a Director, Manager, or Secretary of the company or by an advocate of Supreme Court or of a
High Court or by practicing chartered accountant stating that all the requirements of the Act (and the Rules
with regard to incorporation) have been duly fulfilled.
9) Undertaking of a Director to Take and Pay for Qualification Shares with Necessary Stamp Duty: In
the case of a public limited company, this undertaking is necessary for Directors other than those who have
signed the Memorandum of Association. A signatory to the Memorandum need not file a separate
undertaking for qualification shares. This document is not required for private company or a company
without share capital.
10) Payment of Fee: The Company must pay the prescribed filing and registration fee and stamp duty while
filing the above documents. The registration fee varies with the amount of authorised capital.
1.3.5.4. Certificate of Incorporation

When the requisite documents are filed with the Registrar, the Registrar shall satisfy himself that the statutory
requirements regarding registration have been duly complied with. If the Registrar is satisfied as to the
compliance of statutory requirements, he retains and registers the Memorandum, the Articles and other
documents filed with him and issues a “certificate of incorporation”, i.e., of the formation of the company
[Section 33(3)].
By issuing certificate of incorporation the Registrar certifies “under his hand that the company is incorporated
and in the case of a limited company, that the company is limited” [Section 34(1)]. The certificate of
incorporation is signed by the Registrar of Companies specifying the date of issue. From the date of issue of
incorporation certificate the company becomes distinct legal entity with perpetual succession and common seal.
Specimen of Certificate of Incorporation
I hereby certify that ………………............................................ (name of the company)

is this day incorporated under the Companies Act, 1956, and that the company is
limited.
Given under my hand at Delhi, this tenth day of October, two thousand and six.
Fees: Deed stamp Rs…………….…

Stamp Duty on Capital Rs………….……
Sd/-
Registrar of Companies
Delhi
Corporate Identity Number of the Company: 7171 of 2006
Conclusiveness of Certificate of Incorporation
A certificate of incorporation given by the Registrar in respect of a company is conclusive evidence that all the
requirements of the Companies Act in respect of registration have been complied with and nothing can be
inquired into as to the regularity of the prior proceedings and the certificate cannot be disputed on any grounds
whatsoever [Section 35].
1.3.5.5. Effects of Registration

The Registrar of Companies will carefully scrutinise the documents and if satisfied with compliance of legal
formalities regarding registration, he enters the name of the company in his register. The Registrar may accept
the declaration as to compliance of legal formalities as sufficient evidence of compliance of all formalities
under the Act and the rules thereunder. But it is at his discretion to scrutinise every document and to satisfy
himself as to compliance of all legal formalities in respect of registration.
1.3.5.6. Duties of Secretary Regarding Incorporation

Duties of Company Secretary before incorporation of company are as follows:
1) Make arrangement of meeting for the promoters.
2) Submitting necessary forms and documents to the registrar of Joint Stock Company for getting certificate of
incorporation, prepare memorandum and Articles of Association as per Company Act 1994.
3) Functions regarding the registration of the company.
4) Drafting articles of association.
5) Collecting certificate of incorporation form the registrar of the companies.
6) Conducting meeting among the promoters.
Duties of Company Secretary after incorporation of company are as follows:
1) Arrange meeting for the Board of Directors.
2) Prepare and circulate prospectus.
3) Collecting certificate of commencement from the registrar of Joint Stock Company.
4) Arrange statutory meeting, prepare statutory report and file the copy of such report with the registrar of the
company.
5) Arranging the meeting of the Board of Directors.
6) Collection of the certificate of commencement.
7) Arranging the statutory meeting of the company.
8) Preparation of statutory report, etc.
4.3.6. Capital Subscription/Floatation

When a company has been registered and has received its certificate of incorporation, it is ready for ‘floatation’;
that is to say, it can go ahead with raising capital sufficient to commence business and to carry it on
satisfactorily. A private company is prohibited from inviting public to subscribe to its share capital. Therefore,
when a private company is formed, the necessary capital is obtained from friends and relatives by private
arrangement. In the case of a public company also, the promoters may not invite public to subscribe to its share
capital and may arrange the capital privately as in the case of a private company.
In such a case, the intention of the promoters is to take advantages of incorporation not available to a private
company, e.g., to have unlimited number of members, to confer unrestricted right to transfer shares on the
members, etc. However, by far the largest number of public companies raises their capital in the very first
instance by inviting public to subscribe to its share capital.
Section 70 makes it obligatory for every public company to take either of the following two steps:
1) Issue a prospectus in case public is to be invited to subscribe to its capital, or
2) Submit a ‘Statement in lieu of prospectus’ in case capital has been arranged privately. It must be done
atleast 3 days before allotment.
4.3.7. Commencement of Business

A private company may commence business immediately after obtaining the certificate of incorporation. A
public company must obtain a ‘Certificate to Commence Business’ from the Registrar before it can commence
business.
1.3.7.1. Documents to be Filed

The Registrar will grant this certificate only when the public company files the following documents:
1) Prospectus or Statement in lieu of Prospectus: A public company must file a copy of prospectus or
statement in lieu of prospectus with the Registrar of Companies. A private company need not file a
prospectus or statement in lieu of prospectus.
2) Minimum Subscription: A public company cannot make allotment of shares unless minimum subscription
has been received. This arrangement has been made in the act to safeguard the interest of shareholders. The
company is required to file a declaration that the minimum subscription has been received in cash. This
provision is not applicable to private company.
3) Qualification Shares: It has been made compulsory for the Directors of public company that they must
take qualification shares and make payment for that. It shows that the proposed Director must be a
shareholder first in order to become a Director. The company must make a declaration that the Directors
have subscribed for their qualification shares.
4) Return of Allotment: The company is also required to submit a return of allotment containing the names
and addresses of shareholders and the number of shares allotted to each.
5) Declaration: That the company has applied for or obtained permission for its shares to be dealt on a
Recognised Stock Exchange is filed.
6) Statutory Declaration: Finally, in order to obtain certificate to commence business, a statutory declaration
by a Director or Secretary of the company or from an advocate that necessary legal formalities have been
complied with has to be filed.
The Registrar will scrutinise the above documents and if satisfied will issue certificate to commence business.
The company will start the business from the date of issue of the certificate.
1.3.7.2. E-Filing
The filing and registration of documents is a statutory requirement under the Companies Act, 1956. At present
the Companies Act lays down the procedure for filing of various documents in physical form and the processes
associated therewith. In order to avail the benefit of advancement in technology, it was decided to make
provisions for electronic filing system and for payment of fee through electronic form under the Companies
Act.
In order to bring in the culture of electronic filing system, new Sections 610B, 610C, 610D and 610E have been
inserted by the Companies (Amendment) Act, 2006. On the commencement of this amendment Act, the
documents in electronic form duly authenticated with digital signatures shall be accepted under the provisions
of the Companies Act. The new electronic system also provides for the multiple modes of payments of statutory
fees.
Following are the legal provisions which have been introduced to give effect to the electronic filing system:
1) Provisions Relating to Filing of Applications Documents, Inspection, etc., through Electronic Form
[Section 610B]: This section empowers the Central Government to make rules to facilitate the filing of
various documents returns, etc., through the electronic form with digital signatures which earlier were
required to be filed physically by companies and professionals alike. The payment of fees can also be made
through electronic form. Provisions contained in Section 610B are reproduced hereunder:
i) Notwithstanding anything contained in this Act, and without prejudice to the provisions contained in
Section 6 of the Information Technology Act, 2000 (21 of 2000), the Central Government may, by
notification in the Official Gazette, make rules so as to require from such date as may be specified in
the rules, that:
a) Such applications, balance sheet, prospectus, return, declaration, memorandum of association,
articles of association, particulars of charges, or any other particulars or document as may be
required to be filed or delivered under this Act or rules made thereunder, shall be filed, through the
electronic form and authenticated in such manner as may be specified in the rules.
b) Such document, notice, any communication or intimation, required to be served or delivered under
this Act, shall be served or delivers under this Act through the electronic form and authenticated in
such manner as may be specified in the rules.
c) Such applications, balance sheet, prospectus, return, register memorandum of association, articles
of association particulars of charges, or any other document and return filed under this Act or rules
made thereunder shall be maintained by the Registrar in the electronic form and registered or
authenticated, as the case may be, in such manner as may be specified in the rules.
d) Such inspections of the memorandum of association articles of association, register index, balance
sheet, return or any other document maintained in the electronic form, which is otherwise available
for such inspection under this Act or rules made thereunder may be made by any person through the
electronic form as may be specified in the rules.
e) Such fees, charges or other sums payable under this Act or rules made thereunder shall be paid
through the electronic form and in such manner as may be specified in the rules.
f) The Registrar shall, register change of registered office, alteration of memorandum of association
or articles of association, prospectus, issue certificate of incorporation or certificate of
commencement of business, register such document, issue such certificate, record notice receive
such communication as may be required to be registered or issued or recorded or received, as the
case may be, under this “Act or rule” made thereunder or perform duties or discharge functions or
exercise powers under this Act or rules made thereunder or do any act which is by this Act directed
to be performed or discharged or exercised or done by the Registrar, by the electronic form, in such
manner as may be specified in the rules.
ii) The Central Government may, by notification in the Official Gazette frame a scheme to carry out the
provisions specified under sub-section (1) through the electronic form. Provided that Central
Government may appoint different dates in respect of different Registrar of Companies Regional
Directors from which such scheme shall come into force.
2) Power to Modify Act in Relation to Electronic Records (including the Manner and Form in which
Electronic Records shall be Filed) [Section 610C]: This section empowers the Central Government to
modify the Companies Act in relation to electronic records through notifications. Provisions contained in
Section 610C are reproduced hereunder:
i) The Central Government may, by notification in the Official Gazette, direct that any of the provisions of this
Act, so far as it is required for the purpose of electronic record specified under Section 610B in the electronic
form:
a) Shall not apply, in relation to the matters specified under clauses (a) to (f) of sub-section (1) of
Section 610B as may be specified in the notification; or
b) Shall apply, in relation to the matters specified under clauses (a) to (f) of sub-section (1) of Section 610B
only with such consequential exceptions, modifications or adoptions as may be specified in the
notification.
It is provided that no such notification which relates to imposition of fines or other pecuniary penalties
or demand or payment of fees or contravention of any of the provisions of this Act or offence shall be
issued under this sub-section.
ii) A copy of every notification proposed to be issued under sub-section (1), shall be laid in draft before
each Houses of Parliament, while it is in sessions, for a total period of thirty days which may be
comprised in one session or in two or more successive sessions, and if, before the expiry of the session
immediately following the session or the successive sessions aforesaid both Houses agree in
disapproving the issue of the notification or both Houses agree in making any modification in the
notification, the notification shall not be issued or, as the case may be, shall be issued only in such
modified form as may be agreed upon by both the houses.
3) Providing for Value Added Services through Electronic Form [Section 610D]: The Central
Government may provide such value added services through the electronic form and levy such fees as may
be prescribed.
4) Application of Provisions of the Information Technology Act, 2000 [Section 610E]: All the provisions
of the Information Technology Act, 2000 relating to the electronic records (including the manner and
format in which the electronic records shall be filed), in so far as they are not inconsistent with this Act,
shall apply, or in relation, to the records in electronic form under [Section 610B].
1.3.7.3. Register of Companies

The various registers and files to be maintained by the Companies under the Companies Act, 1956 and other
Corporate Laws have been segregated into three categories as follows:
1) Statutory Books or Registers: Every company is required to keep the following statutory registers, and to
provide access to them. They must be kept at the company’s registered office or (register of members and
register of directors’ interests only) at some other place notified to Companies House. Most companies keep
the statutory registers in a single bound book or loose-leaf binder, but they may be kept in any form, such as
a computer record. The statutory registers are important. Not only it is a requirement of the Companies Act
that they should be kept, and kept up to date, but the register of members, in particular, is the primary
authority as to who members of the company are and how many shares they hold. Various statutory books
are:
i) Register of members,
ii) Register of fixed deposits,
iii) Register of debenture-holders,
iv) Minute books,
v) Inspecting the register of members,
vi) Register of directors,
vii) Register of secretaries,
viii) Register of charges,
ix) Register of allotments,
x) Register of transfers, and
xi) Register of sealings.
2) Optional Registers: With a view of keeping proper records, companies invariably maintained some other
books in addition to statutory books. These are called optional books. Various optional registers are:
i) Register of transfer of shares,
ii) Register of documents sealed,
iii) Register of share application and allotment,
iv) Register of share warrants,
v) Director’s Attendance Book,
vi) Register of attendance of shareholders, and
vii) Register of proxies for general meetings.
3) Files: Various files maintained by the companies are:
i) Forms filed with the Registrar of Companies.
ii) Stock Exchange File, shall be Exchange-wise File (only listed companies).
iii) Documents on which the common seal of the company has been affixed.
iv) Advertisements published.
v) Notice, letter of offer issued pursuant to Section 81 of the Companies Act – Right Issue.
vi) Share certificates.
vii) Transfer deeds.
viii) Notice and Agenda of the Board Meeting/Annual General Meeting/Extra Ordinary General Meeting.
ix) Shorter Notice Consent of the AGM/EGM – Form 22A.
x) Extracts of the Board Resolution/General Meeting and documents placed before the Board at its
meeting.
xi) Instrument of proxy.
xii) Representation letters.
xiii) Board resolution of the Body Corporates authorising the Representative.
xiv)Declaration of Beneficial Interest – Form I and Form II.
xv) Circular resolutions.
xvi)Annual reports.
xvii) Various correspondences with the Auditors.
xviii) Special notices if any received under Section 190.
xix)Consent and Resignation Letters received from the Directors.
xx) DIN Application and various other documents relating to it.

xxi)Declaration received under Section 274(g).
xxii) Declarations under Section 299(3) from the directors.
xxiii) Central Government Approvals received.
xxiv) Disclosures received from the directors about their shareholding [Section 308].
xxv) RTA/STA/Demat File (only listed companies).
xxvi) NSDL/CDSL File (only listed companies).
xxvii) Shareholder’s correspondence file (applicable to all companies).
xxviii) One file for keeping Annual Reports, Prospectus, Memorandum and Articles of Association
(Original/Updated) (applicable to all companies).
xxix) Disclosures under takeover code (only listed companies).
xxx) Memorandum of Transfers (only listed companies).
xxxi) Inward file giving information about the various correspondences received from outside agencies
requiring secretarial action (applicable to all companies).
1.3.7.4. Certificate of Commencement of Business

In order to obtain the Certificate of Commencement of Business, a public company must file following
documents with the Registrar of Companies:
1) A declaration that shares payable in cash have been subscribed for and allotted upto the minimum
subscription mentioned in the prospectus;
2) A declaration that every director has paid in cash, the application and allotment money on his shares in the
same proportion as others;
3) A declaration that no money is payable or liable to become payable to the applicants because of the failure
of the company to either apply for or obtain permission to deal in its securities on a stock exchange; and
4) A statutory declaration that the above requirements have been duly complied with. This declaration can be
signed by a director or secretary of the company.
A public company which has earlier filed a statement in lieu of prospectus has to submit only documents 2 and
4 listed above because it has raised capital privately. The Registrar will scrutinise the above documents. If he is
satisfied that the documents are in order, he will issue a Certificate of Commencement of Business. A public
company can start the business from the date mentioned in the certificate.
Specimen of Certificate of Commencement of Business

Specimen of Certificate of Commencement of Business
I hereby certify that ……………..Ltd. of …………… which

was incorporated under the Companies Act 1956, on the
………. day of ……… 2006 and which has this day filed a
statutory declaration in the prescribed form that the
conditions of Section 149 have been complied with, is
entitled to commence business.
Given under my hand at Delhi this day of ….. two thousand
fourteen.
Seal
Sd/-
4.4. COMPANY DOCUMENTS
4.4.1. Introduction
In order to get incorporation of the company, promoters have to deposit alongwith the application a copy of
Memorandum of Association and a copy of Articles of Association and Prospectus. These documents are called
the primary document of incorporation.
Following are the primary documents of the company:
1) Memorandum of Association,
2) Articles of Association, and
3) Prospectus.
4.4.2. Memorandum of Association (MOA)

Memorandum of association defines the scope of the company’s activities. It is the document that sets out the
constitution of the company. The main purpose of the memorandum of association of a company is two folded.
First, the intending shareholders before making investment in the company should know the field in or the purpose
for which it is going to be used and what risk he is taking in making the investment. The second purpose is that
anyone dealing with the company will know without any doubt what the permitted range of the company is.
According to 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”.
According to Lord Cains, “The Memorandum of Association of a company is its charter and defines the
limitations of powers of the company established under the Act. The Memorandum contains the fundamental
conditions upon which alone the company is allowed to be incorporated”.
According to Lord McMillan, “The Memorandum of Association sets-out the constitution of company. It is,
so to speak, the charter of the company and provides the foundation on which the structure of the company is
built”.
It should be duly stamped, signed by the subscribers, 2 for a private company and 7 for a public company, and
attested by the signature of a witness. The subscribers to the Memorandum are termed as original members of
the company.
1.4.2.1. Importance of Memorandum of Association

Importance of Memorandum of Association is brought out by some of its important features, which are as
follows:
1) Basic Conditions: The Memorandum is the foundation on which the whole super structure of the company
is based. It contains the basic conditions of the company, as the object, within the scope of which the
company will have to carry on its activities, the nature of liability of the members, whether limited and
unlimited, the situation of the company’s registered office and the territorial limits within which the
company may conduct its business activities.
2) Unalterable Charter: Memorandum of Association is regarded as an unalterable document of the
company. A company cannot be incorporated without Memorandum. It is a document that is more or less
permanent. It is the most stable document of the company. It cannot be changed without the permission of
the Court of Law or the Government. Even taken permission of the Court or the Government involves a
lengthy and complicated procedure.
3) Public Documents: It is a ‘public document’; anybody at the office of the Registrar of Companies can
inspect it. Every person who is dealing with the company is supposed to have a full knowledge of its
contents. Third parties and outsider, after going through the contents of Memorandum of Association are in
a position to know whether the contract, which they intend to make, is within the scope of the objects of the
company.
4) Base of Incorporation: Memorandum of Association is the basis of incorporation of a company. In the

case of private company atleast two members, and in the case of public company atleast seven members
must sign the Memorandum of Association.
5) Guide to Directors: It acts as a guide to the directors of a company. Memorandum of Association gives a
clear picture of the objectives and operation of the company.
1.4.2.2. Contents of Memorandum of Association

Contents of Memorandum of Association contain the following clauses:
Contents of Memorandum of Association
Name Clause Domicile Clause/Registered

Office Clause
Objects Clause
Liability Clause
Capital Clause
Association Clause
1) Name Clause: The first clause of a Memorandum shall state the name of the proposed company. The name
of a company establishes its identity and is the symbol of its existence. A company may subject to the
following rules, select any suitable name:
i) Undesirable Name to be Avoided: A company cannot be registered by a name which, in the opinion
of the Central Government, is undesirable [Section 20(1)]. Broadly speaking, a name is undesirable and
therefore rejected if it is either:
a) Too similar to the name of another company; or
b) Misleading.
ii) Injunction if Identical Name Adopted: If a company gets registered with a name which resembles the
name of an existing company, the other company with whom the name resembles can apply to the
Court for an Injunction to restrain the new company from adopting the identical name.
iii) ‘Limited’ or ‘Private Limited’ as the Last Word or Words of the Name: The Memorandum shall
state ‘Name of the Company’ with “Limited” as the last word of the name in case of a Public Limited
Company, and with “Private Limited” as the last words of the name in case of a Private Limited
Company.
iv) Prohibition of Use of Certain Names: The Emblems and Name (Prevention of Improper Use) Act,
1950 prohibits, except with the previous permission of the Central Government, the use of, or
registration of a company or firm with, any name or emblem specified in the schedule to the Act.
v) Use of Some Key Words According to Authorised Capital: If a company uses some key words in its
name, it must have a minimum authorised capital. For example, if a company uses the word
‘Corporation’ in its name, it must have a minimum authorised capital of `5 crore.
2) Domicile Clause/Registered Office Clause: Every company shall have an office registered from the day on
which it begins to carry-on business, or as from the 30th day after the date of its incorporation, whichever is
earlier. All communications and notices are to be addressed to that registered office [Section 146(1)]. Notice of
the situation of the registered office and every change shall be given to the Registrar within 30 days after the date
of incorporation of the company or after the date of change [Section 146(2)]. If default is made in complying
with these requirements, the company and every officer of the company who is in default shall be punishable
with line which may extend to `50 for every day during which the default continues [Section 146(4)].
3) Objects Clause: The objects clause defines as well as confines the spheres of business activities that the
company would engage in. Any activity, which is not specifically and explicitly allowed by the object
clause, cannot be carried-on by the company. Such activities will be treated as ultra vires, which means
outside the competence of the company.
The object that would be pursued by the company is divided into three classes, namely:
i) The main objects to be pursued by the company on its incorporation.
ii) The objects incidental or ancillary to the attainment of the main objects.
iii) Other objects, which are not included in the main objects of the company.
4) Liability Clause: This clause states that the liability of members is limited by the face value of shares.
The change in the liability can be brought by passing a special resolution to that effect. Directors may have
an unlimited liability while members may have limited liability. For a company limited by guarantee this
clause will mention the amount which every member undertakes to contribute to the assets of the
company, e.g., not exceeding 500, in the event of winding-up. For unlimited company this clause is not
needed.
5) Capital Clause: This clause states the amount of share capital with which the company is
registered and the mode of its division into shares of fixed valued, i.e., the number of shares into
which the capital is divided and the amount of each share. If there are both equity and preference
shares, then the division of the capital is to be shown under these two heads.
6) Association Clause: At the end of the Memorandum of every company there is an association or
subscription clause or a declaration of association which reads something like this:
“We, the several persons whose name and addresses and occupations are subscribed, are desirous of being
formed into a company in pursuance of this Memorandum of Association, and we respectively agree to take
the number of shares in the capital of the company set opposite our respective names.” Then follows the
names, addresses, descriptions, occupations of the subscribers, and the number of shares each subscriber
has taken and his signature attested by a witness.
1.4.2.3. Alteration in Memorandum of Association

Alteration of memorandum of association includes:
1) Change in Name Clause: The name of the company can be changed:
i) By Special Resolution: A company may change its name by a special resolution and with the
approval of the Central Government. A change of name, which merely involves the deletion or
addition of the word ‘Private’ on the conversion of a private company into a public company or vice
versa, does not require the approval of the Central Government [Section 21].
ii) By Ordinary Resolution: If through inadvertence or otherwise, a company is registered by a name
which, in the opinion of the Central Government, is identical with, or too nearly resembles, the name of
an existing company:
i) The company may change its name, by ordinary resolution and with the previous approval of the
Central Government.
ii) The company shall change its name if the Central Government so directs within 12 months of its
first registration or registration by its new name, as the case may be.
2) Change of Registered Office: This may involve:
i) Change of Registered Office from One Town to another Town in the Same State: In this case, a
notice is to be given within 30 days of the change to the Registrar [Section 146(2)].
ii) Change of Registered Office from One State to another State: In this case, a special resolution is
required to be passed at a general meeting of the shareholders and a copy of it is to be filed with the
Registrar within 30 days. Then within 30 days of the removal of the office, a notice has to be given to
the Registrar of the new location of the office.
3) Change in Object Clause: The objects clause is the most important clause in the Memorandum. The legal
personality of a company exists only for the particular purposes of incorporation as defined in the objects
clause. By Section 17(1), the objects of a company may be altered by a special resolution so as to enable the
company:
i) To carry-on its business more economically or more efficiently.
ii) To attain its main purpose by new improved means.
iii) To enlarge or change the local area of its operations.
iv) To carry-on some business which under existing circumstances may conveniently or advantageously be
combined with the objects specified in the Memorandum.
v) To restrict or abandon any of the objects specified in the Memorandum.
vi) To sell or dispose of the whole or a part of the undertaking, or any of the undertakings of the company.
vii) To amalgamate with any other company or body of persons.
4) Change in Liability Clause [Section 38]: A company limited by shares or guarantee cannot change its
Memorandum so as to impose any additional liability on the members or to compel them to buy additional
shares of the company unless all the members agree in writing to such change either before or after the
change.
5) Change in Capital Clause [Section 94]: Section 94 of the Companies Act, 1956 provides that, if the
articles authorise, a company limited by share capital may, by an ordinary resolution passed in general
meeting, alter the conditions of its memorandum in regard to capital so as:
i) To increase its authorised share capital by such amount as it thinks expedient by issuing fresh shares.
ii) To consolidate and divide all or any of its share capital into shares of larger amount than its existing
shares.
iii) To convert all or any of its fully paid-up shares into stock, and reconvert the stock into fully paid-up
shares of any denomination.
iv) To sub-divide its shares, or any of them, into shares of smaller amount than fixed by the memorandum,
but the proportion paid and unpaid on each share must remain the same.
v) To cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or
agreed to be taken by any person.
4.4.3. Articles of Association

The Articles of Association of a company and its bylaws are regulations, which govern the management of its
internal affairs and the conduct of its business. It defines the duties, rights, powers and authority of the
management, and the Board of Directors in their respective capacities and of the company, and the mode and
form in which the business of the company is to be carried-out.
The signatories to the Memorandum must sign it in the presence of witness. Generally, companies have their
own Articles but they may adopt the model Articles given in Table ‘A’ of Companies Act.
The public company will be deemed to have adopted Table A in Schedule I of the Companies Act, if it does not
file its own Articles of Association. This document should be properly stamped, duly signed by the signatories
of the Memorandum and also attested (signed by a witness).
Companies, which must have their Own Articles [Section 26]

Following companies shall have their own Articles, namely:
1) Unlimited companies,
2) Companies limited by guarantee,
3) Private companies limited by shares.
1.4.3.1. Importance of Articles of Association

The articles of association of a company serve as a contract between all the shareholders to comply with the
regulations contained therein. They are binding on all until they are altered in the manner provided by the Companies
Act, i.e., by a meeting duly called to pass a resolution for altering them. Any dispute that may arise among them must
be primarily decided with reference to the principles contained in these articles. Thus, the articles bind the members.
It is well-settled that the articles of association will have a contractual force between the company and its members as
also between members inter se in relation to their rights as such members.
Since the articles constitute a contract between the members inter se, any contract entered into between them
subsequent to their joining the company must inevitably be subject to the provisions of the articles. But this
contract is not for the benefit of strangers or even of members in some other capacity, for the articles are not
contracts with outsiders.
However, the articles do not bind the company to persons who are not members; even if they are not directors
of the company, solicitors to the company, etc., nor do the articles bind the company to the members in any
capacity other than that of members. If a member is also a director, the articles give him his rights as a member
but in no way give him rights as a director. It has been, however, held in some cases that the articles constitute
part, though not the whole, of a contract between the company and its directors.
1.4.3.2. Contents of Articles of Association

Section 5(1) and Section 5(2) of the Companies Act, 2013 provide for the contents of the Articles of
Association. The articles must contain the regulations for the management of the company alongwith the
matters prescribed by the Central Government. Further, the Articles of Association must also contain the
following:
1) Share Capital: Share capital including sub-division, rights of various shareholders, the relationship of
these rights, payment of commission, share certificates.
2) Lien of Shares: It means to retain possession of shares in case the member is unable to pay his debt to the
company.
3) Calls on Shares: It include the whole or part remaining unpaid on each share which has to be paid
by the shareholders on the company’s demand.
4) Transfer of Shares: The Articles of Association include the procedure for the transfer of shares by the
shareholder to the transferee.
5) Transmission of Shares: Transmission includes devolution of title by death, succession, marriage,
insolvency, etc. It is not voluntary but is in fact brought about by operation of law.
6) Forfeiture of Shares: The Articles of Association provide for the forfeiture of shares if the purchase
requirements such as paying any allotment or call money, are not met with.
7) Surrender of Shares: Surrender of shares is when the shareholders voluntary return the shares they own to
the company.
8) Conversion of Shares in Stock: In consonance with the Articles of Association, the company can convert
the shares into stock by an ordinary resolution in a general meeting.
9) Share Warrant: A share warrant is a bearer document relating to the title of shares and cannot be issued by
private companies; only public limited companies can issue a share warrant.
10) Alteration of Capital: Increase, decrease or re-arrangement of capital must be done as the articles of
association provide.
11) General Meetings and Proceedings: All the provisions relating to the general meetings and the manner in
which they are to be conducted are to be contained in the Articles of Association.
12) Voting Rights of Members, Voting by Poll, Proxies: The members right to vote on certain company
matters and the manner in which voting can be done is provided in the Articles of Association.
13) Dividends and Reserves: The Articles of Association of a company also provide for the distribution of
dividend to the shareholders.
14) Accounts and Audits: The auditing of a company shall be done subject to the provisions of the Articles of
Association of the company.
15) Winding-Up: Provisions relating to the winding-up of the company finds mention in Articles of
Association of the company and must be done accordingly.
16) Directors, their appointment, remuneration, qualifications, powers and proceedings of the boards of
directors meetings.
17) Accounts, audit and borrowing powers.
1.4.3.3. Alteration of Articles of Association

The company has wide powers to alter its Articles to meet requirements from time to time. A declaration in the
meeting of the Board must be taken to change all or any of the regulations of the existing Articles and they shall
fix up the day, time, place and agenda for the general meeting. It should be noted that a company can never
replace the existing Articles. It can only change the regulations contained in the Articles.
The proposed alteration conforms to the provisions of the Act and the Memorandum. The change must not
increase the liability of any member and the change must not provide for the expulsion of a member by the
company.
A notice calling the general meeting should be sent to every member atleast 21 days before the meeting wherein
the proposed special resolution and the explanation relating to the implications of the proposed change be given.
In case of the listed company notice shall be send to the stock exchange. The special resolution should be
passed by the shareholders in the general meeting.
After the Articles have been altered six copies of the amended Article should be filed with the stock exchange.
The copy of the special resolution alongwith explanatory statement in e-Form No. 23 must be filed with the
Registrar within 30 days after passing of the resolution.
Necessary changes must be made in all the copies of the Articles. If the effect of the alteration is to convert a
public company into a private company, the approval of the Central Government is necessary. Also a copy of
the altered Articles should be filed with the Registrar within one month from the date of the receipt of the
consent of the Central Government to the alteration. Once an alteration is made in accordance with the
provisions then the altered Articles shall be binding on the members in the same way as the original Articles.
Limitations or Restrictions on Power to Alter Articles

Limitations or restrictions on power to alter articles are as follows:
1) Not to be Inconsistent with the Companies Act: The alteration must not be inconsistent with any
provision of the Companies Act or any other, statute.
2) Not to be Inconsistent with the Memorandum: The alteration must not exceed the powers given by the
memorandum or conflict with other provisions of the memorandum.
3) Not to be Inconsistent with Order of Government or Court: The alteration must not be inconsistent with
an order of the Central Government or tribunal as the case may be.
4) Not to be Illegal: The altered articles must not include anything which is illegal, or opposed to public
policy or unlawful.
5) Not by Ordinary Resolution: Alterations of Articles will be made only by a special resolution as defined
under the Act. Articles can never be altered by an ordinary resolution even if they provide for such a
procedure.
6) Bona fide for the Benefit of the Company as a Whole: The alteration must be bona fide for the benefit of
the company as a whole.
7) Not to Increase the Liability of Members: The alteration of Articles which increases the liability of the
existing shareholders is inoperative and without any legal effect. Thus, by alteration of Articles the
shareholders cannot be asked to pay more than their liability unless they agree in writing. The liability of
the shareholders cannot be increased in any way.
8) Not to Constitute a Fraud on the Minority: The alteration must not constitute a fraud on the minority by
the majority. If the alteration is not for the benefit of the company as a whole, but for majority of the
shareholders, then the alteration would be bad. In other words, an alteration to the articles must not
discriminate between the majority shareholders and the minority shareholders so as to give the former an
advantage of which the latter have been deprived.
9) Central Government Approval in Certain Cases [Section 31(1), 268, 310]: An alteration of articles to
effect a conversion of a public company into a private company cannot be made without the approval of the
Central Government.
10) Not Result in Alteration in Breach of Contract: A company cannot justify breach of contract with third
parties or avoid a contractual liability by altering articles.
11) No Retrospective Operation: The amended regulation in the Articles of Association cannot operate
retrospectively but only from the date of amendment.
1.4.3.4. Difference between Memorandum and Articles of Association

Basis of Difference Memorandum of Association Articles of Association
1) Status Memorandum of Association is the charter Articles of Association are the rules and
of the company and defines the fundamental regulations framed to govern the internal
conditions and objects for which the management of the company.
company is granted incorporation.
2) Drafting or Necessity Every company must prepare and file it. A public company limited by shares may adopt
Table A.
3) Scope Constitution of the company, defines its Rules and regulations for day to day working of
objects and powers. the company.
4) Purpose To define the objects and powers of a To lays-down rules and regulations for
company. management of internal affairs.
5) Alteration Since Memorandum is the constitution of In the case of Articles of Association, members
the company, clauses of the Memorandum have a right to alter the Articles by a special
cannot be easily altered. They can only be resolution. Generally, there is no need to obtain
altered in accordance with the mode the permission of the Court or the Company
prescribed by the Act. Sometimes, the Law Board for alteration of the Articles.
company must get the approval of the
Central Government and in some cases the
sanction of Company Law Board must be
obtained to make an alteration in the
Memorandum.
6) Provisions The Memorandum is subordinate to the Whereas the Articles are subordinate to the
Companies Act so it cannot include any Companies Act as well as the Memorandum of
clause contrary to the provisions of the Association so Articles should be consistent
Companies Act. with the provisions of the Companies Act and
the conditions contained in the Memorandum.
7) Relationship The Memorandum generally defines the While the Articles regulate the relationship
relation between the company and the between the company and its members and
outsiders. between the members inter se.
8) Legal Effects Acts done by a company beyond the scope But the acts of the Directors beyond the
of the Memorandum are absolutely void and Articles, it is simply irregular and can
ultra vires and the company is not bound by subsequently be ratified by shareholders,
it, even cannot be ratified by unanimous provided it is within the scope of the
vote of all the shareholders. Memorandum.
9) Dependent It is dependant upon the Company Law. It is dependent upon the Memorandum of
Association.
10) Supremacy It is not governed by the Articles of It is governed by the Memorandum of
Association. It is supreme. Association.
4.4.4. Prospectus
According to Section 2(36) of Indian Companies Act, 1956, “Prospectus means document described or issued
as prospectus and includes any notice, circular, advertisement, or other documents inviting offers from the
public for the subscription or purchase of any shares or debentures of a body corporate”. Thus, a prospectus is
not merely an advertisement; it may be a circular or even a notice. A document shall be called a prospectus if it
satisfies two things:
1) It invites subscriptions to share or debentures or invites deposits.
2) The aforesaid invitation is made to the public.
1.4.4.1. Contents of Prospectus

In contents, the detailed description regarding the establishment of the company, its characteristics and its
estimated future is given. The important matters included in the prospectus are as follow:
1) Brief History and Prospects: It includes:
i) Brief history of company,

ii) The main objects of the company,
iii) The location of the plant,
iv) Information about project, plant and its machinery raw material, etc., and
v) Economic justification and marketability of the goods to be produced.
2) Capital Structure: Under this head, information is provided regarding:
i) Share capital of the company; authorised, issued, subscribed and paid-up capital, present issue offered
for subscription,
ii) Basis of allotment of shares, and
iii) Facilities available to non-resident for purchase of shares, etc.
3) Information about the Company Management: Under this head, complete information is provided
about the history, main objects and present business of company, the experiment and background of the
promoters, full addresses of the manager, managing director and other directors is provided.
4) Details about the Project: The main information provided under this head is the cost of the project,
the means of financing the project. Location of the project, utilities like water supply power, nature of
the products, etc.
5) Financial Information: Under financial information, the following particulars are provided:
i) Auditors report,
ii) Shareholders equity and liabilities,
iii) Auditor certificate on share capital, and
iv) Estimated cost of the project and the means of the finance.
6) General Information: The main information provided under this head are:
i) Appointment of chief executive,
ii) Election of directors,
iii) Power of directors,
iv) Borrowing powers of the directors,
v) Voting rights,
vi) Transfer of shares, and
vii) Quorum of general meeting.
7) Commission, Brokerage and Tax Exemptions: This part contains the following information:
i) Commission to be paid to the bankers to the issue,
ii) Brokerage,
iii) Tax exemption on investment on the shares of the company, and
iv) Exemption from custom duty and sales tax on plant and machinery if any.
8) Board of Directors: Under this head, the names, addresses, and occupation of the board of directors is
given.
9) Interest of Directors: This head provides information regarding:
i) Interest of directors in dividends and other benefits, and
ii) Remuneration to be paid to the chief executive, directors and the secretary.
10) Miscellaneous: The main contents under this head are:
i) Place of registration office, factory,
ii) Bankers of the company,
iii) Bankers to the issue both local and foreigner, and
iv) Legal adviser, consultants to the issue, etc.
1.4.4.2. Types of Prospectus

Different types of prospectus are as follows:
1) Offer Document: It means prospectus in case of a public issue or offer for sale and Letter of Offer in case
of a right issue which is filed with Registrar of Companies (ROC) and Stock Exchanges. An offer document
covers all the relevant information to help an investor to make his/her investment decision.
2) Draft Offer Document: It means the offer document in draft state. The draft offer documents are filed with
SEBI atleast 21 days prior to the filing of the Offer Document with ROC/SEs. The draft offer document is
available on the SEBI website for public comments for a period of 21 days from the filing of the draft offer
document with SEBI.
3) Red Herring Prospectus: It is a prospectus which does not have details of either price or number of shares
being offered or the amount of issue. This means that in case price is not disclosed, the number of shares
and the upper and lower price bands are disclosed.
4) Abridged Prospectus: It means the Memorandum as prescribed in Form 2A under sub-section (3) of
Section 56 of the Companies Act, 1956. It contains all the salient features of a prospectus. It accompanies
the application form of the public issue.
5) Shelf Prospectus: Section 60A of the Companies Act, 1956 permits any financial institution or bank to file
a shelf prospectus covering one or more issue of securities or class of securities specified in the prospectus
with the ROC. The advantage of a shelf prospectus is that the issuing institution need not file a fresh
prospectus at every stage of an offer within the validity of the shelf prospectus. Normally, the validity of the
shelf prospectus is one year.
1.4.4.3. Registration of Prospectus [Section 60]

A prospectus can be issued by or on behalf of a company or in relation to an intended company only when a
copy thereof has been delivered to the Registrar for registration. The registration must be made on or before the
date of publication thereof. The copy must be signed by every person who is named therein as director or
proposed director of the company, or by his agent authorised in writing. Further, the prospectus must state on
the face of it that a copy of it has been delivered to the Registrar for registration. It must also specify that
necessary documents and consent of the experts have been attached to or indorsed on the copy so delivered.
The prospectus must be issued within 90 days of the date on which a copy thereof is delivered for registration.
If a prospectus is not issued within this period, it is deemed to be a prospectus, a copy of which has not been
delivered to the Registrar.
Penalty for Non-Registration of Prospectus

If a prospectus is issued without a copy thereof being delivered to the Registrar for registration, or without the
necessary documents or the consent of the experts, the company and every person, who is knowingly a party to
the issue of prospectus, shall be punishable with fine which may extend to `5,000.
1.4.4.4. Consequences of Misstatement in a Prospectus [Section 56 to 59]

If there is any misstatement of a material fact in a prospectus or if the prospectus is wanting in any material fact,
there may arise the following liabilities:
1) Civil Liability: The civil liabilities include the following:
i) Compensation: The above persons shall be liable to pay compensation to every person who subscribes
for any shares or debentures for any loss or damage sustained by him by reason of any untrue statement
included therein.
It has been held that the measure of the damages is the loss suffered by reason of the untrue statements,
omissions, etc., the difference between the value which the shares would have had and the true value of
the shares at the time of the allotment.
ii) Damages for Deceit or Fraud: Any person induced to invest in the company by fraudulent statement
in a prospectus can sue the company and person responsible for damages. The shares should be first
surrendered to the company before the company is sued for damages. Fraud occurs when any statement
is made without belief in the truth or carelessly. A statement made with knowledge that it is false, will
constitute fraud or deceit.
iii) Recession of the Contract for Misrepresentation: Recession means avoiding the contract. Any
person can apply to the Court for recession of the contract if the statements on which he has taken the
shares are false or caused by misrepresentation whether innocent or fraudulent. The misrepresentation
must be false. It must be of material fact and not of law. The applicant of shares must have acted on the
statements contained in the prospectus or must have been induced to act on the statements. It should be
noted that a person cannot claim recession of contract on misrepresentation, if he had the means of
discovering the truth with ordinary diligence.
iv) Liability for Non-Compliance [Section 56]: A Director or other person responsible for not setting-out
matters and reports required to be set-out in the prospectus as provided under Section 56 of the Act,
shall be punishable with fine which may extend to `50,000.
v) Liability under General Law: Any person responsible for the issue of prospectus may be held liable
under the general law or under the Act for misstatements or fraud.
vi) Penalty for Contravening [Sections 57 or 58]: If any prospectus is issued in contravention of Section
57 (experts to be unconnected with formation or management of company), or Section 58 (expert’s
consent to issue of prospectus containing statement by him), the company and every person who is
knowingly a party to the issue thereof, shall be punishable with fine which may extend to `50,000
[Section 59(1)].
vii) Penalty for Issuing the Prospectus without Delivering for Registration: If a prospectus is issued
without a copy thereof being delivered to the Registrar, the company and every person who is
knowingly a party to the issue of the prospectus shall be punishable with fine which may extend to
`50,000 [Section 60(5)].
2) Criminal Liability [Sections 63(1) and 68]: Every person who authorises the issue of prospectus shall be
punishable for untrue statements with imprisonment for a term which may extend to 2 years or with fine
which may extend to `50,000 or with both.
3) Fraudulently Inducing Persons to Invest Money: Any person who either knowingly or recklessly makes
any statement, promises or forecasts which is false, deceptive or misleading or by any dishonest
concealment of material facts, induces or attempts to induce another person to enter into:
i) Any agreement with a view to acquiring, disposing of, subscribing for, or underwriting shares or
debentures; or
ii) Any agreement, the purpose of which is to secure a profit to any of the parties from the yield of shares
or debentures, or by reference to fluctuations in the value of shares or debentures; shall be punishable
with imprisonment for a term which may extend to 5 years or with fine which may extend to one lac
rupees or with both.
1.4.4.5. Defences against Civil Liability [Section 62(2)]

Every person made liable to pay compensation for any loss or damages may escape such liability by proving
that:
1) Withdrawal of Consent before Issue: Having consented to become a Director of the company, he
withdrew his consent before the issue of the prospectus and that it was issued without his authority or
consent.
2) Issued without Knowledge: The prospectus was issued without his knowledge or consent and that on
becoming aware of its issue, he forthwith gave reasonable public notice that it was issued without his
knowledge or consent.
3) Withdrawal of Consent after Issue: After the issue of prospectus, and before allotment thereunder, he, on
becoming aware of any untrue statement therein withdrew his consent to the prospectus and gave
reasonable public notice of the withdrawal and the reasons therefore.
4) Reasonable Belief: As regards every untrue statement not purporting to be made on the authority of an
expert or of a public official document or a statement, he had reasonable ground to believe, and did
upto the time of the allotment of the shares or debentures, as the case may be, believe that the
statement was true.
5) Statement by an Expert: As regards every untrue statement purporting to be a statement by an expert or
contained in what purports to be a copy or an extract from a report or valuation of an expert, the person
charged can escape liability on proving that:
i) It was correct and fair representation of the statement;
ii) A correct copy of, or a correct and fair extract from the report or valuation;
iii) He had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that
the person making the statement was competent to make it; and
iv) That the person (expert) had given the consent to the issue of prospectus and had not withdrawn that
consent before delivery of a copy of the prospectus for registration or before allotment.
6) Statement by an Official Person or Extract from a Public Official Document: As regards every untrue
statement made by an official person or contained in what purports to be a copy of or extract from a public
official document, it was a correct and fair representation of the statement, or a correct copy of, or a correct
and fair extract from the document.
4.5. DIRECTORS
4.5.1. Meaning & Definition of Directors [Section 149]
A company is an artificial person, invisible, intangible and existing only in the eyes of Law. It has neither a
mind nor a body of its own. Hence, we have to entrust its business to human agents. Therefore, control of its
management and the exercise of its powers must necessarily be delegated. Directors have to act as agents of the
company which delegates to them most of its powers through the memorandum and Articles of association.
The general body of shareholders entrust the management and the conduct of the business of the company to
their representatives who form the Board of Directors.
The Directors are responsible for contemplating and determining the general policy of management and
directing the company’s business in the best manner possible.
According to Section 2(34) of Companies Act, 2013, “Director means a director appointed to the Board of a
company”.
4.5.2. Number of Directors [Section 252]

The Articles of a company generally prescribe the number of Directors that may be appointed, but a public
company must have atleast three Directors, and a private company including a private company which is
regarded as a public company under Section 43A, must have atleast two Directors [Section 252]. Only an
individual – A man or a woman – Can be a Director [Section 253].
4.5.3. Kinds of Directors

The following are the kinds of directors:
1) Full-Time Working Director: A Director may be a full-time working Director, namely, – Managing or
Whole-Time Directors covered by a service contract. Managing and Whole-Time Directors are in-charge of
the day-to-day conduct of the affairs of a company and are together with other team members collectively
known as “management” of the company.
2) Non-Executive Directors: A company may also have Non-Executive Directors who do not have anything
to do with the day-to-day management of the company. They may attend board meetings and meetings of
committees of the board in which they are members.
3) Shadow Directors: Another category of Directors can be recognized as per certain provisions of the Indian
Companies Act – “Shadow Directors”. These so-called “Deemed Directors” acquire their status by virtue of
their giving instructions (other than professional advices) according to which “appointed” Directors are
accustomed to act.
4.5.4. Appointment of Directors

Appointment of directors happens in the following ways:
Appointment of Directors
First Directors
Appointment of Directors by
Company
Appointment of Directors by the
Board of Directors Appointment of Directors by
Third Parties
Appointment of Directors by
Proportional Representation
Appointment of Directors by the
Central Government
1) First Directors: The Article of Association contains the name of the first directors. Where the articles do
not provide for the appointment of the first directors, the subscribers to the memorandum who are
individuals shall be deemed to be the first directors of the company, subject to the regulations of the
company’s articles. The first directors can hold office until the directors are duly appointed in accordance
with the provisions of Section 152 [Section 152].
If all the subscribers to the Memorandum happen to be bodies corporate, none of the subscribers can be
deemed to be directors; and the company will have no directors until the first directors are appointed
under the Section 152.
2) Appointment of Directors by Company: According to Section 152, Directors must be appointed by the
company in general meeting. The appointment of Directors by company in general meeting is governed by
the following provisions:
i) At the first annual general meeting of a public company or a private company which is a subsidiary of a
public company, held after the general meeting at which the first Directors are appointed and at every
subsequent annual general meeting, 1/3rd (or the number nearest to1/3rd) of the Directors liable to retire
by rotation must retire from office.
ii) The Directors to retire by rotation at every annual general meeting must be those who have been longest
in the office since their last appointment.
iii) At the annual general meeting at which a Director retires by rotation, the company may fill up the
vacancy (thus created) by appointing the retiring Director or some other person.
iv) If the place of the retiring Director is not filled up, the meeting stands adjourned till the same day in
the next week. If at the adjourned meeting also, the place of the retiring Director is not filled up, the
retiring Director is deemed to have been re-appointed at the adjoined meeting unless:
a) At the meeting or at the previous meeting a resolution for the re-appointment of such Director is put
to the meeting and lost; or
b) The retiring Director has, by a notice in writing addressed to the company or its Board of Directors,
expressed his unwillingness to be so re-appointed; or
c) He is not qualified or is disqualified for appointment or
d) A special or ordinary resolution is required for appointment or re-appointment.
v) If a new Director is to be appointed, a notice by him or some member intending to propose him in
writing should be given to the company atleast 14 days before the meeting alongwith a deposit of 500.
The deposit shall be refunded if the person succeeds in getting elected as a Director. In case he is not
elected as a Director, the amount deposited shall be forfeited by the company.
vi) Every person (other than a Director retiring by rotation) proposed as a candidate for the office of a
Director must sign and file with the company his consent in writing to act as a Director if
appointed [Section 152].
vii) Appointment of Directors of a public company must be done individually by separate ordinary
resolutions.
3) Appointment of Directors by the Board of Directors: The Board of Directors may appoint Directors:
i) As Additional Directors [Section 161]: Such additional Directors hold office only up to the date of the
next annual general meeting of the company.
ii) In a Casual Vacancy [Section 161]: In the case of a public company, or a private company which is a
subsidiary of a public company, the office of any Director appointed by the company in general
meeting may be vacated before his term of office expires in the normal course. In such a case, the
resulting casual vacancy may be filled by the Board of Directors at a meeting of the board.
iii) As Alternate Director [Section 161]: The Board of Directors of a company may, if so authorised by
its Articles or by a resolution passed by the company in general meeting, appoint an alternate Director.
He is to act for a Director, called ‘the original Director’, during his absence for a period of atleast three
months from the date in which meetings of the board are ordinarily held.
4) Appointment of Directors by Third Parties: The Articles under certain circumstances give power to the
debenture-holders or other creditors, e.g., a banking company or a financial corporation, who have
advanced loans to the company to appoint their nominees to the board. The number of Directors so
appointed must not exceed 1/3rd of the total number of Directors, and they are not liable to retire by rotation.
5) Appointment of Directors by Proportional Representation: The Articles of a company may provide for
the appointment of not less than 2/3rd of the total number of Directors of a public company, or of a private
company which is a subsidiary of a public company, according to the principle of proportional
representation, whether by the single transferable vote or by a system of cumulative voting or otherwise.
The appointment must be made once in 3 years and internal casual vacancies must be filled in the manner
as provided in the Articles [Section 163].
6) Appointment of Directors by the Central Government: The central government may appoint such number
of Directors on the board of a company as the Company Law Board may specify as being necessary to
effectively safeguard the interest of the company, its shareholders or the public interest. The period of
appointment shall not exceed 3 years on any one occasion.
4.5.5. Qualifications of Directors

No person shall be capable of being a Director of the said association who shall not be a proprietor in his own
right of five shares of the capital stock of the said Association. If the Articles of a company require its Directors
to hold a certain number of shares, they are called qualification shares. A Director must obtain them within two
months of his appointment. The value of qualification shares cannot exceed five thousand rupees.
Only shares must be held and not share warrants and also in the Director’s own right. He must not take them as
a present from the company or its promoters. A Director, who fails to hold his qualification shares,
automatically vacates his office on the expiry of two months and becomes liable to punishment if he continues
to act [Section 272].
4.5.6. Legal Position of Directors

It is very difficult to pinpoint the exact legal position of the directors of a company. They are called by various
names, sometimes as agents, sometimes as trustees, and sometimes as managing partners of a company. But
such expressions are not used as exhaustive of the powers and responsibilities of such persons but only as
indicating useful points of view from which they may for the moment and for the particular purpose be
considered:
1) Directors as Agents: A company is an artificial person and it cannot act itself. It must, therefore, act
through agents, known as directors who are, in the eyes of the law, agents of the company for which they
act. The general principles of the law regulate in most respects the relationship of the company and its
directors. Like other agents, directors are not personally liable for the contracts made by them for the
company if they act within the scope of their authority. If, however, they exceed the powers given to them
by the Memorandum or the Articles, they are liable for breach of warranty of authority. Their actions may
be ratified by the company in general meeting if they act within the powers in memorandum but outside the
powers conferred by them on the articles.
It is strictly not true to say that the directors are nothing more than agents of a company. By the articles and
under the Companies Act the directors have in certain matter independent powers in certain matters. An
agent is bound to take instructions from his principal and to abide by his wishes in the business of the
agency. But the Directors are not bound to consult the shareholders in all matters.
2) Directors as Employees: Although, directors are agents of a company, yet, they are not employees or
members of the staff of the company for being entitled to privileges and benefits which are granted under
the Companies Act to the employees. But there is nothing to prevent a director from being a servant of a
company under a special contract of service which he may enter into with the company.
3) Directors as Officers: For certain matters under the Companies Act, directors are treated as officers of a
company. As such they are liable to certain penalties if the provisions of the Companies Act are not strictly
complied with.
4) Directors as Trustees: Although, directors are not properly speaking trustees, yet, they have always been
considered and treated as:
i) Trustees of a company’s money and property in the sense that they must account for all the company’s
money and property over which they exercise control. They have also to refund to the company any of
its money or property which they have improperly paid away or transferred. They are, however, not
trustees in the real sense of the word because they are not vested with the ownership of the company’s
property. It is only as regards some of their obligations to the company and certain powers that they are
regarded as trustees of the company.
ii) Trustees of the powers entrusted to them in the sense that they must exercise their powers honestly and
in the interest of the company and the shareholders and not in their own interest.
Although directors are loosely called trustees, they are not trustees in the strict sense of the term. The
correct view is that they stand in fiduciary relationship to the company and are really only quasi-trustees
because:
i) The company’s money and property are not vested in them but in the company;
ii) Their functions are not the same as those of trustees, and
iii) Their duties of care are not as onerous as those of trustees.
4.5.7. Powers of Directors

Powers of the directors are as follows:
1) The Board of Directors derives their powers from:
i) The Companies Act;
ii) Articles of Association;
iii) Board resolutions;
iv) Resolutions in general meetings;
v) Agreements or contracts with the company.
2) Subject to the provisions of the Act, the Board of Directors of a company shall be entitled to exercise all such
powers, and do all such acts and things, as the company is authorised to exercise and do. The Board shall not
exercise any power or thing which is required to be done by the company in a general meeting [Section 291].
3) The Board of Directors shall exercise the following powers on behalf of the company by means of
resolutions passed at the meeting of the Board:
i) The power to make calls on shareholders in respect of money unpaid on their shares;
ii) The power to issue debentures;
iii) The power to borrow money otherwise than on debentures;
iv) The power to invest the funds of the company; and
v) The power to make loans.
4) By a resolution passed at a meeting, the Board may delegate, to any committee of Directors, the managing
Director, the manager or any other principal officer of the company, the above powers on such conditions
as the Board may prescribe.
5) The resolution delegating the power, to borrow money otherwise than on debentures, shall specify the total
amount outstanding at any one time upto which money may be borrowed by the delegate.
6) The resolution delegating the power to invest the funds of the company shall specify the total amount upto
which the funds may be invested and the nature of investments which may be made by the delegate.
7) The resolution delegating the power to make loans shall specify the total amount upto which loans may be
made by the delegate, the purpose for which the loans may be made and the maximum amount of the loans
which may be made for each such purposes in individual cases.
4.5.8. Duties of Directors

Duties of Directors may be divided under two heads:
1) Statutory Duties of Directors: Statutory duties of directors are as follows:
i) To File Return of Allotments: Section 75 charges a company to file with the registrar, within a period
of 30 days, a return of the allotments stating the specified particulars. Failure to file such return shall
make Directors liable as ‘officer in default’. A fine upto 500 per day till the default continues may be
levied.
ii) Not to Issue Irredeemable Preferences Shares or Shares Redeemable After 10 Years: Section 80,
forbids a company to issue irredeemable preference shares or preference shares redeemable after 10
years. Directors making any such issue may be held liable as ‘officer in default’ and may be subjected
to fine upto 1,000.
iii) To Disclose Interest [Sections 299-300]: A Director who is interested in a transaction of the company
must disclose his interest, to the Board. The disclosure must be made at the first meeting of the Board
held after he has become interested. This is because a Director stands in a fiduciary capacity with the
company and therefore, he must not place himself in a position in which his personal interest conflicts
with his duty. Interest should be such which conflicts with the duties of the Director towards the
company.
iv) To Disclose Receipt from Transferee of Property: Section 319 provides that any money received by
the Directors from the transferee in connection with the transfer of the company’s property or
undertaking must be disclosed to the members of the company and approved by the company in general
meeting. Otherwise the amount shall be held by the Directors in trust for the company. This money may
be in the name of compensation for loss of office but in essence may be on account of transfer of
control of the company. But if it is bonafide payment of damages of the breach of contract, then it is
protected by Section 321(3).
v) To Disclose Receipt of Compensation from Transferee of Shares: If the loss of office results from
the transfer (under certain conditions) of all of the shares of the company, its Directors would not
receive any compensation from the transferee unless the same has been approved by the company in
general meeting before the transfer takes place [Section 320]. If the approval is not sought or the
proposal is not approved, any money received by the Directors shall be held in trust for the shareholders
who have sold their shares.
Section 320 further provides that in pursuance of any agreement relating to any of the above transfers,
if the Directors receive any payment from the transferee within one year before or within 2 years after
the transfer, it shall be accounted for to the company unless the Director proves that it is not by way of
compensation for loss of office.
Section 321 further provides that if the price paid to a retiring Director for his shares in the company is
in excess of the price paid to other shareholders or any other valuable consideration has been given to
him, it shall also be regarded as compensation and should be disclosed to the shareholders.
2) General Duties of Directors: General duties of directors are as follows:

i) Duty of Good Faith: The Directors must act in the best interest of the company. Interest of the
company implies the interests of present and future members of the company on the footing that the
company would be continued as a going concern.
A Director should not make any secret profits. He should also not exploit to his own use the corporate
opportunities.
ii) Duty of Care: Directors should carry out their duties with such care, skill and diligence as is
reasonably expected from persons of their knowledge and status. If they fail to exercise due care in
the discharge of their duties, they are guilty of negligence. The standard of care, skill and diligence
would, however, vary with:
a) The type and nature of work;
b) The division of power between Directors and other officers;
c) The general usages and customs of that type of business; and
d) Whether Directors work gratuitously or remuneratively.
iii) Duty to Attend Board Meetings: A number of powers of the company are exercised by the Board of
Directors in their meetings held from time to time. Although a Director is not expected to attend all the
meetings but if he fails to attend three consecutive meetings or all meetings for a period of three
months, whichever is longer, without permission, his office shall automatically fall vacant.
iv) Duty Not to Delegate: Director being an agent is bound by maxim ‘delegatus non potest delegare’
which means a delegate cannot further delegate. Thus, a Director must perform his functions
personally. A Director may, however, delegate in the following cases:
a) Where permitted by the Companies Act or Articles of the company;
b) Having regarded to the exigencies of business certain functions may be delegated to other officials of the
company.
4.5.9. Liabilities of Directors

Liabilities of directors are as follows:
1) Liability to Third Parties: This may arise:
i) Under the Act: Liability of Directors to third parties may arise in connection with the issue of a
prospectus which does not contain the particulars required by the Act, or which contains material
misrepresentations. They may also incur such liability:
a) Where they fail to repay application money if minimum subscription has not been subscribed
[Section 69 (5)].
b) Where the allotment of shares has been irregular [Section 71(3)].
c) Where they fail to repay application money if the application for the securities to be dealt in on a
recognised stock exchange is not made or is refused [Section 73 (2)].
ii) Independently of the Act: Directors, as agents of a company, are not personally liable on contracts
entered into as agents on behalf of the company. For whatever an agent is liable, those Directors would be
liable; where the liability would attach to the principal only, the liability is the liability of the company. In
general, the Directors, who contract as agents, incur no personal liability, but there are a number of
exceptions to this rule. If they fail to exclude personal liability, for instance, while signing a negotiable
instrument without mentioning the company’s name, they are personally liable to the holder of such
instrument. They are also personally liable if they act in their own name.
2) Liability to the Company: The liability to the company may arise from:
i) Breach of Fiduciary Duty: Where a Director acts dishonestly in disregard to the interests of the
company, he will be held liable for breach of fiduciary duty. Most of the powers of Directors are ‘powers
in trust’ and therefore, should be exercised in the interest of the company and not in the interest of the
Directors or any Section of members. Thus, where the Directors, in order to forestall a take-over bid,
transferred the unissued shares of the company to trustees to be held for the benefit of the employees and
an interest-free loan from the company was advanced to the trustees to enable them to pay for the shares,
it was held to be a wrongful exercise of the fiduciary powers of the Directors.
ii) Ultra Vires Acts: Directors are supposed to act within the parameters of the provisions of the
Companies Act, Memorandum and Articles of Association since these lay down the limits to the
activities of the company and accordingly to the powers of the Board of Directors. The Directors shall
be held personally liable for acts beyond the aforesaid limits, being ultra vires. Thus, where the
Directors pay dividends or interest out of capital, they will be liable to indemnify the company for any
loss or damage suffered due to such act.
iii) Negligence: The Directors shall be deemed to have acted negligently in discharge of their duties and
consequently liable for any loss or damage resulting there from where they fail to exercise reasonable
care, skill and diligence. However, error of judgment will not be deemed as negligence. It may be noted
that the Directors cannot be absolved of the liability for negligence by any provision in the Article
(Section 201). The court may award relief to Directors against such liability under Section 633.
iv) Misfeasance: Directors are also liable to the company for misfeasance which means ‘misconduct’ of
Directors for which they may be sued in a Law Court. But in order to amount to misfeasance, the
misconduct must be willful. Where any Director, or for that matter any officer of the company (and also
promoter or liquidator) has misapplied or retained money or property of the company or has been guilty of
breach of trust or misfeasance, the Court may examine into his conduct and order him to repay or restore the
money or property or to pay compensation.
3) Liability for Breach of Statutory Duties: There are numerous provisions of the Companies Act which is
the duty of the Directors to carry out.
Most of these duties relate to maintenance of proper accounts, filing of returns or observance of certain
statutory formalities. If they fail to perform these statutory duties, they render themselves liable to penalties.
4) Liability for Acts of his Co-Directors: A Director is not liable for the acts of his Co-Directors of which he
has no knowledge and in which he has not taken any part. This is because his Co-Directors are not his
servants or agents and therefore how can be their acts impose liability on him.
4.6. WINDING-UP OF COMPANIES

4.6.1. Meaning of ‘Winding-Up’
Winding-up is the process of putting an end to the life of the company. In other words, it is a proceeding by
which a company is dissolved. In the course of such dissolution, the assets of the company are disposed of, the
debts are paid-off out of the realised assets and the surplus if any, is then paid off to the members in proportion
to their holdings in the company.
The process of winding-up commences after the Court passes the order for winding-up. The company is not
dissolved immediately on the commencement of the winding up proceedings. Winding-up of a company
precedes its dissolution. Thus, in between the winding-up and dissolution, the legal status of the company is in
existence and it can be sued. On the dissolution, the existence of the company comes to an end and its name is
struck off by the Registrar from the register of companies.
Thus, winding-up of a company is the stage, whereby the company takes its last breath. It is a process by which
business of the company is wound up and the company ceases to exist anymore. All the assets of the company
are sold, and the proceedings collected are used to discharge the liabilities on a priority basis.
4.6.2. Modes of Winding-Up

There are three modes of winding of a company, viz.:
1) *Compulsory Winding-up by the Court; or
2) Voluntary winding-up. This may be:
i) Members’ voluntary winding-up, or
ii) Creditors’ voluntary winding-up.
3) Winding-up subject to the supervision of the Court.
*Note: The powers of Court are transferred to the National Company Law Tribunal by the Company
(Amendment) Act, 2002. The Central Government is in the process of formation of this Tribunal. As on date,
the powers are exercised by Courts. Hence, in this section Tribunal/NCLT has been used.
4.6.3. Compulsory Winding-Up by Court [Section 433]

The winding-up by the Court is generally referred to as the ‘compulsory winding-up’. The Court may order the
winding-up of a company in the cases mentioned under section 433. The Court will issue an order for the
winding-up of a company on an application by any of the persons mentioned under section 439.
1.6.3.1. Grounds of Winding-Up by the Court

Grounds for compulsory winding-up are as follows:
1) Special Resolution: Special resolution for winding-up by the Court is passed by the members in a general
meeting.
2) Default in Filing Statutory Report or Holding Statutory Meeting [Section 439(7)]: If a default is made
in delivering the statutory report of a public company to the Registrar or in holding the statutory meeting of
the company, the Court may make a winding-up order.
3) Failure to Commence Business within Time: A company is wound-up on this ground if it does not
commence its business within a year from its incorporation or suspends its business for a whole year,
unless:
i) There are reasonable prospects of the company starting business within a reasonable time, and
ii) There are good reasons for the delay as, e.g., when the company is waiting for the trade depression to
pass.
4) Reduction of Membership: Reduction of membership below the legal minimum limit, i.e., below 7 in a
public company and 2 in a private company. The company may be ordered to be wound-up.
5) Inability to Pay Debts [Section 434]: A company may be ordered to be wound-up, if it is unable to pay its
debts. A company is deemed to be unable to pay its debts:
i) If a creditor for a sum exceeding 500 has served on the company at its registered office a demand for
payment and the company has for 3 weeks thereafter neglected to pay or otherwise satisfy him. The
debt must be presently payable and the company should not have any bona fide dispute about it.
ii) If execution or other process issued on a degree or order of any Court in favour of a creditor of the
company is returned unsatisfied in whole or in part.
iii) If it is proved to the satisfaction of the Court that the company is unable to pay its debts. In determining
whether a company is unable to pay its debts, the Court must take into account the contingent and
prospective liabilities of the company also (Section 434).
6) Default in Filing P/L Account and B/S: If a company is find to be a defaulter in filing Profit and Loss
Account and Balance Sheet under the Companies Act, 1956 then the Court may order for the compulsory
winding-up of the company.
7) Acted against Sovereignty and Integrity of India: The Court may order for the compulsory winding-up
of the company in case if the company has acted against sovereignty and Integrity of India.
8) Sick Industrial Company: If the Court finds that the company is not in good financial condition and falls
within the criteria of the Sick Industrial Company then it may pass an order for the compulsory winding-up
of the company.
9) Just and Equitable: If the Court is of opinion that it is just and equitable that the company should be
wound-up. The cases are:
i) Loss of objective,
ii) Deadlock in management,
iii) Oppression of minority,
iv) Fraudulent purpose, and
v) Where company is a dummy.
1.6.3.2. Powers of Liquidators in Winding-Up by Court

Powers of liquidators in winding-up by court are as follows:
1) With the Court’s Sanction
i) To institute any suit (civil/criminal) on behalf of the company.
ii) To carry on company’s business.
iii) To sell property of the company.
iv) To borrow on the security of assets.
v) To do all such other things necessary for winding-up.
2) Without the Court’s Sanction

i) On behalf of the company to do all acts and execute all deeds, receipts, and other documents.
ii) To use Company’s seal.
iii) To inspect records and returns or the files of the Registrar without payment of any fee.
iv) To prove, rank and claim in insolvency of any contributory for any balance against his property.
v) To draw, accept, make or endorse any hundi, bill or promote on behalf of the company.
vi) To take out in his official name letters of administration of any dead contributory and to do any other
act for getting payment of money due from a contributory.
vii) To appoint an agent to do any business which the liquidator is unable to do himself.
1.6.3.3. Duties of Liquidators in Winding-Up by Court

Duties of liquidator in winding-up by court are as follows:
1) To Conduct Proceedings in Winding-Up [Section 451 (1) and (3)]: The liquidator shall conduct the
proceedings in winding-up the company and perform duties imposed by the Court. The acts of the
liquidator shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or
qualification. Acts done, after his appointment has been shown to be invalid, shall not be deemed to be
validly done.
2) To Make Report [Section 455 (1)]: The Official Liquidator shall as soon as practicable after receipt of
the statement of affairs of the company (to be submitted under Section 454), and not later than 6 months
from the date of the order of winding-up submit a preliminary report to the Court. The report shall
contain particulars:
i) As to the amount of the capital issued, subscribed, and paid-up, and the estimated amount of assets and
liabilities.
ii) If the company has failed, as to the cause of the failure; and
iii) Whether, in his opinion, further inquiry is desirable as to any matter relating to the promotion,
formation, or failure of the company, or the conduct of business thereof.
3) Custody of Company’s Property [Section 456]: Where a winding-up order has been made or where a
provisional liquidator has been appointed, the liquidator provisional liquidator shall take into his custody all
the property, effects and actionable claims to which the company is entitled. So long as there is no
liquidator, all the property and effects of the company shall be deemed to be in the custody of the Court.
4) Exercise and Control of Liquidator’s Powers [Section 460]: The liquidator shall, in the administration of
the assets of the company and the distribution thereof among creditors, have regard to any directions which
may be given by resolution of the creditors or contributories at any general meeting or by the committee of
inspection. Any directions by the creditors or contributories at any general meeting shall override any
directions given by the committee of inspection.
5) To Summon Meeting of Creditors and Contributories [Section 460(3)]: The liquidator may summon
general meetings of the creditors or contributories whenever he thinks fit for the purpose of ascertaining
their wishes. He shall summon such meetings at such times as the creditors or contributories may by
resolution direct, or whenever requested in writing to do so by not less than 1/10th in value of the creditors
or contributories, as the case may be.
6) Directions from the Court [Section 460(4) and Section 460(5)]: The liquidator may apply to the Court
for directions in relation to any particular matter arising in winding-up. He shall also use his own discretion
in the administration of the assets of the company and in the distribution thereof among the creditors.
7) Books to be kept by Liquidator – Proper Books [Section 461]: The liquidator shall keep proper books
for making entries or recording minutes of the proceedings at meetings and such other matters as may be
prescribed. Any creditor or contributory may, subject to the control of the Court, inspect any such books
personally or by his agent.
8) Audit of Liquidator’s Accounts [Section 462]: The liquidator shall, at such times as may be prescribed
but at least twice each year during his tenure of office present to the Court an account of his receipts and
payments as liquidator. The account shall be in the prescribed form, shall be made in duplicate, and shall be
duly verified. The Court shall cause the account to be audited. For the purpose of the audit the liquidator
shall furnish the Court with such vouchers, information and the books as the Court may require. One copy
of the audited accounts shall be filed and kept by the Court. The other copy of the account shall be
delivered to the Registrar for filing. Each copy shall be open to the inspection of any creditor, contributory
or person interested.
9) Appointment of Committee of Inspection [Section 464]: The Court may at the time of making an order
for the winding-up of a company, or at any time thereafter, direct that there shall be appointed a committee
of inspection to act with the liquidator.
10) Pending Liquidation [Section 551]: The liquidator shall, within 2 months of the expiry of each year from the
commencement of winding-up, file a statement duly audited by a qualified auditor of the company with respect
to the proceedings in, and position of the liquidation.
4.6.4. Voluntary Winding-Up [Section 484-521]

Voluntary winding-up means winding-up by the members or creditors of the company themselves without the
intervention of the court. The object of a voluntary winding-up is that the company, i.e., the members as well as
the creditors are left free to settle their affairs without going to the Court of law. They may, however, apply to
the Court for any directions, if any, when necessary [Section 518].
Section 484 of the Companies Act, 1956, provides that a company can be wound-up voluntarily under the
following circumstances:
1) Ordinary Resolution: The members passed in a general meeting in the following cases:
i) Where the duration of the company was fixed by Articles of Association and the period has expired;
and
ii) Where the Articles of Association provided for winding-up on the occurrence of any event and that
event has occurred.
2) Special Resolution: Passed by the members in all other cases. Within 14 days of passing the resolution for
voluntary winding-up, it must be notified to the public by an advertisement in the ‘Official Gazette’ and in
local newspapers. The voluntary winding-up will commence from the date of the passing of the resolution.
The company shall cease to carry on its business except for the benefits of winding-up proceedings.
1.6.4.1. Types of Voluntary Winding-Up

Under the Act there is a clear distinction between:
1) Members’ voluntary winding-up,
2) Creditors’ voluntary winding-up.
1.6.4.2. Members’ Voluntary Winding-Up [Section 489-498]

This is possible only in the case of a solvent company. A winding-up in the case of which a declaration has
been made by the Board and filled with the Registrar is referred to as ‘members’ voluntary winding-up.
Sections 490 to 498 apply in relation to members’ voluntary winding-up and are as follows:
1) Appointment of Liquidator [Section 490],
2) Board’s power to cease [Section 491],
3) Power to fill vacancy in the office of liquidator [Section 492],
4) Notice of appointment of liquidator to Registrar [Section 493],
5) Power of liquidator to accept shares, etc., as consideration for sale of company property [Section 494]
6) Duty of liquidator to call creditors’ meeting [Section 495],
7) General meeting at end of each year [Section 496], and
8) Final meeting and dissolution [Section 497].
Procedure of Members’ Voluntary Winding-up

Procedure of members’ voluntary winding-up is as follows:
1) Appointment of Liquidators: The Company in general meeting shall appoint one or more liquidators for
the purpose of winding-up the affairs and distributing the assets of the company.
2) Board's Powers to Cease on Appointment of Liquidator: On the appointment of a liquidator, all the
powers of the Board of Directors, and Manager, if there be any of these, shall cease, except when the
company in general meeting or the liquidator sanctions them to continue [Section 491].
3) Power to Fill Vacancy in Office of Liquidator: If a vacancy occurs by death, resignation or otherwise in
the office of any liquidator appointed by the company, the company in general meeting may fill the
vacancy.
4) Notice of Appointment of Liquidator to be given to Registrar: The Company shall give notice to the
Registrar of the appointment of a liquidator or liquidators within 10 days of the appointment [Section 493].
5) Power of liquidator to accept shares, etc. as the consideration for sale of property [Section 494]: This
was discussed in detail in the Chapter on “Compromises, Amalgamations and Reconstructions.”
6) Duty of Liquidator to Call Creditors’ Meeting in Case of Insolvency: If the liquidator is at any time of
opinion that the company will not be able to pay its debts in full within the period stated in the declaration,
he shall summon a meeting of the creditors and lay before it a statement of the assets and liabilities of the
company [Sections 495 (1)]
7) Duty to Call General Meeting at the End of the Year: The liquidator shall call a general meeting of the
company at the end of every year from the commencement of the winding-up.
8) Final Meeting and Dissolution: As soon as the affairs of the company are fully wound up, the liquidator
shall make up an account of the winding-up, showing how the winding-up has been conducted and how the
property of the company has been disposed of. He shall then call a general meeting of the company and lay
before it the accounts showing how the winding-up has been conducted. This is the final meeting of the
company.
1.6.4.3. Creditors’ Voluntary Winding-Up [Section 499-509]

If the declaration of solvency has not been made by Directors, the winding-up is referred to as ‘creditors’
voluntary winding-up.’ In the absence of the solvency declaration, voluntary winding-up will naturally be
controlled and supervised by the creditors. Section 500 to 509 shall apply in relation to a creditors’ voluntary
winding-up. These provide for:
1) Meeting of creditors [Section 500],
2) Notice to Registrar [Section 501],
3) Appointment of Liquidator [Section 502],
4) Committee of Inspection [Section 503],
5) Liquidators’ remuneration [Section 504],
6) Power of board to cease [Section 505],
7) Power to fill a vacancy in the office of a liquidator [Section 506],
8) Power to accept shares, etc., as consideration for sale of company property [Section 507],
9) Meeting at end of each year [Section 508], and
10) Final meeting and dissolution [Section 509].
Procedure for the Creditors’ Voluntary Winding-up

Procedure for the creditors’ voluntary winding-up is as follows:
1) Meeting of Creditors: The Board of Directors will convene two separate meetings – one of members and
the other of creditors – either on the same day or one after the other, i.e., on the two consecutive days. Both
the notices will be simultaneously sent and advertised duly in the Official Gazette and also in two regional
newspapers.
2) Notice of Resolution to be given: Within 10 days of the passing of the resolution for voluntary winding-up
at the creditors’ meeting, a copy of the same must be filed with the Registrar.
3) Appointment of Liquidator: In the company meeting and the creditors’ meeting, resolution for voluntary
winding-up will be passed and each meeting will appoint a liquidator for winding-up the affairs and
distributing the assets of the company.
4) Committee of Inspection: The creditors at their meeting may appoint a committee of inspection (not more
than 5 persons). On such a committee, the shareholders’ meeting may also nominate (not more than 5
persons) as their representatives on the committee. The creditors may object to such members’ nominees
and in that case the Court can be approached for the final decision.
The committee of inspection shall have frequent meetings. Any member or liquidator can convene the
meeting of the committee of inspection as and when necessary. The committee will consider the problems
arising out of winding-up and give necessary guidance to the liquidator. The quorum for its meeting shall be
1/3rd of the total number of members or two, whichever is higher. Maximum membership of the committee
shall be 12. The committee shall have the right to inspect the accounts of the liquidator.
5) Liquidator’s Remuneration: The remuneration of the liquidator will be fixed by the committee of inspection or
by the creditors. There may be one or more liquidators. All the powers of the Board will be transferred to the
liquidator. The committee of inspection or the creditors meetings shall, of course, control the activities of the
liquidator.
6) Board’s Powers to Cease on Appointment of Liquidator: On the appointment of a liquidator, all the
powers of the Board of Directors shall cease. But the committee of inspection, or if there is no such
committee the creditors in general meeting, may sanction the continuance of the Board (Section 505).
7) Duty of Liquidates to Call Meeting of Company and of Creditors at the End of Each Year: The
liquidator will call the meetings of members and creditors at the end of the first year and lay before the
meeting his report and accounts.
8) Final Meeting and Dissolution: As soon as the affairs of the company are fully wound up, he shall call the
final meetings and submit his final report. Within one week of such meetings, a copy of the account will be
filed with the Registrar, within 3 months of the registration, the company shall be deemed to be dissolved.
1.6.4.4. Powers of Liquidators in Voluntary Winding-Up

Powers of liquidators in voluntary winding-up are as follows:
1) Power Exercisable with Sanction: The powers of liquidator are the same as of the official liquidator in the
compulsory winding-up of company. Section 512 lays down the powers of liquidator in voluntary winding-up.
The difference is that the powers exercised by the official liquidator which are to be sanctioned by the court are
exercised by this liquidator with a special resolution passed by company in members’ voluntary winding-up. In
case of creditors winding-up it is the court which sanctions or the committee of inspection.
Section 546 lays down the powers of a liquidator involuntary winding-up can exercise with the sanction of
a special resolution of the company and subjected to control of the court. These are:
i) To pay any class of creditors in full.
ii) To make any compromise or arrangement with creditors or persons claiming to be creditors.
iii) To compromise any call or liability to call, debt and liability capable of resulting in a debt and any
claim with contributories or debtors of the company and take any security for the discharge in respect
thereof.
2) Powers Exercisable without Sanction: The liquidator may exercise all powers that the liquidator in a
company winding-up by the court may exercise under Section 457(2) without any sanction. In addition to
above powers, he can exercise the following powers, without obtaining the sanction:
i) The power of the court for settling a list of contributories.
ii) The power of court for making calls.
iii) The power of calling general meetings of the company for the purpose of obtaining the sanction of the
company by ordinary or special resolution.
3) Joint Liquidators: In this case several liquidators are appointed. Any powers given by this act may be
exercised by such one or more of them as may be determined at the time of appointment.
In default of such determination, any power exercisable by them should be exercised by at least two of
them. [Section 512(4)].
4) Power to Apply to Court to have Questions Determined: Section 518 permits the liquidator or any
contributory or creditor to apply to the Tribunal to determine any question arising in the winding-up of the
company or to exercise all or any of the powers which the Tribunal may exercise if the company were being
wound-up by it.
5) Public Examination of Promoters, Directors, etc.: Section 519 permits the liquidator that he may make a
report to the Tribunal stating that in his opinion a fraud has been committed by any person in the promotion
or formation of the company or by any officer of the company in relation to the company since its
formation; and the Tribunal may, after considering the report, direct that person or officer shall attend
before the Tribunal on a day appointed by it for that purpose, and be publicly examined as to the promotion
or formation or the conduct of the business of the company, or as to his conduct and dealings as officer
thereof.
The provisions of sub-sections (2) to (11) of Section 478 shall apply in relation to any examination directed
under sub-section (1) as they apply in relation to an examination directed under sub-section (1) of Section
478 with references to the liquidator being substituted for references to the Official Liquidator in those
provisions.
1.6.4.5. Duties of Liquidators in Voluntary Winding-Up

Duties of liquidators in voluntary winding-up are as follows:
1) Section 512(3) prescribes a duty on the liquidator that he shall pay the debts of the company and shall
adjust the rights of the contributories among themselves.
2) Every liquidator in voluntary winding-up shall pay the money received by him in his capacity as such into
scheduled bank to the credit of special banking account opened by him on behalf and called the liquidation
account of the company.
3) According to Section 496 the liquidator should keep the contributories informed.
4.6.5. Winding-Up Under the Supervision of the Court [Section 522-527]

At any time after a company has passed a special resolution for voluntary winding-up, the Court may make an
order that the voluntary winding-up shall continue, but subject to the Court supervision, and on the terms and
conditions specified by the Court.
Any contributory, creditor or the voluntary liquidator himself may apply for a supervision order and the Court
may permit for such a winding-up under its supervision. Winding-up under the supervision of the Court will
naturally protect the interests of all parties, viz., the members, creditors and the company. The Court will protect
the minority against any fraudulent or aggressive majority of members or creditors. In case of need, the Court
may also pass an order for the compulsory winding-up superseding the voluntary winding-up.
1.6.5.1. Power of Court to Appoint or Remove Liquidators [Section 524-525]

The court has power to appoint an additional liquidator or liquidators. It may also remove any liquidator so
appointed or any liquidator continued under the supervision order and fills any vacancy occasioned by a
removal, by death or by resignation.
The court may appoint an official liquidator as a liquidator or to fill any vacancy caused by the removal of the
previously appointed liquidator. The court may also appoint or remove a liquidator on an application of the
registrar in his behalf.
1.6.5.2. Status of Liquidator

In company winding-up, he is an officer of the court as well as an agent of the company. In voluntary winding-
up he is an agent of the company and not an officer of the court.
He may be liable in damages to a creditor or contributory for the breach of his statutory duty. But he is not a
trustee of the company’s assets property of the company is not vested in him. But, still, he is in a fiduciary
position in relation to the company and will be held liable for paying any invalid claim.
4.6.6. Consequences of Winding-Up

1) Consequences as to Shareholders: In the case of Limited Company, the share are partly paid shares, the
present as well as past members (called contributories on ‘A’ and ‘B’ Lists respectively) shall be called
upon to contribute to the extent of unpaid amount on the shares. For instance a share of `100 is paid up to
the extent of `60. The members will be required to pay `40 per share to meet the company’s debts and
obligations. In the case of a Guarantee Liability Company, the member shall have to pay the guaranteed
amount as per Memorandum of Association.
2) Consequences as to Proceedings Against the Company: From the point of view of the company,
winding-up does not indicate the end or the dissolution. Even during the proceedings of winding-up, the
company enjoys separate legal existence. However, the management and administration of a company
under winding-up shall be in charge of the Liquidator.
3) Consequences as to Creditors:
i) The Company’s creditors cannot file suits or continue any pending suits against the company. They are
required to lodge their claims and prove their debts.
ii) A secured creditor need not prove his debts in the Court, unless his securities are worthless. He may
rely on his security if it can recover his claim. He may realize his security, i.e., sell off the mortgaged
property and prove for the balance. He may decide to surrender his security and act as an unsecured
creditor proving his debt in the Court.
4) Consequences as to Servants and Officers: A winding-up order by the Court (compulsory winding-up)
gives the notice to the company’s servants regarding the termination of their services. But this will not be
applicable to a voluntary winding-up.
5) Consequences as to Board of Director: The Board of Directors ceases to function and their powers come
to an end. The Liquidator will take over all the powers and duties of the Board.
6) Consequences at to Company Assess: Any disposal of company’s property and assets shall be inoperative
and void unless such disposals are permitted by the Court or the Liquidator.
7) Consequences as to Costs: All costs and expenses of winging up will be payable out of the company’s
assets.

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MBA Ist Semester – (AUC) (Legal Aspects of Business) 4.

4.1. COMPANIES ACT, 2013

4.1.2. Definitions under Companies Act, 2013

Provided that nothing in this Clause shall apply to:

4.1.3. Important Provisions of Companies Act, 2013

vi) Who possesses such other qualifications as may be prescribed.

4.1.4. Amendments as per Companies Act, 2013

4.2.1. Meaning and Definition of a Company

4.2.2. Nature of Companies

4.2.3. Types of Companies

Based on Based on Based on Basis on Basis on

1) Classification of Companies Based on Incorporation: Based on incorporation, the companies can be

4.3. FORMATION OF A COMPANY

4.3.2. Objectives of Forming a Company

4.3.3. Stages in Formation of a Company

Stages in Formation of a Company

− Discovery of − Memorandum − Permission from − Copy of prospectus

4.3.4. Promotion of Company

1.3.4.1. Meaning & Definition of Promoters

A promoter is an individual, a firm, a company, an institution, or even a Government department, who

The business opportunities may be:

3) Novel selling techniques,

1.3.4.2. Legal Position of Promoter

1.3.4.3. Functions and Duties of Promoter

Naming the Company Appointing Bankers,

1.3.4.4. Liability and Rights of Promoter

1.3.4.5. Importance of Promoter

4.3.5. Incorporation/Registration of Company

1.3.5.1. Mode of Forming Incorporated Company (Section 12)

1.3.5.2. Availability and Approval of the Name

1.3.5.3. Documents to be Filed with Registrar

1.3.5.4. Certificate of Incorporation

I hereby certify that ………………............................................ (name of the company)

Fees: Deed stamp Rs…………….…

1.3.5.5. Effects of Registration

1.3.5.6. Duties of Secretary Regarding Incorporation

4.3.6. Capital Subscription/Floatation

4.3.7. Commencement of Business

1.3.7.1. Documents to be Filed

1.3.7.3. Register of Companies

xx) DIN Application and various other documents relating to it.

1.3.7.4. Certificate of Commencement of Business

Specimen of Certificate of Commencement of Business

I hereby certify that ……………..Ltd. of …………… which

4.4. COMPANY DOCUMENTS

4.4.2. Memorandum of Association (MOA)

1.4.2.1. Importance of Memorandum of Association

4) Base of Incorporation: Memorandum of Association is the basis of incorporation of a company. In the

1.4.2.2. Contents of Memorandum of Association

Name Clause Domicile Clause/Registered

1.4.2.3. Alteration in Memorandum of Association

4.4.3. Articles of Association

Companies, which must have their Own Articles [Section 26]

1.4.3.1. Importance of Articles of Association

1.4.3.2. Contents of Articles of Association

1.4.3.3. Alteration of Articles of Association

Limitations or Restrictions on Power to Alter Articles

1.4.3.4. Difference between Memorandum and Articles of Association

1.4.4.1. Contents of Prospectus