Corporate Law

Anil Kumar
LAST
AUR
SS
10th Edition
2021
work
1-6 PREFACE TO TENTH EDITION
book building, shares including dividend, general meetings,

management of companies and powers of directors. Chapter 14
Syllabus
contains the concept and modes of winding up of companies,
The Depositories Act contained in Chapter 15 makes the book
relevant not only for under-graduate students but also those
who have an interest in the securities market. The examination
questions and case problems are given at the end of each
chapter to enhance the utility of this book for the students
B.COM. (HONS.): SEMESTER-I1
preparing for their semester examinations.
PAPER BCH 2.3: CORPORATE LAWS
Feedback from readers is solicited and would be thankfully
acknowledged. Course Objective
To impart basic knowledge of the provisions of the Companies Act, 2013
and the Depositories Act, 1996. Case studies involving issues in corporate
March 15, 2021 laws are required to be discussed.
Course Learning Outcomes
After completing the course, the student shall be able to:
CO1: understand the regulatory aspects and the broader procedural aspects
involved in different types
of companies covering the Companies Act, 2013
and Rules thereunder.
CO2: Follow the basic legal documents and their usage essential for oper-
ations and management of company.
CO3: enable the students to synthesis company processes, meetings and
decisions.
CO4: equip the students with framework of dividend distribution and role
of auditors in a company.
CO5: comprehend and evaluate working of depositories and their functions
in stock markets.
Course Contents
Unit I: Introduction
Meaning and characteristics of a company; Lifting of corporate veil;
Administration of Company Law [including National Company Law Tribunal
(NCLT), National Company Law Appellate Tribunal (NCLAT), Special Courts};
Types of companies including private and public company, government
company, foreign company,
one person company,
small company, associate
company, dormant company and producer company; Association not for
1-7
1-8 SYLLABUS
profit; Illegal association; Formation of company, promoters, their legal

position and pre-incorporation contracts; Online registration of acompany.
Unit Il: Documents and shares
Memorandum of Association and its alteration, Articles of Association and
its alteration, doctrine of constructive notice, doctrine of ultra vires and Contents
|
indoor management; Prospectus, Shelf and Red herring prospectus, mis-
statement in prospectus; book building; Allotment and Forfeiture of share,
Sweat Equity, ESOPs, Bonus issue, and Further issue of shares, buyback
and provisions regarding buyback; Membership of company.
Unit I: Management and Meetings PAGE
Classification of directors-Additional, Alternate and Casual directors, Preface to Tenth Edition iS
Women directors, Independent director, Small shareholder's director;
Syllabus iF
Director Identity Number (DIN); Appointment, Disqualifications, Removal
of directors; Legal positions, Powers and Duties; Key managerial personnel, CHAPTER | : COMPANY : MEANING AND FEATURES
Managing director, Manager and Whole Time Director; Board Meetings: CHAPTER 2 : ADMINISTRATION OF COMPANY LAW 24
meeting through video conferencing; Shareholder meetings: AGM and CHAPTER 3 : KINDS OF COMPANIES 32
EGM. Convening and Conduct of meetings: Requisites of a valid meeting;
Resolutions; Postal ballot; e-voting. CHAPTER 4 : FORMATION OF COMPANY 56
Unit IV: Dividends, Audit and Winding up
CHAPTER 5 : MEMORANDUM OF ASSOCIATION #3
CHAPTER 6 : ARTICLES OF ASSOCIATION
Provisions relating to payment of Dividend, Company Audit-auditor’s
qualification and disqualifications, Auditor's appointment, Rotation of CHAPTER 7 : PROSPECTUS 106
auditors, Auditor's removal, Auditors’ report and Auditor's powers. CHAPTERS : SHARES AND SHARE CAPITAL 132
Winding Up: Concept and Modes of Winding Up; Provisions of winding up CHAPTER 9 : MEMBERS AND SHAREHOLDERS 166
under Insolvency and Bankruptcy Code, 2016. CHAPTER 10 : DIRECTORS AND KEY MANAGERIAL PERSONNEL i77
Unit V: The Depositories Act, 1996 CHAPTER 11 : SHAREHOLDERS MEETINGS 222
Definitions; Depositories system; Rights and obligations of depositories; CHAPTER 12 : AUDIT 255
Participants
issuers and beneficial owners; Inquiry and inspections; Penalty. CHAPTER 13 : DIVIDEND PROVISIONS 273
Teaching Learning Process CHAPTER 14 : WINDING UP OF COMPANIES 286
The teaching - learning processes play a vital role in instilling in the stu- CHAPTER 15 : THE DEPOSITORY SYSTEM 30F
dent the curiosity to study the subject law. It includes lectures through
presentations of case laws, expert lectures, case study approach is widely
B.Com (Hons.) Paper - May-June 2016 af?
followed, role plays, seminars, tutorials, project-based learning. Case laws B.Com (Hons.) (CBCS) Paper - May 2017 320
comprehension and higher-order skills of reasoning and analysis will be B.Com (Hons.) (CBCS) Paper - May 2018 323
encouraged through teaching strategies. B.Com (Hons.) (CBCS) Paper - May 2019 326
L-9
COMPANY: MEANING AND FEATURES
+ Meaning
of Company
# Characteristics
of Company
# Doctrine of Lifting the Corporate
Veil
Meaning of Company
In general, company means an association of persons fora common object.
The term ‘company’ is derived from the Latin word—cort means with or
together, panis means bread, and originally referred to an association of
persons who take their meals together. Company as a form of business
is traditionally called ‘joint-stock company’. “By a company is meant an
association of many persons who contribute money or money's worth
to a common stock and employ it for a common purpose. The common
stock so contributed is denoted in money and is capital of the company,
The persons who contribute it or to whom it belongs are members. The
proportion of capital which each member is entitled is his share. Shares
are always transferable, although right to transfer them is often more or
less restricted."
However, joint contribution of capital is not sufficient to describe a company.
In partnership firms? also, the capital is brought jointly by the partners.
Company different from partnership firms, is not merely an association
of persons, it is an incorporated association of persons created by law to
carry on the expressly laid down objects, A company exists only in the
1. Lord Justice Lindley,

2. In fact, one may come across a partnership firm or sole proprietorship firm using the word
‘Company’ as a par of its name, eg. Frank Brothers & Company, Gokuldass & Company,
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¢
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2 COMPANY : MEANING AND FEATURES COMPANY : MEANING AND FEATURES 3
contemplationof law, Law creates it and law alone can dissolve it. Tt may (c) Banking companies, except insofar as the said provisions are incon-
be formed by an Act of Parliament,or by Royal Charter, or by registration sistent with the provisions of the Banking Regulation Act, 1949;
under company law. (@) Companies engaged in the generation or supply of electricity, except
The essential feature of company is that it is an incorporated association insofar as the said provisions are inconsistent with the provisions of
created by the law. Chief Justice Marshal of U.S.A. has defined a company the Electricity Act, 2003;
as “a person, artificial, invisible, intangible and existing only in the eyes of (e) Any other company governed by any special Act for the time being
the law. Being a mere creature of law, it possesses only those properties in force, except insofar as the said provisions are inconsistent with
which the charter of its creation confers upon it, either expressly or as the provisions of such special Act; and
incidental to its very existence.”
(f) Such body corporate, incorporated by any Act for the time being in
Company
as a form of doing business has its origin in 1600 A.D. when the force, subject tosuch exceptions, modifications or adaptation, as may
East India Company was established by way of a Royal Charter in England. be specified in the notification issued by the Central Government.
Subsequently, the legislative developments in the mid-nineteenth century
in the UK give rise to the modern form of company, At present, company Machinery for Administration of the Act
has become a pre-dominant form of doing the business. This is on account
of numerous advantages which a company has. Corporate laws world over ‘The Central Government has the overall responsibility for administration
have regulations regarding formation and functioning of companies. and enforcement of the Companies Act. The Ministry of Corporate Affairs
(MCA) of the Government of India is the nodal agency /authority which has
In India, the Companies Act of 2013 (known as the Indian Companies Act, been given various powers under the Act. Most of the powers are vested
2013) contains the law relating to companies. The Companies Act being
to the authorities created under the Act:
the Act of the Central Legislature (Le. Parliament) applies to companies
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throughout India on a uniform basis. 1. Tribunal: National Company Law Tribunal (NCLT) and the National
TARMARS
Company Law Appellate Tribunal (NCLAT) are quasi-judicial bodies

Indian Companies Act, 2013 to administer the provisions of the Companies Act. The Tribunal
exercises such powers which are conferred on it by the Companies
The Companies Act, 2013 was passed to consolidate and amend the law Act, 2013 and any other law for the time being in force.
relating to companies. The Act comprisesof 7 schedules, 29 chapters and
470 sections. The Act extends to the whole of India. The Act of Parliament 2. Regional Directors: The Regional Directors are appointed by the
Central Government whoare in-charge of the respective regions, each
received the assent of the President on the 29th August, 2013. The Act has
become applicable from financial year 2014-15. region comprising a number of States and Union Territories. They
supervise the working of the offices of the Registrars of Companies
and the Official Liquidators working in their regions. They also
Nature
and Scope of Act
maintain liaison between the respective State Governments and the
The Companies Act is the Act of the Central Legislature which applies to Central Government in matters relating to the administration of the
companies throughout India on a uniform basis subject tospecial provisions Companies Act, 2013.
in specified states and UTs made and notifications issued by the Central 3. Registrar of Companies (ROC): Registrars of Companies (ROCs)
Government. appointed by the Central Government under the Companies Act,
The provisions of this Act apply to: 2013 are the full-time officers appointed in various States and Union
(a) Companies incorporated under this Act or under any previous com- Territories who are vested with the primary duty of registering com-
pany law; panies floated in the respective States and the Union Territories and
ensuring that such companies comply with statutory requirements
(5) Insurance companies, except insofar as the said provisions are incan- under the Act. The offices of ROC function as registry of records
sistent with the provisions of the Insurance Act, 1938 or the Insurance relating to the companies registered with them, which are available
Regulatory and Development Authority Act, 1999;
————
Sore
forinspection
by members of the public
on payment of the prescribed # Nationalised Banks
fee. The Central Government exercises administrative control over # Limited Liability Partnerships registered under the Limited Liability
these offices. Partnership Act, 2008.
4. Official Liquidators: Official Liquidators are the whole-time officers However, ‘body corporate’ does not include:
of the Central Government who are appointed to conduct the winding
up of companies by the Tribunal. They exercise such powers and (a) A co-operative society registered under any law relating to co-oper-
perform such duties as may be entrusted to them by the Tribunal ative societies, and
and the Central Government. (2) Any other body which the Central Government may, by notification
5. Special Courts: The Central Government may establish as many in the Official Gazette, specify in this behalf.
Special Courts as may be necessary, for the purpose of providing It may be noted
that company is a body corporate
but all body corporates
speedy trial of offences under this Act. Special Court consists of a are not companies.
single judge who is appointed by the Central Government with the
concurrence of the Chief Justice of the High Court within whose
jurisdiction the judge to be appointed is working. Characteristics of Company
1. Incorporated Association: Company is an incorporated association
Definition of Company under the Companies Act, 2013 of persons which is created by registration under the Companies Act,
Section 2(20) of the Companies Act defines a company as “company means 2013 (or any former Indian Companies Act). For forming a public
a company incorporated under this Act or under any previous company company at least seven persons and for a private company at least
law*", Thus, a company formed and registered under the Companies Act, two persons are required. These persons subscribe their names to
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1956 or under any former Indian Companies Act is a company, the memorandum of association and also comply with other legal
requirements of the Act in respect of registration to form and incor-
Company means ‘a company formed and registered under the Indian porate a company.
Companies Act, 2013 or under any previous company law’. Artificial Legal Person: The registration of a company under the
he
.
Companies Act grants a legal entity to the company enabling it to
Company and Body Corporate discharge functions akin to a person such as the right to acquire and
‘Body corporate’ means a corporate entity which is incorporated under a dispose of the property, to enter into contract with third parties in
statute and has a perpetual succession with a common seal, and is a legal its own name, and to sue and be sued in its own name. A company
entity separate from the members constituting it.“ The term ‘body corpo- can enter into partnership with one or more individuals or another
rate’ is wider than the ‘company’ and it includes: company. It can buy shares or debentures of another company.
@ Companies registered under the Companies Act, 2013 or any former Although, a company does not exist in the physical form—has no
Indian Companies Act body, no soul and no conscience, it has most of the attributes of a
person. It exists but in the eyes of the law. So, a company can be
Foreign Companies described as an artificial legal person. It has a nationality, domicile
# Corporations formed under special Act of the Parliament or of State and residence but cannot ask for enforcement of those fundamental
Legislatures or of a foreign country rights which are exclusively available to national citizens. Not being
@ Public financial institutions as defined in section 2(72) of Companies a natural person, it cannot enjoy the rights under the Constitution
Act, 2013 of India or Citizenship Act,
3, Before passing of the Companies Act, 2013, Indian Companies Act, 1956, the Indian Companies
Act, 1850, the Indian Companies Act, 1866, the Indian Companies Act, 1882, and the Indian
Companies Act, 1913 were theenactments
in India for registration and regulation
of companies,
These have since been repealed.
4. Ramaiva A, “Guide tothe Companies Act’ Sixth edition, pp, 54.55,
Sa
Transferability A company can be held liable for criminal acts. It can be held liable
of Shares for breach of law and can be made to pay fine. However, no impris-
onment of a company is possible. It can be charged with conspiracy
to defraud or may be convicted of making use of false documents
with intent to deceive. It can also be held liable for torts committed
by its employees in the course of their employment.
On account of the independent corporate existence, the creditors
of a company are creditors of the company alone and their remedy
lies against the company and its property only and not against any
of its members. Law recognizes the existence of the company quite
irrespective of the motives, intentions, scheme or conduct of the in-
dividual shareholders. A director or a managing director cannot be
held personally liable for the payment of arrears of taxes or salaries
of employees due by the company. Similarly, shareholders cannot
be held liable for the wrongs or misdeeds of the company.
The principle of separate legal entity of the company was judicially
recognized by the House of Lords in 1867 in the case of Oakes v.
Turguand and Hording (1867), It was then held that since an incor-
porated company has a legal personality distinct from that of its
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members, a creditor of such a company has remedy only against the
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Perpetual Separate
Existence Property company and not against an individual shareholder. Thus, a creditor
of an incorporated company hasremedy only against the company for
3. Independent Legal Entity: A company has a legal entity distinct and his debts and not any of the members of whom it is composed. The
separate from its constituent members (shareholders). It is an au- position was further clarified by the House of Lords in the famous
tonomous bedy, self-controlling and self-governing. It can hold and case of Salomon v. Salamon & Co, Ltd. (1897), The facts of the case
deal with any type of property of which it is the owner, in any way are as Follows:
it likes. It can enter into contracts, open a bank account in its own Mr. Salomon was the owner
of a prosperous shoe business. He floated
name, sue and be sued by its members as well as outsiders. acompany ‘Salomon& Co, Ltd.’ with only seven shareholders
- himself,
The rights and obligations of a company are distinct from its con- his wife, daughter and four sons. The newly formed company pur-
stituent members. “Shareholders are not, in the eyes of the law, part chased the sole proprietorship business of Mr. Salomon for £ 40,000,
owners of the undertaking. The undertaking is something different The purchase consideration was paid by the company by allotment
from the totality of the shareholders.” A member cannot claim any of £ 20,000 shares and £ 10,000 debentures and the balance in cash to
ownership rights in the assets of the company either individually or Mr. Salomon, The debentures carried a floating charge on the assets
jointly during the existence of the company or in its winding up. The of the company.
property of the company is to be used for the benefit of the company The company went into liquidation within a year due to trade
and not for the personal benefit of the shareholders. depression. On winding up, assets of the company were running short
A director of a company can be the office bearer of the trade union of its liabilities by £11,000. The unsecured creditors of the company
of the workers of the same company. A shareholder, if otherwise
contended that the company, though incorporated under the Act, had
never an independent existence; it was infact Salomon under the name
qualified, can be the auditor of the same company. At the same
of a company. On this ground, the creditors claimed priority for the
time, the members of the company can enter into contracts with the
payment of their debts over the debenture-holders (Mr. Salomon),
company in the same manner as any other individual can. whereas as per the law secured creditors are given precedence for
5. Short v. Treasury Commissioner (1948) the payment when a company is wound up.
—~S oS
COMPANY : MEANING AND FEATURES. COMPANY : MEANING AND FEATURES 9
The plea of the unsecured creditors that Mr. Salomon and Salomon & The court did not accept this contention and observed. “The com-
Co. are one and the same was not accepted by the court. It was held that pany was a separate body altogether from the shareholders and
the existence
of a company is quite independent and distinct from its the transfer was as much a conveyance, a transfer of property, as
members, Shareholders may also be the creditors of the company. "The the shareholders had been totally different persons.”
company is at law a different person altogether from the subscribers
to the memorandum, and though it may be that after incorporation Acompany is different from its directors. The claim of the third par-
the business is precisely the same as before, the same persons are ties is maintainable against the company not against its directors or
managers, and the same hands receive the profits, the company is employees. The liability of an individual member or director is not
not in law their agent or trustee. There is nothing in the Act requiring increased by the fact that he is the sole person beneficially interested
that the subscribers to the Memorandum should be independent for in the property of the company and that the other members have
unconnected, or that they or any of them should take a substantial become members merely for the purpose of enabling the company
interest in the undertaking, or that they should have a mind or will of to become incorporated and possess only a nominal interest in its
their own, or that there should be anything like a balance of power property or hold it in trust for him. Directors or members also cannot
in the constitution of the company.” Hence the plea of the unsecured enforce any right of the company in their individual capacity.
creditors for precedence was rejected.
Abdul Hagy. Das Mal (1910)—Abdul Haq was an employee inacom-
The concept of separate corporate entity was again confirmed in the pany. He had not been paid his salary for several months. He sued
case of Lee v. Lee's Air Farming Lid. (1961). Das Mal, a director of the company for recovery of the amount of
Lee formed a company for the purpose of carrying on his own salary due to him. It was held that he would not succeed, because
business of aerial top-dressing. He was the beneficial owner of the remedy lies against the company and not against the directors
the shares and also the sole “governing director" of the company. or members of the company.
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He also got himself appointed as the chief pilot of the company The concept of independent corporate entity
or the Salomon principle
and under statutory obligations caused the company to insure is also known as the veil of incorporation. The law will not go behind
him against liability to pay compensation under the Workmen's the separate personality of the company to get at members except in
Compensation Act. He was killed in a flying accident. In a suit by certain exceptional situations. This is explained later in the chapter
his widow for compensation, the Privy Council held that Lee and while explaining the circumstances under which the corporate veil
his company were distinct legal entities which had entered into may be pierced, or lifted up.
contractual relationships under which he became the chief pilot, . Separate Property: The corporate property is clearly distinguished
a servant of the company. In his capacity of governing director, he from the members’ property. Members have no direct proprietary
could, on behalf of the company, give himself orders, in his other rights to the company’s property but merely their ‘shares’. Company
capacity of pilot, and hence the relationship between himself as cannot be the property of the person who owns all the shares in the
pilot, and the company was that of a servant and master. In effect company, nor can it be considered to be his agent.’ No member can
the magic of corporate personality enabled him to be a master and either individually or jointly claim any ownership rights in the assets
servant at the same time and to get all the advantages of both—and of company during its existence or on its winding up.
of limited liability.
“No shareholder has any right to any item of property owned by
The Indian Courts have also unequivocally upheld the independent the company, for he has no legal or equitable interests therein.” A
legal entity of a company in various cases. member cannot have any insurable interest in the property of the
Re. Kondoli Tea Co, Lid. (1886)—Some persons owned a tea estate. company.’ The leading case is:
They transferred it to a company. They claimed exemption from
ad valorem (according to value) duty on the ground that it is sim-
ply a transfer from them to themselves under a different name. 7. EBM. Co, Lid. v. Dominion Bank (1937)
& Mrs. BE Gazdar v. The Commissioner of Income Tax, Bombay (1955)
6. Gower, LOB, “The Principles of Modern Company Law", Third Ed, p. 202. 9. Macaura v. Northern Assurance Co, Ltd. (1925).
10 COMPANY : MEANING AND FEATURES COMPANY : MEANING AND FEATURES ll
‘Macatura v. Northern Assurance Co, Ltd. (1925) Mr. Macaura was 8. Limited Liability: The liability of shareholders of a company is dif-
‘the holder of nearly all the shares, except one, of a timber company. ferent from the liability of the company. Shareholders generally"
He was also the substantial creditor of the company. He insured have limited liability- limited to the extent of unpaid value of shares
the company’s timber in his own name. The timber was destroyed held up. Shareholders have no obligation to the company once they
by fire after a while. It was held that the insurance company was. have paid full amount on the shares held by them. In cases of losses,
not liable to compensate as Macaura had no insurable interest in shareholders are not called upon to make good the losses." Creditors
the property. The property of the company belonged to the com- cannot claim from the personal wealth of the shareholders. In the
pany only. case of a guarantee company, the members are liable to contribute
a specified agreed sum to the assets of the company in the event of
5. Perpetual Existence: A company has a perpetual succession. It has no the company being wound up.
allotted span of life. The mode of incorporation and dissolution of a
company and the right of the members to transfer shares guarantee . Transferability
of Shares: One can sell one's share
of ownership rights
the continuity of the existence of the company quite independent of to an interested buyer as the shares of a company are transferable.
the life of the members. The existence of a company can be termi- While in case of public companies shares are freely transferable,
nated only by law. Being an artificial person, it cannot die irrespec- there are some restrictions in the transferability of shares of private
tive of the fact that its members, even the founders or subscribers companies. In fact transferability of shares and limited liability are
to the Memorandum, may die or go out of it. Moreover, in spite of the enabling factors for the tremendous rise of companies all over
the changes in the membership of the company, it can perform its the world,
contracts and enter into future agreements, Thus, members may
come and go but the company can go on forever. Advantages of Company
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Re. Meat Suppliers Guildford Ltd. During the war, all the members Continuity: The continuity and stability of the company is not af-
of a private company while in the general meeting were killed by
fected by the death, insolvency and insanity of its members. So the
perpetual succession of the company allows company to undertake
a bomb. Held, the company survived.
the big projects which need long time for their completion.
. Common Seal: A company isan artificial person and it has no physical
existence, so it cannot sign any document personally. Therefore, it Large Capital: It is much easy to generate capital in case of com-
panies as Funds may be raised from the public by issuing shares or
is necessary for every company to have its own common seal which
works as its signature. All the acts of the company are authorized debentures. Thus a company has very large and unlimited resources
by its “common seal" which is the official signature of the company. available for undertaking large businesses.
A document not bearing the common seal of the company will not Limited Liability: Limited liability feature of company encourages
oa
:
be binding on the company. more investment in the company as the shareholders are only liable
to the extent of their investments in the company.
. Separation of Ownership and Management: A company is owned
(de facto) by a number of shareholders which is too large a body to Transferability of Shares: This feature of the company provides
*
manage the affairs of the company. Shareholders set the objectives liquidity to the funds invested. The shareholders may any time sell
of the company and appoint their representatives or agents (known their shares for cash. The trading in shares is facilitated by stock
as directors) to manage the affairs of the company on their behalf to exchange.
pursue their objectives. The directors, in turn, hire professional man-
agers (executives) to run the day-to-day operations of the company
under their supervision and control. The separation of ownership and 10, Company law of many countries including India also provides for a company with unlimited
managementis the distinguished feature of company. The separation liability, but such companies are very few and are in the nature of non-tracding companies
has raised many issues also which give rise to evolution of corporate (pursuing religious or socially useful objects).
LL. There are a few exceptions when the sharcholders or officers of a company may be called
governance as the focal point of modern corporations. upon to compensate the company for the losses suffered by the company; or in cases of the
officers including directors are found to be negligent in discharging their duties, This is known
as ‘piercing the corporate veil’.
— wn
5. Democratic Set Up: Elected representatives of shareholders manage . Too many Legal Formalities: There are too many legal formalities
and control
the working of the company. They are accountable tothe to be compiled with right from the incorporation to the winding up
shareholders of the company. The voting power of the shareholders of the company.
indirectly controls the policies of the company. . Slow Decision Making Process: No one in the company is vested
Diffused Risk: The risk of loss is diffused over a large number of with the final authority to make decisions. There are some decisions
persons in case of a public company. It becomes so little that indi- which are taken in different general meetings. That causes delay in
vidually, each shareholder does not feel the burden of it. taking the decisions.
Large Membership: There is no restriction on the maximum num- Possibility of Frauds: The separation of ownership from manage-
ber of members a company can have. This permits organization of ment increase the possibility of frauds as unscrupulous persons may
business in large scale and across national borders. form or wind up the company to cheat the shareholders or grab the
Economies of Large Scale: The large number of members and raising investments of the innocent shareholders.
of funds from the public make it possible fora company to engage in . Domination of Majority: All the decisions are taken by majority in
large scale business which in turn, provides the economies of large the company. There are very little provisions which safeguard the
scale. interest of minority shareholders.
Creditability: The companies are under certain obligations eg, to . Social Disadvantages: The rise of big companies and multinationals
publish its annual accounts, to file Memorandum of Association and has certain social disadvantages such as monopolistic tendencies,
Article of Association etc. which are helpful in winning
the confidence wasteful expenditure, wastage of resources, pollution etc.
of general public. This increases the borrowing power
of the company
also. Company Distinguished from Partnership Firm
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Disadvantages Company is an incorporated association having an independent legal entity
with a perpetual succession, a common seal for its signatures, a common
Difficult Incorporation: To form a company prescribed legal for-
T
capital comprised of transferable shares and limited liability. Partnership

malities are required to be complied with. These include filing of is the relation between persons who have agreed to share the profits of
Memorandum of Association and Article of Association; obtaining a business carried on by all or any of them acting for all. Persons in the
Corporate Identity Number and Director Identity Number; and pay- partnership are indivicually called partners and collectively firm.
ment of registration fees with the registrar of companies. The following are the main distinctions between a company and a part-
. Lack of Personal Interest: The working of the company is organized nership firm.
and managed by the elected representativesof the shareholders called
directors. They may not have any personal interest in the business SL | Basis of Company Partnership Firm
and this may cause losses to the company. No.| Difference
. Separation of Ownership from Management: The shareholders of the 1. | Made of By Registration under the | By agreement called Part-
Creation | Companies Act, 2013. nership Deed which may be
company do not have any direct say in the working of the company
written ororal, Registration
as they are scattered far and wide throughout the country. The voice
under the Partnership Act,
of the shareholders may remain unheard. 1932 is not compulsory.
. Lack of Secrecy: It is difficult to maintain secrecy in the company 2. | Legal Legal entity distinct from | Firm and partners are not
form of organization as the company is under obligations such as Status members. Has a perpetual | separate;no perpetual suc-
to publish its annual accounts, to file Memorandum and Article of succession, cession. Has uncertain life
Association, and other documents.
— Soe
14 COMPANY : MEANING AND FEATURES COMPANY

: MEANING AND FEATURES 15
SL| Basis of Company Partnership Firm LIFTING THE CORPORATE VEIL

‘No. Difference
| A company is a person created by law (legal persona) and it has a distinct
3. | Liability of | Limited liability of members. | Unlimited joint and several entity. Yet in reality it is an association of persons who are in fact the bene-
Members liabilities of partners. ficial owners of the corporate property. The persons behind a company
4. | Authority | Divorce between ownership | Ownership and manage- are disregarded once they have formed a company and given to their
and management. Managed | ment common. Partners association the status of a legal entity. The general principle laid down in
by Board of Directors who | have the right to take part Salomon v. Salomon & Co, is followed, that a company duly formed and
are the representatives of the | in the management. Each registered is a separate legal entity and is an independent person with its
members, partner hasimplied author- own rights and liabilities distinct from those of its shareholders. There are,
ity te bind the firm by his/ however, certain cases when the corporate veil of company will be probed
her dealing. into and the veil is lifted. The cases in which the doctrine of the lifting of
5. | Transfer of | Public Company-freely
trans- | Ordinarily noright of trans- the veil has been applied can be put under two categories:
shares ferable. Private Company- | fer bya partner. (i) Cases under judicial interpretation.
transferable with a few re-
strictions. Transferee gets all (ii) Cases under statutory provisions.
the rights of the transferor. Doctrine of Lifting the
6. | Number of | Public Company-minimum7; | Minimum 2; maximum 50 Corporate Veil
Members | maximum unlimited. Private I
Company- minimum 2; max-
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imum 200,
Cases underJudicialInterpretation| | Cases under Statutory Provisions
7. | Legal Statutory books have to be | No legal formalities. Regis-
Formalities | maintained.Audit of accounts | tration is not compulsory. @ Determination of Character @ Reduction in Membership
is compulsory. Documents | Audit is also not compul- of Company. @ Holding and Subsidiary
and required information | sory, # Company Acting as Agentsof Company Relationship.
is to be filed. Publication of the Shareholders. Investigation in the Affairs of
accounts required. Benefit of Revenues. Company.
8 | Resources | Large and unlimited resourc- | Limited resources. Depen- @ Evasion of Personal and # Investigation of Ownership in
es especially in case of public | dent on partners personal Statutory Obligation. Company.
companies as funds can be | resources.
raised from the public. @ Avoidance of Welfare # Directors with Unlimited
Legislation. Liability.
9. | Conduct of | Affairsof acompany are con-| Partners may carry any
Affairs. ducted as per the Companies | business
as they decide,
so # Fraud and Fraudulent # Fraudulent Conductof Business.
Act. A company has to op- | long it is not illegal. They Schemes. # Failure to Return Application
erate within the objects laid | are free to make whatever @ Diversion of Business Money.
down by the Memeorandum | arrangements they wish to Opportunity. Misrepresentation in Prospectus.
of Association. run the affairs of the firm.
+ ¢
# Determining Expertise of Mis-description of Name.
*¢¢
10, | Dissolution | May be dissolved only ac-| Dissolution by agreement, Company.
cording to the provisions of by notice, or by court. Pre-incorperation Contracts.
law: usually by an order of Death of a partner dissolves Ultra vires Acts.
the court. Death of mem- the partnership. Liability uncer Other Statutes,
ber(s) does not dissolve the
company.
Cases under Judicial Interpretation that the company had been brought into existence for the sole
‘When the notion of legal entity is used to defeat public convenience, justify purpose of enabling it to qualify as a British film. Therefore there
wrong, protect fraud, or defend crime, the law will regard the corporation was a relationship of agency. The court refused to compel the film
as an association of persons,”* censor board to register the film produced as an English film. Held,
a company cannot be allowed to act as agent of its shareholders.
Courts have in general disregarded the concept of independent corporate
personality in those cases where corporate personality has been blatantly 3. Benefit of Revenues: Courts may break the corporate shell of a com-
used asa cloak for fraud orimproper conduct or doing things against public pany if it appears that the company has been formed for the only
policy or for evading individual responsibility. Such cases are as follows: purpose of evasion of taxes or to circumvent tax obligation. Courts
1. Determination of Character of Company: In case it is suspected that may identify the shareholders with the company when it is against
the interest of the revenues of the government.
the company is owned by the enemies of the country, the court may
disregard the corporate veil and examine the character of persons in Re, Sir Dinshaw Maneckjee Petit (1927) provides a clear illustration:
real control of the corporate affairs. To allow alien enemies to trade Sir Dinshaw Maneckjee Petit was a wealthy man enjoying huge
under the corporate fagade is against public policy. The leading case
dividend and interest income. He formed four private companies
is: and agreed with each to hold a block of investment as an agent for
Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (1916) —A it. Income received was credited in the accounts of the company
company was incorporated in England to sell tyres manufactured but the company handed back the amount to him as a pretended
by a German company. The German company held majority of the loan. This way he divided his income into four parts in a bid to
shares in the English company and all its directors were Germans. reduce his tax liability.
- gNNVINX YL
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Thus, the real control of the company was in German hands. During Tt was held that the company was formed by the assessee purely
the World War I the company brought a case to recover a trade and simply as a means of avoiding super-tax and the company
debt. But the court was requested to restrain the company from was nothing more than the assessee himself. It did no business,
doing so since it belonged to alien enemies. but was created simply as a legal entity to ostensibly receive the
The company was barred from maintaining the suit. It was observed, dividends and interests and to hand them over to the assessee as
“Company is not a natural person with mind or conscience, it cannot pretended loans.
be loyal or disloyal, it can be neither friend nor enemy, but it may . Evasion of Personal and Statutory Obligations: Courts may disregard
assume an enemy character when persons in de facto contral of its the separate existence of a company where it appears that company
affairs are residents in an enemy country or, wherever residents was formed for evading contractual and statutory obligations, The
are acting under the control of enemies.” leading case is Gilford Mator Co. v. Horne (1933):
2. Company Acting as Agents of the Shareholders: Shareholders can-
Horne was appointed as the managing director of Gilford Motor
not be the principals for the company. Where it is so, shareholders
could be made liable for the acts of the company, thus ignoring the Company on the condition that he would not solicit the customers
of the company so long as he was the managing director of the
corporate veil. It happened in Re. FG. (Fils) Lid, (1953).
company or afterwards. He attempted to evade this obligation by
An American holding company set up a British subsidiary to pro- forming a company which undertook the soliciting.
duce a film so that it might be classified as a British film. The Board It was held that the company started by Horne was a mere cloak
of Trade refused to register it as such, and the matter came to the or sham for the purpose of enabling him to commit a breach of
court. It was held that the British company’s participation in the his agreement against solicitation, and, therefore, it was restrained
making of the film was so small as to be practically negligible, and from enticing away Gilford Motor Company's customers.
12. United State +. Milmaubee Retrigerator Transit co.

Where a company is incorporated as a device or stratagem to con- New Horizons Ltd. (NHL) was a joint venture company wherein
ceal the identity of the proprietor of fraud, the corporate veil shall Indian and foreign group companies held shares. The groups had
be lifted up. If an individual forms a company to avoid specific per- contributed towards the resources of the NHL in the form of
formance of his contracts, court will enforce specific performance machines, equipment and expertise. The Supreme Court held that
t the company." in respect of such a joint venture company, the experience could
5. Avoidance of Welfare Legislation: Court will not permit resorting to mean the experience of the constituents of the company. Thus, it
devise of incorporation of a company to evade welfare legislation, was thought proper to pierce the corporate veil to determine the
A case in point is: expertise of the company.
Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Cases under Statutory Provisions
Industry Lid. In this case, a company incorporated a subsidiary
company and transferred toitsome of itsinvestments and securities The Companies
Act and other statutes provide expressly the circumstances
only for the purpose of splitting the profits into two hands and where corporate veil of a company is disregarded. Following are some of
thereby to reduce the incidence of the obligation to pay bonus. those cases:
The Supreme Court held that the separate existence of the new 1. Reduction in membership. As per section 3A, when number of mem-
company would be disregarded for the purpose of working out bers in a company falls below specified number (7 in case of public
the amount of bonus payable to workers. company and 2 in a private company) and business of the company
6. Fraud and Fraudulent Schemes: The corporate facade cannot be al- is carried out for more than 6 months, then every member, of such
lowed to be used as a cover for illegalities and frauds. The court may company who are aware of the fact shall be severally liable for pay-
VIL
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lift the corporate veil to find out and expose persons who are behind ment of who debts of the company contracted after six months from
the fraudulent activities in the garb of company. In numerous cases,
- g NNW
such reduction,
courts have ordered police investigations, seizure and confiscation
of properties from the individuals. Some of such cases are: SEBI v. Holding and Subsidiary Company Relationship. As per section 2(46),
a “holding company” is defined as, in relation to one or more other
Libra Plantation Ltd; Ali Jawad Ameerhasan Rizviv. Indo French companies, acompany of which such companies are subsidiary com-
Biotech Enterprises Lie, Dindas 8. Thange v. State of Maharashtra.
panies, A company is termed as a holding company when it has the
Diversion of Business Opportunity: When a company is formed to power
to control the composition of the board
of directors of another
divert the business opportunity of another company, court may lift company or holds a majority of its share. The other company called
the corporate veil to prevent such diversion. a subsidiary of the former company has a separate legal entity. The
Gencor ACP Lid. vy. Dalby (2002) A director of a public company principle of lifting the corporate veil is applicable in holding-subsidi-
ary company relationship in two cases:
formed a private company. He used the company tosell the materials
of the public company. Court considered it appropriate to lift the (4) Section 129(3) of the Companies Act requiresa holding company
corporate veil of the private company as that company was held toattach toits Balance Sheet, copies of the Balance Sheet, Profit
to be merely a cloak to earn profits for which the director was & Loss Account, Director's Report and Auditors Report of each
responsible to the public company. of its subsidiaries. Further, listed companies are required, as
per the Accounting Standards, to prepare Consolidated Balance
8 Determining Expertise of Company: The expertise and experience
Sheet to give better information of the financial position of the
+
of the shareholders could be regarded as the expertise of the com-

pany. This would mean piercing the corporate veil. The decision of group as a whole to the creditors, shareholders and public,
the court in New Horizons Ltd. v. Union of india (1994) illustrates it. (if) Where in spite of subsidiary companies being separate legal
The facts of the case are as under: entities, the facts and circumstances show that they are in
reality parts of one concern owned by a parent company or a
group as a whole.
13. Jones + Lipman.
COMPANY : MEANING AND FEATURES COMPANY : MEANING AND FEATURES 21
. Investigation in the affairs of a company. If an inspector

is appointed of a Bill of Exchange drawn upon a company by a director in his
under section 210 or 212 or section 213 of the Companies Act to in- personal name or omitting to use the name of the company in the
vestigate the affairs of the company, he has the power to investigate prescribed manner (for example, not using the word ‘Ltd.’ as a part
alsothe affairsof any otherrelated company inthe same management of the company's name).
or group (section 219), This is in complete disregard to the separate . Liability of Promoters for pre-incorporation contracts. Promoters will
entities of the companies. be personally liable for all those pre-incorporation contracts which
. Investigation of ownership of a company. Central Government can are not adopted by the company after incorporation.
appoint inspectors to investigate and report matters relating to com- . Ultra vires acts. The directors of the company will be personally liable
pany and its membership for finding out the true persons behind a for all those acts which they have done on behalf of the company, if
company (Section 216), they are:
lt, thus involves piercing the corporate veil, (@) ultra vires the company, or
Directors with unlimited liability. Ordinarily, the liability of a di- (i) ultra vires the directors if the company does not adopt their
rector in a limited company is the same as that of the members of acts,
the company. There is nothing in the Act, however, to prevent their
liability being made unlimited by memorandum of the company
or if . Liability under other Statutes. There are many other provisions of the
limited by memorandum, being converted into an unlimited liability company law where director(s) of a company are personally liable
in pursuance of authority given by the articles. The same principle for the default in complying with those provisions. Some of these are:
applies also in the case of a manager of a limited company. (Sec. 286) non-maintenance of proper books of account; default in holding of
annual general meetings; default in filing the annual returns; default
- Fraudulent conduct of business. If in the course of the winding up in paying dividends after declaration; false declaration of solvency;
TAXMANN®
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of a company, it appears that any business of the company has been non-cooperation with the company auditors or with the liquidators
carried on with the intention to defraud creditors of the company (in the event of winding up of the company); non-compliance with
or any other persons, the Tribunal may declare that any persons the regulations of the Securities and Exchange Board of India (SEBI).
who were knowingly parties to the carrying on of the business in Besides these, directors may be held liable under pollution laws,
the fraudulent manner, shall be personally responsible without any social security laws (e.g. Minimum Wages Act, ESI, EPF, Gratuity),
limitation of liability for all or any of the debts or other liabilities of Competition Act, Foreign Exchange Management Act (FEMA), and
the company. (Sec, 339) taxation laws.
. Failure toreturn Application Money, If the application money of those
applicants whom no share has been allotted is not repaid within 45 IMPORTANT CASES
days of the issue of the prospectus, then the directors of the company
shall be jointly and severally liable to repay that money with interest Salomon vs. Salomon & Co. Ltd. Independent Legal Entity
¢
@ 15% pa. from the expiry of 45th day [See. 393)]. Lee vs. Lee’s Air Farming Ltd. Independent Legal Entity
@
. Misrepresentation in the Prospectus. [n the case of misrepresentation Re. Kondoli Tea Co. Ltd. Independent Legal Entity
in a prospectus, every director, promoter
and every other person who
¢
authorizes the issue of such a prospectus incurs liability towards Abdul Haq vs. Das Mal Independent Legal Entity
¢@¢
those who subscribe for shares on the faith of untrue statements Rajendra Nath Dutta vs.ShibendraNath Independent Legal Entity
*
contained therein. Further, they may be held criminally also (Sec. Mukherjee
34). Macaura vs. Northern Assurance Co,Lid. Separate Property
+
. Mis-description of Name. Directors and other officers of the com- Re, Meat Suppliers Guildford Ltd. Perpetual Existence
*
pany will be personally liable for all the contracts made by them Daimler Co.Ltd. vs.Continental Tyreand Lifting the Corporate Veil
on behalf of the company in their personal names, e.g, acceptance Rubber Co.
re
COMPANY : MEANING AND FEATURES COMPANY : MEANING AND FEATURES 23.
Merchandise Transport Limited vs. Lifting the Corporate Veil 11. Under what circumstances the court may disregard the separate
British Transport Commission legal entity of a company.
Ref. FG. (Films) Ltd. Lifting the Corporate Veil 12. What is reverse piercing? Illustrate with the case law.
Apthrope vs.PeterBehoenhoferBrewing — Lifting the Corporate Veil 13. ‘The doctrine of lifting the corporate veil ought to be applied in
Co. exceptional circumstances and not as a routine matter’. Comment.
Re. Dinshaw Maneckjee Petit Lifting the Corporate Veil 14. During a war all the members of a private company, while in gen-
Gilford Motor Co. vs. Horne Lifting the Corporate Veil eral meeting
are killed by a bomb. Does the company cease to exist
Workmenof Associated RubberIndustry Lifting the Corporate Veil because all the members die? State reasons.
Ltd. vs. Associated Rubber Industry Ltd. Ans, [A company has a perpetual succession. Its existence is in no
Kersington International Ltd. vs. Lifting the Corporate Veil way affected by the death of all its members].
Republic of Congo
New Horizons Ltd. vs. Union of India Lifting the Corporate Veil
LIC vs. Escorts Ltd. Lifting the Corporate Veil
REVIEW QUESTIONS
. "A company is an artificial person created by law with a perpetual
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succession and common seal.” Comment.
. “A company is a different person altogether from the members.”
Comment.
. What is meant by corporate personality? Explain with reference
to the case law.
“The property of the Company is the property of its members”.
Comment.
What is a corporate veil? When is it pierced by the order of the
-
Court?
. “The Doctrine of lifting of the veil of corporate personality is an
accepted legal principle.” Explain quoting the case law.
7 The fundamental attribute of corporate personalityis that company
.
is alegal entity different from its members. Elucidate the statement

citing relevant case laws.
“The term body corporate connotes a wider meaning than the term
company.” Comment.
. ‘A company having no natural existence cannot sue but be sued.”
Comment.
10. “The property of the Company is the property of its members’.
Comment.
Sor
ADMINISTRATION OF COMPANY LAW 25
3. The Appellate Authority for Industrial and Financial Reconstruction.

4. Jurisdiction and powers relating to winding up restructuring and
other such provisions, vested in the High Courts,
With the establishment of the NCLT and NCLAT, the Company Law Board
under the Companies Act, 1956 stand dissolved.
The provisions relating to the investigation of acompany’s accounts, freezing
of assets, class action suits, conversion of a public company to a private
company are governed by the NCLT, and appeal therefrom by the NCLAT
instead of High Court,
ADMINISTRATION OF COMPANY LAW The Tribunal (NCLT) is not bound by the strict judicial rules of evidence
and procedure.It can decide cases by following principles
of natural justice.
NCLAT or “Appellate Tribunal" is an authority provided for dealing with
# National Company Law Tribunal appeals arising out of the decisions of the Tribunal. Any party dissatished
by any order of the Tribunal may bring an appeal to contest that decision.
* National Company Law Appellate Tribunal The Appellate Tribunal reviews the decisions of the Tribunal and has power
# Special Courts to set aside, modify or confirm it.
The decisions of Appellate Tribunal can further be challenged in the
National Company Law Tribunal (NCLT) and National Company Supreme Court.
aNNVAKWL
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Law Appellate Tribunal (NCLAT) Difference between National Company Law Tribunal (NCLT) and National
The Companies Act, 2013 provides for the constitution of the National Company Law Appellate Tribunal (NCLAT)
Company Law Tribunal (NCLT) and the National Company Law Appellate 1. The NCLT has primary jurisdiction whereas NCLAT has appellate
Tribunal (NCLAT) and lays down its composition
and powers undersections jurisdiction.
407 to 434. 2. NCLAT is a higher quasi-judicial body than NCLT.
National Company Law Tribunal (NCLT) and the National Company Law 3. Evidence and witnesses are generally presented before NCLT for
Appellate Tribunal (NCLAT) are the quasi-judicial bodies to adjudicate taking the decisions and NCLAT generally reviews decisions of NCLT
issues and matters relating to companies in India. and checks it on a point of law or fact.
The Central Government has constituted National Company Law Tribunal 4. Fact finding and evidence collection is primarily a task of Tribunal
(NCLT) under section 408 of the Companies Act, 2013 with effect from Ist whereas the Appellate Tribunal decide cases based on already col-
June, 2016, lected evidences and witnesses.
Inthe first phase the Ministry of Corporate Affairs has set upeleven Benches,
one Principal Bench at New Delhi and one each Regional Benches at New Composition of the NCLT and NCLAT
Delhi, Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati,
Hyderabad, Kolkata and Mumbai. The National Company Law Tribunals consist of a President and such
number of Judicial and Technical Members not exceeding sixty two, as the
The establishment of the National Company Law Tribunal (NCLT) Central Government deems fit. The qualifications for appointment of the
consolidates the corporate jurisdiction of the following authorities: President and members of the Tribunal have been laid down by the Act.
1. Company Law Board. The President and every other Member of the Tribunal shall hold office
2. Board for Industrial and Financial Reconstruction. for a term of five years from the date on which he enters upon his office
but shall be eligible for re-appointment.
24
— he 1h
26 ADMINISTRATION OF COMPANY LAW ADMINISTRATION OF COMPANY LAW 27
The National Company Law Appellate Tribunal is headed by a Chairperson Qualifications for Appellate Tribunal [Section 411]
and members not exceeding eleven for hearing appeals against the orders The chairperson
shall be a person whois
or has been a Judge of the Supreme
of the Tribunal. Court or the Chief Justice of a High Court.
Qualification of President and Members [Section 409] A Judicial Member shall be a person who is or has been a Judge of a High
The President shall be a person who is or has been a Judge of a High Court Court or is a Judicial Member of the Tribunal for five years.
for five years. A Technical Membershall be a person of provenability,
integrity and standing
Judicial Member having special knowledge and experience, of not less than twenty-five
A judicial member shall be person, who - years, in law, industrial finance, industrial management or administration,
industrial reconstruction, investment, accountancy, labour matters, or
(a) is or has been a judge of a High Court; or such other disciplines related to management, conduct of affairs, revival,
(5) is or has been a District Judge for at least five years; or rehabilitation and winding up of companies.
(c) has for at least ten years as an advocate of a court or held a judicial Selection of Members [Section 412]
office or as member of a tribunal. The President of the Tribunal and the chairperson and Judicial Members
Technical Member of the Appellate Tribunal, shall be appointed after consultation with the
A technical member shall be a person who - Chief Justice of India,
(a) has for at least fifteen years been a member of the Indian Corporate The Members of the Tribunal and the Technical Members of the Appellate
Law Service or Indian Legal Service out of which at least three years Tribunal shall be appointed on the recommendation of a Selection Committee
as Joint Secretary or above; or consisting of—
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() is or has been in practice
as a chartered accountant for at least fifteen (@) Chief Justice of India or his nominee — Chairperson;
years; or (5) asenior Judge of the Supreme Court or a Chief Justice of High Court
(e) is or has been in practice as a cost accountant for at least fifteen — Member;
years; or (ec) Secretary in the Ministry of Corporate Affairs — Member;
(ed) is or has been in practice as a company secretary for at least fifteen (@) Secretary in the Ministry of Law and Justice — Member; and
years; or (e) Secretary in the Department of Financial Services in the Ministry of
(e) is a person of proven ability, integrity and standing having special Finance — Member.
knowledge and experience, of nat less than fifteen years, in law, in- The Secretary, Ministry of Corporate Affairs shall be the Convener of the
dustrial finance, industrial management or administration, industrial Selection Committee.
reconstruction, investment, accountancy, labour matters, or such
other disciplines related to management, conduct of affairs, revival, Term of Office [Section 413]
rehabilitation and winding up of companies; or The President and every other Member of the Tribunal shall hold office
(f) is, or has been, for at least five years, a presiding officer of a Labour as such for a term of five years from the date on which he enters upon his
Court, Tribunal or National Tribunal constituted under the Industrial office, but shall be eligible for reappointment for another term of five years.
Disputes Act, 1947. A Member of the Tribunal shall hold office as such until he attains,
Constitution of Appellate Tribunal [Section 410]: (a) in the case of the President, the age of sixty-seven years;
The Central Government shall by notification, constitute an National (6) in the case of any other Member, the age of sixty-five years:
Company Law Appellate Tribunal, constituting of a Chairperson and not A person who has not completed fifty years of age shall not be eligible for
exceeding eleven members for hearing appeals against the orders of the appointment as Member. The Member may retain his lien with his parent
Tribunal. cadre or Ministry or Department, as the case may be, while holding office
as such for a period not exceeding one year.
The chairperson or a Member of the Appellate Tribunal shall hold office (f) reviewing its decisions;
for a term of five years from the date on which he enters upon his office, (g) dismissing a representation for default or deciding it ex parte.
but shall be eligible for re-appointment for another term of five years.
(7) Any order made by the Tribunal or the Appellate Tribunal may be
AMember of the Appellate Tribunal shall hold office as such until he attains, — enforced by that Tribunal in the same manner as if it were a decree
(a) in the case of the Chairperson, the age of seventy years; made by a court in a suit pending therein.
(5) in the case of any other Member, the age of sixty-seven years: (8) All proceedings before the Tribunal or the Appellate Tribunal shall
A person whe has not completed fifty years of age shall not be eligible for be deemed to be judicial proceedings within the Indian Penal Code.
appointment as Member. The Member may retain his lien with his parent (9) Nocivilcourt shall have jurisdiction to entertain any suit or proceeding
cadre or Ministry or Department, as the case may be, while holding office in respect of any matter which the Tribunal or the Appellate Tribunal
as such for a period not exceeding one year. is empowered to determine by or under this Act and no injunction
shall be granted by any court or other authority in respect of any
Powers and Procedure action taken or to be taken in pursuance of any power conferred by
or under this Act.
(1) The powers of the Tribunal may be exercised by Benches, constituted
by the President of the Tribunal, out of which one shall be a Judicial (10) Any person aggrieved by any decision or order of the Appellate
Member and another shall be a Technical Member. Tribunal may file an appeal to the Supreme Court within sixty days
from the date of communication of the decision or order of the
(2) The Tribunal may, after giving an opportunity of being heard to the
parties to any proceeding before it, pass such orders thereon as it Appellate Tribunal to him on any question of law arising out of such
decision or order.
thinks fit.
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Powers vested in NCLT
(3) The Tribunal shall have power to review its own orders.
Some of the important powers that are presently vested with NCLT are
(4) Any person aggrieved by an order or decision of the Tribunal may as follows:
prefer an appeal to the Appellate Tribunal.
1. Class-action suits
(5) The Tribunal and the Appellate Tribunal shall not be bound by the
procedure laid down in the Code of Civil Procedure, 1908 , but shall . Deregistration of companies
bo
be guided by the principles
of natural justice. Subject to the other pro- . Remedy against oppression and mismanagement
Oo tn & We
visions of this Act and of any rules made by the Central Government,
cs)
. Remedy in case of refusal to transfer shares
the Tribunal and the Appellate Tribunal shall have power to regulate
their own procedure. . Redressal for deposits with the companies
(6) The Tribunal and the Appellate Tribunal shall have the same powers . Reopening of Accounts and Revision of Financial Statements
as are vested in a civil court under the Code of Civil Procedure, 1908 . To order investigation against the company
while trying a suit in respect of the following matters: . Te investigate into the ownership of the company
(a) summoning and enforcing the attendance of any person and . Power to impose restrictions on securities
Oo
examining him on oath;
. Power to freeze assets of the company
(6) requiring the discovery and production of documents;
. Powers under the Insolvency & Bankruptey Code, 2016
(ec) receiving evidence on affidavits; he
. Convening of AGM and EGM of the company
(@) subject to the provisions of the Indian Evidence Act, 1872,
requisitioning any public record or document or copy of such . Compounding of offences
ew
record or document from any office; . Change in Financial Year

—
(e) issuing commissions for the examination of witnesses or

documents;
th 1k
Special Courts Act, 2013. This provision will come into play when a person is arrested
and detained in custody, and it appears that the investigation cannot
The Companies Act, 2013 has provision to form “special courts” for the
be completed within the period of 24 hours as required under the
purpose of providing speedy trial and disposal of offences punishable
Code of Criminal Procedure, 1973 (CrPC) and there are grounds for
under the Companies Act, 2013 with imprisonment of two years or more.
believing that the accusation or information is well-founded, and
Sections 435 to 446 of the Companies Act, 2013 contain provisions on the
detention is authorized by Magistrate for a period not exceeding
special courts.
15 days (if ordered by Judicial Magistrate) or 7 days (if ordered by
Executive Magistrate), as the case may be. In such cases, the Special
Establishment of Special Court Court has the same power as the Magistrate having jurisdiction to
As per section 435(1) of the Companies Act, 2013, the Central Government try such case;
may establish or designate as many special courts as may be necessary to (ii) take cognizance of an offence under the Companies Act, 2013, with-
provide speedy trial of offences punishable under the Companies Act, 2013 out the accused being committed to it for trial upon: (a) perusal of
with imprisonment of two years or more. Provided that all other offences the police report of the facts constituting such offence, or (b) if a
shall be tried as the case may be by a Metropolitan Magistrate or a Judicial complaint has been filed in that behalf;
Magistrate of the First Class having jurisdiction to try any offence under
this Act or under any previous company law, (iv) try at the same trial an offence for which an accused may be charged
under CrPC in addition to an offence under the Companies Act, 2013;
A Special Court shall consist of a single Judge who shall be appointed by
the Central Government with the concurrence of the Chief Justice of the {v) if the Special Court thinks fit, it may try in a summary way, any
High Court within whose juriscliction the Judge to be appointed is working offence under the Companies Act, 2013, which is punishable with
[Section 435(2)].
imprisonment for a term not exceeding 3 years, provided that in the
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case of any conviction in such trial, person cannot be sentenced for
The Judge of a “special court” must be a person holding an office of a imprisonment for a term exceeding | year.
Sessions Judge or an Additional Sessions Judge. [Section 435(3)]
In exercise of the powers conferred by the Companies Act, the Central Appeal/Revisions from Special Courts to High Courts
Government after obtaining the concurrence of the respective Chief
Justicesof High Courts, existing courts in the State of Maharashtra, Jammu For appeal and revision, the High Court have been granted jurisdiction, as
and Kashmir, Goa, Gujarat, Madhya Pradesh, Chhattisgarh, West Bengal, if the Special Court within the local limits of the jurisdiction of the High
Gujarat, Rajasthan, Punjab, Manipur, Meghalaya and Union territory of Court were a Court of Session trying cases within the local limits of the
Andaman and Nicobar Islands, and Dadra and Nagar Haveli and Daman jurisdiction of the High Court.
and Diu, Chandigarh, Puducherry, Delhi and Coimbatore (Tamilnadu)
have been designated as Special Courts for the purposes of trying offences Compounding under Special courts
under the Companies Act, 2013. As per the notification, these courts have The offences under the act, for which the punishment is “imprisonment or
been designated for the purposes of trial of offences punishable under the fine, or with imprisonment or fine or with both” are compoundable only
Companies Act, 2013 with imprisonment of 2 years or more. with the permission of the special court.
Offences triable by Special Courts REVIEW QUESTIONS

As per the provisions of the Companies Act, 2013, following offences are
triable by Special Courts: 1. Write a short note on National Company Law Tribunal.
( offences for which the Companies Act, 2013, provides for imprison- 2. What are the offences triable by special courts?
ment of 2 years or more;
(ii) cases forwarded by a Magistrate (where he thinks detention is
unnecessary) for any offence committed under the Companies
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KINDS OF COMPANIES 33
serve people. The liability of the members

of such companies is limited. But
in most of the cases, they may not be required to use the word ‘limited’ as
part of their names. Annual Report on the working of each such company
is required to be placed on the table of the Legislature (Parliament or State
Legislative Assembly as the case may be). The audit of such companies is
conducted under the supervision, control and guidance of the Comptroller
and Auditor General of India. Some of the important statutory companies
are Reserve Bank of India, State Bank of India, Life Insurance Corporation
of India, Industrial Finance Corporation, etc.
KINDS OF COMPANIES Registered Company

Company registered under the Indian Companies
Actis knownas Registered
Company, These companies are governed and regulated by the provisions
# Company Limited by Share and Guarantee of the Companies Act, 2013. These companies may be limited by shares or
* Private Company and Public Company limited by guarantee or unlimited companies.
# One Person Company
Kinds of Registered Companies
+ Holding and Subsidiary Companies
Associate Company Registered Companies
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Small Company |
! i
# Dormant Company Limited Unlimited
Company Company
* Foreign Company
* Government Company
@ Association not for Profit Limited by Limited by
Shares Guarantee
# Producer Company
+ Illegal Association = | =|
A company may be incorporated by either a special Act of the legislature With share With share Without With share Without
or under the Indian Companies Act, 2013. Accordingly, a company may be: capital capital share capital capital share capital
(1) Statutory Company, or (2) Registered Company.
es A eres er
Statutory Company
A company formed by a special Act passed either by the Central or State
[Pen | Peat] Pen | Pea] [Pen | [Pear] [Pen | [Peal [Pen
| [Pea
Legislature is called a Statutory Company. Statutory companies are gov-
erned by the provisions of their special Acts. However, the provisions of Kinds of Companies on the Basis of Liability of Members
the Companies Act, 2013 which are not inconsistent with the special Acts (i) Companies Limited by Shares. [ Sec. 2/22)] defines “company limited
apply to these companies. These companies are usually formed to carry by shares” as a company having the liability of its members limited
out some special public undertakings requiring extraordinary powers and by the memorandum to the amount, if any, unpaid on the shares
privileges. The object of such companies is not so much to earn profit but to respectively held by them; For example if AB Ltd. has a share capital
of 10,000 shares of Rs. 10 each, and A has purchased 100 shares on
32
KINDS OF COMPANIES KINDS OF COMPANIES 35
which he has paid so far Rs. 6 per share, the maximum liability of A An unlimited company may or may not have any share capital. In case it
is only Rs, 4 per share (the unpaid amount). has any share capital, it can increase or reduce its share capital without
Also known as ‘Limited Liability Company’, a large majority of com- any restriction.
panies registered in India belongs to this category. The last word of Such type of companies, though permitted by the Companies Act, is very
the name of such company is ‘Limited’ (Ltd. in short). few in the country,
(ti) Companies Limited by Guarantee. Company limited by guarantee, Difference between Unlimited Company and Partnership Firm
alsocalled Guarantee Company isa company in which liability of each Although the members of an unlimited company are fully liable for the
member is limited to such amount as the members may voluntarily debts incurred by the company like partners of a partnership firm, unlimi-
undertake under the memorandum of association to contribute to ted company is different from partnership firm:
meet out the deficiency of the assets of the company in the event of
its being wound up. The guaranteed amount may differ from member (i) The creditors of unlimited companies cannot sue the members di-
to member [Sec. 2(21)]. The amount guaranteed by each member is rectly on account of separate legal personality of the company. In
in the nature of a reserve capital. It cannot be called up except in the case of company fails to pay, the creditors will have to resort to the
case of winding up of the affairs of the company. No charge can be winding up of the company. The liquidator will call upon the members
created on the guarantee of the members. The articles of association to contribute towards the assets of the company so as to enable him
of such a company shall state the number of members with which to meet the debts and the costs of winding up of the company.
the company is to be registered. (i) An unlimited company is registered under the Companies Act and
These companies may or may not have share capital If it has a share is a legal person with perpetual succession and a common seal. A
capital, liability of members shall be two-fold, firstly liable to pay partnership firm on the other hand has no existence as a legal entity.
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the amount which remains unpaid on their shares plus the amount
payable under the guarantee. The guarantee undertaken by the The Registered Companies (whether limited or unlimited) may be either
members would be payable only in the event of winding up of the private or public companies.
company. (1) Private Companies [Sec. 2(68)]
Also referred as non-trading companies, the objective of these com- “Private company" means a company which by its articles:
panies is not to earn profits. These companies are usually formed for ()) Restricts the right to transfer its shares;
the promotion of educational or scientific research or for any other
kind of social or charitable purposes. Sports club, trade associations, (i) Except in case of One Person Company, limits the number of
NGOs are usually registered as guarantee companies. its members to 200, Where two or more persons hold one or
more shares in a company jointly, they shall, for the purposes
(iii) Unlimited Companies. A company not having any limit on the liability
of this clause, be treated as a single member. In counting this
of its members is termed as an unlimited company [| See. 492)]. In number the following persons are excluded:
the case of an unlimited company, liability of each member extends
to the whole amount of the company's debts and liabilities. (a) Persons who are in the employment of the company;
The Articles of an unlimited company should state the number of and
members with which the company is to be registered, [Fit has a share (5) Persons who, having been formerly in the employment
capital, the amount of share capital with which the company is to be of the company, were members of the company while
registered, should also be stated in the Articles. in that employment and have continued to be members
after the employment ceased.
The personal liability of the members of the unlimited company to
contribute towards the payment of its debts is not an asset of the iii) Prohibi
tu) Prohibits any invitati he publi
invitation to the bscribef for any
public to subscribe
company, It is a contingent liability of the members which will fall securities of the company.
due only on the winding up of the company. No charge can be created
on the personal liability of the members.
36 KINDS OF COMPANIES KINDS OF COMPANIES 37
(2) Public Company [Sec. 2(71)] Members. A private company can be formed with only two persons
Public company as defined by Sec. 2(71), means a company which- as members. [Sec. 3]
(a) is not a private company; Prospectus. A private company need not issue prospectus. Thus a
private company is exempted from complying with the provisions
(4) is a company which is subsidiary of a company which is not a of the Act regarding the issue of the prospectus. [Sec. 23(/)]
private company (i.e. subsidiary of a public company whether
constituted as a private company or public company shall be Exemption regarding share capital. Restrictions applicable to public
regarded as public company). companies regarding kinds of share capital, voting rights, issue of
shares with disproportionate voting rights and termination of dispro-
A public company must have a minimum of 7 members. The articles of portionate excessive rights donot apply to private companies. Further,
association of public company does not contain the restrictions applicable a private company can give financial assistance for the purchase of
to a private company. That is: shares of a public company are freely trans- subscription of its own shares or its holding company [Sec. 67(2)].
ferable; there is no restriction on the maximum number of members; and
a public company may invite the public to subscribe for any shares in, or Exemption regarding directors. A private company enjoys following
debentures of, the company. However, a public company is under no legal exemptions regarding directors:
binding to invite public to subscribe to its shares or debentures. () A private company may have two directors.
(ij) A private company is not required to appoint independent
Distinction between a Private and a Public Company directors.
Following are the main points of distinction between a private and a public (ii) Directors of private company need not retire by rotation.
company:
(iv) Persons holding an office of profit can be appointed as direc-
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1. Minimum number of members. The minimum number of tors of a company without passing a special resolution. [Sec.
members required to form a private company is 2, whereas F49(e )i)]
for a public company at least 7 members are needed. (v) The provision excluding an interested director from participat-
2. Maximum number of members, The maximum number of ing in voting at board's proceedings does not apply toa private
members in a public company is unlimited. But a private company.
company cannot have more than 200 members excluding the Exemption regarding director. The restriction as to maximum number
past and present employees of the company. of companies of which a person may be appointed as director is 20
3. Invitation to public. A private company is prohibited to in- in case of private company and 10 ina public company. [Sec. 165(1)].
vite public to subscribe to its share capital. It need not issue Exemption regarding managerial remuneration. The provisions of the
a prospectus. But a public company can invite the public to Act regarding fixing or increasing the remuneration of managerial
subscribe to its shares or purchase its shares. personnel of a company are not applicable to private companies.
4, Transferability of shares. Articles of Association of a private (Sec. 197)
company impose restrictions on the transfer of shares, But . Audit committee. A private company is not required to constitute an
the shares of a public company are freely transferable. [See audit committee of the Board (Sec. 177).
2(68) i] . Exemption from Rotation of auditors: Private companies whichhave
Privileges and Exemptions of a Private Company a paid up share capital of less than Rs. 50 crore do not have to rotate
the auditors compulsorily.
Since a private company does not involve funds from the public it needs
Thus, a private company, on one hand, is able to enjoy all the benefits
less stringent control from the regulatory provisions. Accordingly, certain
of a joint stock company such as legal entity, perpetual existence,
provisions of the Companies Act which are applicable to public companies
limited liability etc., and on the other hand, it is free from numerous
do not apply to private companies. These exemptions are referred as the
legal restrictions which apply to a public company. This grants it a
privileges or advantages of a private company. These are:
greater freedom of action than a public company in several respects.
Conversion of a Private Company into a Public Company One Person Company (OPC)
Aprivate company may convert into a public company any time by following The Companies Act, 2013 introduced the concept of One Person Company
the provisions of Section 14 of the Companies Act, 2013. The provisions are: (OPC). This has made possible to form a company with only one mem-
(a) Passing of a special resolution to alter its articles of association to ber. OPC provides benefit of both forms of business- Proprietorship and
exclude the restrictions of private company viz. transferability of Company. With formation of an OPC business can be run in same way asa
shares, maximum number of members and prohibition on inviting proprietorship by complying with law and keeping liability of the member
the public for subscription of securities. limited by share or guarantee. Many relaxations have been granted to an
OPC in compliance and procedural aspects.
(5) Filing of altered articles of association along with a copy of special
resolution in the prescribed form (INC 27) to the concerned Registrar
Provisions of One Person Company under Companies Act, 2013
of Companies within 15 days of passing
of resolution.
The company shall cease to be a private company as from the date of ( Section 2(62) of the Act defines OPC as “a company which has only
alteration of articles of association. one person asa member". In One Person Company legal and financial
liability is limited to the company only and not to that person (ie.,
Conversion of a Public Company into a Private Company
liability is limited).
(i) Section 2(68) of the Act provides
that a private company includes OPC,
Apublic company may convert into a private company any time by following All the provisions
of the Act applicable to a private company shall also
the provisions of Section 14 of the Companies Act, 2013. The provisions are: be applicable to an OPC, unless otherwise excluded from the compli-
(a) Passing of a special resolution to alter its articles of association to ance. Section 3 of the Act also lay down that OPC shall be treated as
include the restrictions of private company viz. transferability of a private company for all legal purposes with only one member.
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shares, maximum number of members and invitation to the public (iii) The Name of One Person Company shall include the word OPC ‘One
for subscription of securities. Person Company’ within bracket below the name of the Company.
(4) Approval of the Central Government”. For seeking approval, an ap- (iv) The person who is to form an OPC has to give a separate name and
plication in the prescribed form along with the prescribed fees is to legal identity to the Company, under which all the activities of the
be filed with Regional Director. business are to be carried out. Secondly, the person has to nominate
(e) Declaration by a key managerial personnel stated that number
of it a person with that person's written consent as a nominee of the OPC.
members shall be limited to 200 members and also stanting that no This person will be the member in case of existing sole member's
deposit has been accepted by the company in violation of the Act. death or disability. This provision will ensure perpetuity and conti-
(a) A list of creditors and debenture holders of the company drawn upto nuity to the life of the company.
the latest practicable date (not more than 30 days from the date of (v) Exemptions of One Person Company
filing of application) must also be filed along with the application to (a) Number of Directors - Although the new Act restricts number
the Regional Director, of directors to one in case of OPC, there are no constraints to
(e) Filing of a copy of order of the approval, copy of the altered articles appoint more than one, subject to maximum of 15.
of association along with a copy of special resolution in the prescribed (2) The sole member who is an individual shall be deemed to be
form to the concerned Registrar of Companies within 15 days of the first director of the OPC.
approval from the Central Government.
(¢) The directors of OPC are not required to retire by rotation
The company shall become a private company from the date of approval [section 152(6)(a)].
from the Central Government.
(d@) If there is only one director, there is no compulsion to conduct
Board meetings. Incase of more than one director, at least one
board meeting twice in the year is required to be held and gap
“Companies (Amendmvent} Act, 2019,
between the two meetings must not be less than 90 days.
vu
(e) The provisions of sections 98, 100 and 111 related to General 3. The company shall file an application in e-Form No. INC-é for its con-
Meeting, Extraordinary General Meeting, notice and of conversion into Private or Public Company, other than under section 8 of
vening general meeting are not applicable to OPC. If business the Act, along with fees as provided in the Companies (Registration
is required to be transacted at the general meeting by means Offices and Fees) Rules, 2014 by attaching the following documents:
of ordinary or special resolution it shall be sufficient if the (a) Altered MOA and AOA;
resolution is communicated by the member to company and
noted it down in minute’s book and signed and dated by the (b) copy of resolution;
member. (c) the list of proposed members and its directors along with con-
sent;
(f) Financial statement of One Person Company may not include
the cash flow statement. (a) list of creditors; and
(g) Central Government may prescribe abridged annual return (e) the latest audited balance sheet and profit and loss account.
for OPC. 4. On being satisfied that the requirements stated herein have been
complied with, the Registrar shall approve the form and issue the
Conversion of OPCs into Private and Public Companies Certificate.
Ministry of Corporate Affairs, Government of India has issued the Com- Such conversion will not affect any debts, liabilities or contracts by or on
panies (Incorporation) Rules, 2014 which provide for conversion of OPC behalf of the company before conversion.
into a private or public company. The rules are as under:
Conversion by Operation of Law Holding and Subsidiary Companies
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Acompany which controls another company is knownas Holding company,
its average annual turnover during the relevant period exceeds and the company so controlled is termed as Subsidiary company.
Rs. 2 crore, it shall cease to be entitled to continue as an OPC.
As per section 2(87), a company shall be deemed to control another com-
(ii) Such OPC shall be required to convert itself within six months into pany in each of the following cases:
either a private company with minimum of two members and two
directors or a public company with minimum of seven members (1) If it controls the majority composition of the board of directors of
and three directors in accordance with the provisions of section 18 another company. The composition of other company's board of
of the Act. directors shall be deemed to be controlled if it can, at its direction
appoint or remove the holders of all or a majority of the directorships.
(ii) Tt shall alter its memorandum and articles by passing an ordinary
or special resolution to give effect to the conversion and to make (2) Ifitexercises or controls more than one-half of the total voting power
necessary changes incidental thereto. (aggregate of paid up equity share capital and convertible preference
(iv) Within 30 days, the OPC shall give a notice to the Registrar inform- share capital) either at its own or together with one or more of its
ing him that it has ceased to be a One Person Company and that it subsidiary companies.
is now required to convert itself into a private company or a public (3) A company shall be deemed to be the holding company of another
company. company if another company is a subsidiary of the first mentioned
Process for Conversion of OPC inte Private or Public company company's subsidiary (Le. subsidiary of the subsidiary).
1. The One Person company shall alter its memorandum and articles Illustration
by passing a resolution to give effect to the conversion and to make Company Bis a subsidiary of company A, and company Cis a subsidiary
necessary changes incidental thereto. of company & Company Cis a subsidiary of company A. By virtue of the
2, A One Person company may be converted into a Private or Public above provision, if company Dis subsidiary of company C company Dwill
Company, other than a company registered under section 8 of the Act, be a subsidiary of company # and consequently also of company A.
after increasing the minimum number of members and directors to
two or seven members and two or three directors, as the case may be.
ao
A private company which: is subsidiary of a public company is regarded

as synonymously to describe a company whose parent only possesses a
the public company. minority stake in the ownership of the company which is 20 to 50% of
A subsidiary company cannot be a member of its holding company and the paid up equity shares; if more than 50% of the shares are owned by a
any allotment or transfer of shares in the holding company to its subsidiary parent company, it creates a subsidiary. In case of a subsidiary company,
will be void. another company is a majority shareholder. In a wholly owned subsidiary
the parent company owns 100% of the subsidiary.
Restriction on number of layers of Holding Company
As per the Companies (Restriction on Number of Layers) Rules, 2017 Small Company
(notified on 20 September, 2017), no company shall have more than two
layers of subsidiaries, except that— The Companies Act, 2013 has provisions on “small company". Section
2(85) of the Act defines “Small company" as a company, other than a public
() incase of acompany acquiring acompany incorporated outside India
with subsidiaries beyond two layers as per the laws of such country; company, whose
(i) for computing the number of layers under this rule, one layer which ( paid-up share capital does not exceed Rs. 2 crores or such higher
consists of one or more wholly owned subsidiary or subsidiaries shall amount as may be prescribed; or
not be taken into account. (f) turnover of which as per its last profit and loss account does not
Excepiion exceed Rs. 20 crore or such higher amount as may be prescribed,
The provisions of this rule shall not apply to the following companies : However, a small company cannot be
(a) a banking company - a holding company or a subsidiary company or
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(8) a non-banking financial company - a company registered under section 8 of the 2013 Act
(c) an insurance company - acompany or body corporate governed by any special Act.
(@) a Government company “Turnover” means the aggregate value of the realisation of amount made
The companies in existence on or before the commencement of these rules, from the sale, supply or distribution of goods or on account of services
having number of layers of subsidiaries as specified shall have to inform rendered, or both, by the company during a financial year [section 2(91)].
the Registrar of Companies in the prescribed form and shall not have any
additional layer of subsidiaries over and above the layers existing on such Exemptions of a Small Company
date.
1. Financial statement of small company may not include the cash flow
Associate Company statement [section 2(40)].
An associate company is one over which another company exercises a 2. Signing of annual return - In case of Small Company, the annual
degree of control which is less than the degree of control exercised over return shall be filed by director and company secretary or when
a subsidiary. there is no company secretary, by two directors [section 92(1)].
As per section 2(6) of the Companies Act, 2013 “associate company’, in rela- 3. Frequency of Board meetings - In case of a small company, it is
tion to another company, means a company in which that other company sufficient if at least one meeting of the Board of Directors has been
has a significant influence, but which is not a subsidiary company of the conducted in each half of a calendar year. The gap between the two
company having such influence and includes a joint venture company. For meetings should not be less than ninety days [section 173(5)].
the purposes of this clause, “significant influence” means control of at least 4. Small companies are exempted from the requirement from manda-
20% of total voting power, or of business decisions under an agreement. tory rotation of auditors.
Differences between Affiliate, Associate and Subsidiary companies 5. Small companies are not required to provide details of remuneration
An associate company is partly owned by another company or group of directors and KMP of the company. Only the aggregate amount
of remuneration needs to be disclosed.
of companies. In most cases, the terms affiliate and associate are used
6. The auditors of small company are not required to report on the (i) Application for obtaining status of dormant company can be made
adequacy of the internal financial control in the auditors report. only after obtaining special resolution approval of the shareholders
Central Government has been conferred the power to grant exemption or issuing notice to all the shareholders and obtaining consent of at
to small companies from any of provisions of the 2013 Act or provide least 3/4th of the shareholders in value terms;
that the provision of the Act will apply with exceptions, modifications and (f) No inspection, inquiry, or investigation has been ordered or taken
adaptations. It is expected that many procedural relaxations will be given up against the company or no prosecution has been initiated against
by Central Government to a ‘small company’ under these provisions. the company and pending under any court;
(iit) The company does not have any public deposits or interest thereon
Dormant Company outstanding for payment;
The Companies Act, 2013 has introduced the concept of a dormant com- (iv) There is no outstanding loan, secured or unsecured. If there are
pany. Dormant company can be a company formed for a future project or unsecured loans then consent of the lender should be obtained and
to hold an asset or intellectual property without there being any significant enclosed along with the form;
accounting transaction or a company which is not active. (v) There is no outstanding tax dues either to central or State Govern-
Section 455(1) of the Act states that where a company is formed and regis- ment or local authorities:
tered under this Act for a future project or to hold an asset or intellectual (vi) The company has not defaulted in payment of its workmen's dues;
property and has no significant accounting transaction, such a company
or
(vii) Itis not a listed company.
aninactive company may make an application to the Registrar for obtaining
the status of a dormant company. ‘Inactive company’ has been defined in The Registrar shall maintain aRegisterof Dormant companiesinits Records
section 455 as a company which has not been carrying on any business or or Portal. In case a company has not filed its annual returns for the last
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operation, or has not made any significant accounting transaction during two years, then the Registrar can take it to the dormant company status,
the last two financial years, or has not filed financial statements and annual However a dormant company is still required to have minimum directors,
returns during the last two financial years. hold minimum two Board meetings and file minimum one annual financial
Thus, any company which has not been doing any business for the last document with the Registrar. A dormant company can apply to revert back
two years or which has not filed any financial statements and annual re- to active status company.
turns for the last two years shall be inactive company. At the same time an As per the Companies (Miscellaneous) Rules, 2014 a dormant company
active company doing regular business and regular accounting transactions, cannot remain asadormantcompany for more than 5 consecutive financial
but which has failed to file its mandatory annual returns, then it shall also years. If it remains so, then the Registrar shall commence the process of
become a dormant company. striking off the name of the company from the Records, ie. the company
“Significant accounting transaction’ is also defined by the Act which means will be removed.
any transaction other than—
(a) payment of Fees by a company to the Registrar; Government Company
(5) payments made by it to fulfil the requirements of this Act or any As per Section 2(45) of the Companies Act, government company means
other law; a company in which not less than 51 per cent of the paid-up share capital
is held by:
{c) allotment of shares to fulfil the requirements of this Act; and
(i) the Central Government, or
(@) payments for maintenance of its office and records.
(i) any State Government or Governments, or
A company can apply for a “dormant company" by making an applica-
tion in the prescribed form provided that the rules prescribed under the (iii) partly by the Central Government and partly by one or more State
Companies (Miscellaneous) Rules, 2014 have been complied with, The rules Governments,
provide the following: Government Company includes a company which is a subsidiary of a
Government company.
Government Company is a company in which at least 51% of the paid-up or such other place as the Central Government may approve in this
share capital is held by the Government. behalf.
Holding of shares by municipal and other local authorities or statutory (5 Dividends: Under section 123(4) a Government Company in which
—
corporations (which are the government bodies) is not to be taken into entire paid up share capital is held by the Central Government or by
consideration for this purpose. any State Government(s) or by the Central Government and State
Government(s) or by one or more Government Company need not
A Government company may be a private company or public company. deposit the dividend ina scheduled bank ina separate account within
A Government private company is not required to add the word ‘private’ five days of its declaration.
as part of its name. (6) Board's Report: The requirement of Board's Report to contain
A Government company is not an agent of the government as it is a juristic information on company’s policy on directors’ appointment and re-
person different from its members (the government). muneration including criteria for determining qualifications, positive
attributes, independence of a director, etc. in case of listed and other
Specific Provisions regarding Government Companies companies which are required tohave Nomination and Remuneration
(1) The auditor of a government company is appointed or re-appointed Committee shall not apply to a Government company.
by the Comptroller and Auditor General of India. The Comptroller (7) Independent director: Undersection 149(6)(a), incase of a Government
and Auditor General of India has the power to direct the manner in Company, a person shall be considered as an independent director
which the company’s accounts are to be audited by the auditor and if in the opinion of the Ministry or Department of the Central Gov-
give such other instructions regarding any matter relating to the ernment which is administratively in charge of the company, or as
performance of his functions as such. He can also conduct a supple- the case may be, the State Government is a person of integrity and
possess relevant expertise and experience.
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mentary test audit of the company’s accounts by officers appointed by
him. The auditor must submit a copy of his report to the Comptroller (8) Rotational Directors: Provisions of section 152(6) and (7) relating to
and Auditor General and such report, with his comments thereon, rotation of directors and filling of vacancy arising due to retiring of
shall be placed before the annual general meeting of the company. directors shall not apply to a Government company which is not a
listed company.
(2) Where Central Government is a member of a Government company,
it shall prepare an annual report on the working and affairs of the (9) Managerial remuneration: The provisions of section 197 relating to
company within three months of the annual general meeting and managerial remuneration do not apply to a Government Company.
place it along with the audit report and comments thereon before
both Houses of Parliament. Where a State Government is a member Foreign Companies
of a Government Company, it shall present the annual report on the As per Section 2(42) of the Companies Act, 2013 ‘foreign company’ means
working of the company along with the audit report and comment a company incorporated outside India which-
thereon before the House(s) of the State Legislature.
(a) has a place a place of business in India whether by itself or through
(3) The Central Government may, by notification in the Official Gazette, an agent, physically or through electronic mode, and
direct that any of the provisions of this Act specified in the notifica-
(5) conducts any business activity in India in any other manner.
tion:
However, where not less than 50 per cent of the paid-up share capital of
fa) shall not apply to any Government company ; ar
a company incorporated outside India and having an established place of
(6) shall apply to any Government company, only with such business in India, is held by one or more citizens of India or by one or more
exceptions, modifications and adaptations, as may be specified bodies corporate incorporated in India, whether singly or in the aggregate,
in the notification, such company shall be regarded as if it were a company incorporated in
(4) Place of AGM: Under section 96, a Government company may hold India. (Section 379)
its AGM at the registered office or such other place within the city,
town or village in which the registered office of the company is situate
Obligations of a Foreign Company (a) isabout to be formed asa limited company for promoting commerce,
(1) Document to be submitted: Within 30 days of the establishment of art, science, religion, charity or any other useful object, and
the place of business, a foreign company is required to deliver the (5) intends to apply its profits, if any, or other income in promoting its
following documents to the Registrar for registration— objects, and to prohibit the payment of any dividend to its members,
(a) a certified copy of the charter, statutes, or memorandum and the Central Government may, by licence, direct that the association may
articles, of the company or other instrument constituting or be registered as a company with limited liability, without the addition to
defining the constitution of the company; and, if the instrument its name of the word “Limited” or the words “Private Limited”.
is not in the English language, a certified translation thereof;
Licenced companies are associations not for profit which have been
(6) the full address of the registered or principal office of the granted licence by the Government.
company;
(ce) alist of the directors and secretary of the company, containing Provisions of the Law
the particulars of their names, usual residential addresses,
(i) Such associations, on registration enjoy all the privileges and obliga-
nationality, business occupations, and other directorships held; tions, of limited companies subject ta the provisions of this section.
(@) the name and address or the names and addresses of some
(i) The licence is granted by the Central Government on such conditions
one or more persons resident in India, authorised to accept on and subject to such regulations as it thinks fit, and those conditions
behalf of the company service of process and any notices or and regulations shall be binding on the association to which the
other documents required to be served on the company; and
licence is granted.
(e) the full address of the office of the company in India which is
(iti) Itis not necessary for the association to which a licence is so granted
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to be deemed its principal place of business in India. (Section to use the word “Limited” or the words “Private Limited” as any part
380)
of its name, unless its articles otherwise provide.
(2) Submission of Annual Accounts: A foreign company is required
(iv) A partnership firm may be a member of any association or compa-
to submit, in every calendar year, a balance sheet and profit & loss ny licensed under this section, but on the dissolution of the firm, its
account in the prescribed form along with the prescribed annexures membership of the association or company shall cease.
and documents to the Registrar of Companies. (Section 381)
(v) The licence may at any time be revoked by the Central Government,
(3) Exhibition of the Name: A foreign company is required to exhibit its and upon revocation the body shall cease to enjoy the exemption
name and country of its incorporation outside of every office where
pranted by this section.
it carries on business in India. It has to be in letters easily legible in
English and local language of the locality in which the office or place (vi) A body in respect of which a licence under this section is in force
of business is situated. shall not alter the provisions of its memorandum with respect to its
objects except with the previous approval of the Central Government
The name of the company and country of incorporation must be signified in writing.
contained in English on all business letters, bills, advertisements,
notices and other official publications of the company. (Section 382) (vit) Appointment of a qualified company secretary is not mandatory.
(4) Every foreign company is required to get the accounts pertaining to (viii) A general meeting of such a company may be held by giving 14 days
the Indian business operations, audited by the auditors as laid down notice instead of 21 days.
by the Companies Act, 2013.
(ix) Provisionrelating to appointment of minimum and maximum number
of directors is not applicable to these companies.
Association not for Profit or Licensed Companies [Sec. 8]
(x) Provisions regarding appointment of independent directors are not
Meaning
applicable.
Where to the satisfaction of the Central Government an association—
(xi) Such companies are required to hold at least two board meetings in (10) any other activity, ancillary or incidental to any of these activities
a year instead of four such meetings for other companies. which may promote the principles
of mutuality and mutualassistance
amongst the Members in any other manner;
(xii) Maximum limit of 20 directorships shall not apply to section 8 com-
panies. (11) financing of procurement, processing, marketing or other specified
activities which include extending of credit facilities or any other
PRODUCER COMPANY financial services to its Members.
Concept and Meaning Primary Produce

The Companies Act introduced a new kind of company termed as ‘pro- Producer Company deals only with the “primary produce" of its members,
ducer company’ based on the cooperative principles of mutual assistance, which means:
patronage and limited return.
() produce of farmers, arising from agriculture including animal hus-
As per Section 378A of the Companies Act “Producer Company” means a bandry, horticulture, floriculture, pisciculture, viticulture, forestry,
body corporate having objects or activities specified in section 378B and forest products, re-vegetation, bee raising and farming plantation
registered as Producer Company under this Act, Producer Company deals products, or from any other primary activity or service which pro-
primarily with the produce of its active Members for carrying out any of motes the interest of the farmers or consumer; or
its specified objects.
(fi) produce of persons engaged in handloom, handicraft and other
cottage industries;
Objects of Producer Company [Sec. 378B]
(if) any product resulting from any of the above activities, including
The objects of the Producer Company relate to all or any of the following
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by-products of such product;

matters:
(iv) any product resulting from an ancillary activity that would assist or
(1) production, harvesting, procurement, grading, pooling, handling, promote any of the aforesaid activities or anything ancillary thereto;
marketing, selling, export of primary produce of the Members or
import of goods or services for their benefit; (v) any activity which is intended to increase the production or improve
the quality of anything referred above.
(2) processing including preserving, drying, distilling, brewing, vinting,
canning and packaging of produce of its Members; “Producer” means any person engaged in any activity connected with or
relatable to any primary produce.
(3) manufacture, sale or supply of machinery, equipment or consumables
mainly to its Members; Principles of Producer Company
(4) providing education on the mutual assistance principles to its
Members and others; Producer Company is based on the cooperative principles of patronage,
mutual assistance, and limited return.
(5) rendering technical services, consultancy services, training, re-
(Ll) “Patronage” means the use of services offered by the Producer
search and development and all other activities for the promotion
of the interests of its Members; Company to its Members by participation in its business activities.
(6) generation, transmission and distribution of power, revitalisation of (2) Mutual assistance principle requires:
land and water resources, their use, conservation and communica- (a) the membership to be voluntary and available to all eligible
tions relatable to primary produce; persons who can participate
or avail of the facilities
or services
of the Producer Company and are willing to accept the duties
(7) insurance of producers or their primary produce;
of membership;
(8) promoting techniques of mutuality and mutual assistance;
(4) each Member to have only a single vote irrespective
of holding
(9) welfare measures or facilities for the benefit of its Members; of shares;
Sot
(ce) provision for the education of Members, employees and oth- — any 10 or more individuals, each of them being a producer, or
ers, on the principles of mutuality and techniques of mutual — any two or more Producer institutions, or
assistance.
= acombination of 10 or more individuals and Producer insti-
(3) Limited return wherein every member receives only a limited return tutions.
on the share capital contributed. The surplus if any, remaining after
making provision for payment of limited return and reserves may be (2) The objects for which a Producer Company is to be formed must be
disbursed as patronage bonus, amongst the members, in proportion as specified in Section 378B of the Act.
to their participation in the business
of the Producer Company, either (3) The requirements and provisions of the Act in respect of registration,
in cash or by way of allotment of equity shares, or both, as may be as per the Act must be complied with. The necessary documents
decided by the Members at the general meeting. including Memorandum of Association and Articles of Association
must be submitted to the Registrar of Companies.
Difference between Producer Cooperative and Producer Company (4) If the Registrar is satisfied that all the requirements of this Act have
been complied with in respect of registration and matters precedent
Basis Producer Cooperative Producer Company and incidental thereto, he shall, within 30 days of the receipt of the
Registration Cooperative Societies Act. | Companies Act. documents required for registration, register the memorandum,
Shares Not tradable. Not tradable but trans- the articles and other documents, if any, and issue a Certificate of
ferable. Incorporation under this Act.
Voting Rights One person one vote but One person one vote (5) A Producer Company so formed shall have the liability of its Mem-
Registrar of Cooperative but only active members limited to the amount, if any, unpaid on the shares respectively
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Societies hold veto power. bers can vote. held by them and shall be termed a company limited by shares.
Reserves Not Mandatory. Mandatory to create (6) On registration, the Producer Company shall become a body cor-
reserves. porate as if it is a private limited company to which the provisions
contained in this Part apply, without, however, any limit to the num-
Borrowing Power | Restricted More freedom ber of Members thereof, and the Producer Company shall not, under
Role of Registering | Significant Minimal any circumstance, whatsoever, become or be deemed to become a
Authority public limited company under this Act.
Dispute Settlement| Through Cooperative me-| By Arbitration (7) The last words of the name of such Company shall be “Producer
chanism Company Limited".
Benefits of Producer Companies Illegal Association

Producer companies allow farmers and other growers to formulate a col- An illegal association is an association of more than the prescribed number
lective production and marketing strategies, negotiate better terms with of persons which carries a business without being registered under any
buyers, buy inputs and fertilizers in bulk and receive technical guidance at WAT.
their doorsteps. Producer companies offer advantages of limited company
According to section 464 of the Companies Act, 2013 and Rule 10 of the
with minimal administrative control of the Government. It protects the
Companies (Miscellaneous) Rules, 2014, an association consisting of more
farmers from the influence of local politicians and the State Governments
which is overriding in cooperatives. than 50 persons carrying on any business for profits shall be termed as
‘illegal association’if it is not registered as. a company under the Companies
Act or is not formed according to the provisions of under any other Indian
Formation of Producer Company and its Registration [Sec. 378C] Law. Section 464further provides that the number of members which may
(1) A Producer Company may be formed by: be prescribed under the rules shall not exceed 100. (It may be noted that
at present the number prescribed is 50).
— rs
Thus, an association will be termed as an illegal association, when: 1. No legal existence. An illegal association:
( The association consists of more than 50 members; {a) cannot enter into binding contracts?
(i) The association is formed for carrying on any business with the (6) cannot sue any member or an outsider if the illegality becomes
objective of earning of profits; and apparent.
(ii) The association is not registered as a company under the Companies (e} cannot be sued by a member or an outsider for it cannot con-
or not formed according to the provisions of some other Indian tract any debts“
aw,
Exceptions. The provisions of illegal association are not applicable in the (@) cannot be wound up under the Act either at the instance of a
following cases: creditor, a member or the association itself.’ Members individ-
ually or collectively
of an illegal association cannot bring about
() Joint Hindu Fantily. Such a family can carry on family business with a valid suit against another member or any other persons for
more than 50 members without getting itself registered
as. a company
any contract made by them.*
under the Companies Act or any other law.
Subsequent registration will not alter the position with regard to the
(fi) Associations or Partnerships, if it is formed by professionals who are
past acts. Contracts made before registration cannot be validated
governed by special Acts.
and sued upon by subsequent registration.’ No cause of action can
Penalty. Every member of an illegal association shall be personally liable arise on the basis of an illegal association.
for all the liabilities incurred by such business,
Every member of an illegal association shall be punishable with a fine Case Laws
which may extend to Rs. 100,000, () The consequence of the illegality of the association/partner-
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ship is that its members have no remedy against each other
Rules for counting number of persons. For counting the number of 50
for contribution or apportionment in respect of partnership
the word ‘person’ includes both natural and artificial juristic persons. A
dealings and transactions.
company is a separate legal entity and therefore, it will be counted only
as one person. A partnership firm does not have a separate existence and, (Kumarswami Chettiar v. Chinnathami Chettiar)
therefore, if it is a member of an association, each partner of the firm will (i) An illegal association will not be able to initiate any legal
be counted as a separate person. A Joint Hindu Family carrying on family proceedings against a person to recover debts due to the
business or trade shall be counted as only ‘one’ person. In case two Joint association
Hindu families combine and form a partnership, minors shall be excluded (Madras Hindu Mutual Benefit Fund v. Raghava Cheti)
in computing the number of persons. All the adults of both the joint fam-
ilies shall be counted as members of the association. But if the ‘Karta’ of (iii) Onemember of anillegal association cannot sue anothermem-
a family enters into partnership with another family in his representative ber in respect of any matter connected with the association.
capacity on behalf of his family, he shall be treated as an individual only.' An outsider also cannot maintain a suit against
the association.
(Ram Kishun v. Baij Nath)
Illegality off an association, however, can in no case be cured by subse-
quent reduction in the number of its members to below 50. Subsequent 2. Unlimited personal liability. Every member of an illegal associa-
registration cannot legalise contracts made earlier. tion shall be personally liable for all the liabilities incurred by such
Consequences of Illegal Association
Section 464 is a self-regulating provision in law because the Government . Jennings + Hammen
he
has not appointed any specific agency to enforce the prohibition laid down . Nibaran Chandra Shaha v, Lalit Mohan Shaha (1938)
On de i
by this section. Moreover, the offence is non-cognizable, it cannot be inves- Manekji »G.N. Cama
ao
tigated by the police under the criminal law, The consequences are: . Re. Dfracombe Permanent Mutual Benefit Bldg. Society Ltd. (1901)
Shaw v, Benson (1883)
1, Mewa Ram v Ramgopal (1926) . Gujarat Trading Co. v. Tricumi
55A KINDS OF COMPANIES KINDS OF COMPANIES 55B
business. It will be immaterial if the creditors had knowledge of the 9. What is a small company? What are the exemptions of a small
illegality of the association, or not. company?
3. Penalty. Every member of an illegal association shall be punishable 10. Can a Company incorporated outside India be allowed to do its
with a fine which may extend to Rs. 100,000. The penal provisions business in India? What are the conditions which are prescribed?
will apply only where a company is formed in contravention of this
11. Itis possible to have a company with unlimited liability? How that
section and not where theillegality supervenes
at a subsequent stage. company would be different from a partnership firm?
IMPORTANT CASES 12. “Acompany can be registered with limited liability without the word
limited with its name.” State with reasons whether the statement
Velayudhan Mv, Registrar of Companies | Holding and Subsidiary Co. is correct or incorrect.
Relationship 13. Define a ‘Government company’. What are its special features?
Framroze Rustomji Paymaster v. British | Foreign Company 14. Distinguish between Holding and Subsidiary Company.
Burmah Petroleum Co.
15. What is an ‘Associate Company’? How is an associate company
Mewa Ram v. Ramgopal Illegal Association different from subsidiary company?
Madan Lal vy, Janki Prasad Tllegal Association 16. What isan illegal association? What are the consequences of illegal
association?
Ku marswantt Chettiar v. Chinnathami| legal Association
Chettiar
Ram Kishun v. Baij Nath Illegal Association
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Badri Prasad v. Nagarmal Illegal Association
REVIEW QUESTIONS
1. Whatisa private company? Whatare the privileges and exemptions |

enjoyed by a private company? i
2. Is it possible to form a company with only one person as the mem-
ber? Discuss this in the light of provisions of the Companies Act,
2013. i
3. What do you mean by One Person Company? What are the exemp-
tions enjoyed by One Person Company?
4. How can a One Person Company be converted into a private com-
pany?
5. Define a private company, Is it possible for a public company to
become a private company? If so, state the procedure.
6. Can a private company become a public company?
7. Distinguish between public company and a private company.
8. What is a dormant company? How long a company remain
dormant company?
FORMATION OF COMPANY 57
has the Memorandum and the Articles prepared, executed and registered,
and finds the first directors, settles the terms of preliminary contracts and
prospects (if any) and makes arrangements for advertising and circulating
the prospectus and placing the capital.” Thus,a promoter discovers, formu-
lates and assembles a business proposition and brings about a company
into existence for its development.
Sec. 2(69) of the Companies Act, 2013 defines the term promoter
as 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) Whohas control over the affairs of the company, directly orindirectly
FORMATION OF COMPANY whether as a shareholder, director or otherwise; or
fc) In accordance with whose advice, directions or instructions the
Board of Directors of the company is accustomed to act. This shall,
+ Promotion however not apply to a person who is acting merely in a professional
@ Incorporation capacily.
A promoter may be an individual,a family, a firm, an association of persons,
@ Commencement
acompany oreven the government. It may cover any individual or company
These are three principal stages in the formation of a company: that obtains a director, places shares or negotiates preliminary contracts.
# Promotion A promoter need not necessarily be associated with the initial formation
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of the company; one who subsequently helps to arrange the ‘floating off
aNNVWXYL
@ Incorporation of its capital’ will equally be regarded as a promoter. Persons doing acts
# Commencement of Business of purely ministerial nature or in a professional capacity for remuneration
or fees are not promoters ¢.g, solicitors, valuers, etc. Promoter does not
Promotion include any person by reason of his acting in a professional capacity or
persons engaged in procuring the formation of the company. A person who
Promotion is the stage of conceiving an idea of forming a company to da only advances money to promoters for meeting out preliminary expenses
a business and working on that idea. The person involved in this task is is nota promoter. But a professional who brings financiers to the company
termed as promoter. The promoter may work up the idea with the help of would be considered as promoter.
his own resources, influence or competence or he may, if necessary, take A person cannot be held as a promoter merely because he has signed at
the help of technical and legal experts to bring a company into existence. the foot of the Memorandum or that he has provided money for the pay-
ment of formation expenses.’ A signatory to the Memorandum, who has
Promoter not performed the functions of the promoter of a company, may not be
Promoter is a person who conceives the idea of starting a business, plans liable as a promoter.
the formation of a company and actually brings it into existence. He may
be said to be “the father of the company who sees the prospects of gain in Functions of Promoter
a business which he wishes to set up, and believes that he can persuade The main functions of a promoter are as follow:
others too to think as he does.” A promoter is one who undertakes to form (i) Toconceive an idea of starting a business and explore its possibilities.
a company with reference to a given object and who takes the necessary
(ij) Toundertake detailed technical, economic and commercial feasibility
steps to accomplish that purpose.' Palmer has defined company promoter
as “a person who originates a scheme for the formation of the company, of the business propositions. Help of experts may be taken for that.
(ii) To conduct negotiations for the purchase of a business in case it is
1, Twreross +. Grant (1877) intended to purchase an existing business.
56 2. G. Tiruvengadachariar v. Velu Mudaliar (1938)
— he
58 FORMATION OF COMPANY FORMATION OF COMPANY 59
(iv) To collect the requisite number of persons ie. 2 in the case of a pri- Duties of Promoter
vate company and 7 in the case of a public company, who can sign The promoter stands in a fiduciary relationship with the company. Though
the memorandum and articles of the companyand also agree to act the fiduciary relationship really arises when the company is formed, the
as the first directors of the company. fiduciary obligation of a promoter begins as soon as he sets out to act as
(v) To decide the following: (a) the nature of the company (4) the promoter of the company.‘ This fiduciary relationship imposes the following
location of its registered office (c) the amount and form of its capital obligations on the promoters:
(d) the underwriters or brokers for capital issue, if necessary (e) the (i) Not to make Secret Profit: Promoters should not make any secret
bankers (/) the auditors (g) the legal advisers,
profits
at the cost of the company withoutits knowledge and consent.
(vi) To get the memorandum of association and articles of association Secret profits or undisclosed benefits of any type received by the
drafted and printed. promoters can be recovered from them by the company.‘ Company
(vii) To enter inte preliminary contracts with vendors, under-writers etc. can proceed against the promoters for any damage caused to it on
(viii) To arrange for the preparation of prospectus, its filing, advertisement account of their fraud or breach of duty. The estate of the promoter
and issue of capital. shall remain liable in an action by a company for deceit or breach
of trust if any benefit has accrued to the estate.
(ix) To pay preliminary expenses,
(ii) Disclosure
of Material Facts: It isthe duty of the promoters todisclose
fully all material facts relating to the formation of the company. The
Legal Position
of Promoter disclosure of all material facts, regarding contracts made and the
profits earned by them from the formation of the company, should
A promoter can neither be termed as an agent nor a trustee of a company be made to an independent and competent Board of Directors. If 53
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which has not come into existence. The reason is that there was no principal the promoters fail to disclose complete facts, company may set aside g
or trust in existence for whom or for whose benefit the promoter has acted.
Thus, the legal position of the promoter cannot be precisely established,
the transaction and recover the benefit earned by them. A case is |
illustrated: 5 e
However, Lindley, L_J. described his position in Lydney& Wigpool Iron Ore
Ca, v. Bird (1866) which may be termed as that of ‘quasi-trustee’. Erlanger v. New Sombrero Phosphate Co. (1878) Erlanger together with
“Although not an agent for the company, nor a trustec for it before its for- some of his friends, purchased an island containing phosphate mines
mation, the old familiar principles of law of agency and of trusteeship have for £55,000. The island was then sold to a newly formed company for £
been extended and very properly extended to meet such cases, It ispale 1,10,000. All the five directors of the newly formed company were nomi-
well settled that a promoter is accountable to it for all monies se nated by Erlanger. At the time of the purchase agreement with Erlanger,
tained by hin from it, just as the relationship
of the principal ee two directors were abroad, while out of the remaining three, who signed
the trustee and the trust had really existed between him and the company the purchase deed, two were completely under the control of Erlanger.
when the money was obtained". Later on, a prospectus was issued inviting the public to subscribe for
Promoters have wide powers relating to the formation of the company, the shares of the company. The purchase agreement was approved at
Law has put the relationship of the promoters with the company they the first meeting of the shareholders, but they were not told all material
bring into existence as well as with those whom they induce to become facts regarding the transaction. After some time the company went into
shareholders in it, as that ofa fiduciary nature. This fiduciary relationship liquidation. The liquidator filed a case against Erlanger to recover the
is based on utmost faith and confidence. “Those who accept and use such profit made by him on account of sale of island to the company. Erlanger
extensive powers are not entitled to disregard the interests of the corpora- defended the case on the plea that the Board of Directors had full know-
tion altogether. They must makea reasonable use of the powers which they ledge of the facts. His contention was rejected and he was asked to return
accept from the legislature; and consequently they do stand, with regard the benefit to the liquidator.
to the corporation, when formed, in what is commonly called a fiduciary
relation to some extent.”?
4. SM. Shah, Lectures on Company Law"
4. Lagunas Nitrate Co. » Lagunas Nitrate Svndicate (1899) 5. Cavendish Bentinck v. Fenn (1887)
i e
‘The Court held “If they (promoters) propose to sell their property to the punished with imprisonment for a term which may extend to 3 years
company, it is incumbent upon them to take care that they provide the or a fine from Rs. 50,000 to Rs. 300,000 or both [Section 26(9)].
‘company with an executive who shall both be aware that the property (5) Misrepresentation in the Prospectus: A promoter is liable for any
which they are asked to purchase is the promoter's property, and who untrue statement in the prospectus to a person who has subscribed
shall be competent and impartial judges as to whether the purchase ought for any shares or debentures on the faith of the prospectus. Such
or ought not to be made. They should sell the property to the company a person may sue the promoter for compensation for any loss or
through the medium of a Board of Directors, who can and do exercise damage sustained by him (Section 35).
-an independent and intelligent judgment on the transaction.”
Remuneration to Promoter
Liabilities of Promoter
The promoter has to incur the initial expenses in the process of formation of
(1) Non-disclosure of Secret Profit: In case a promoter fails to make full a company besides undergoing a good deal of arduous task. The promoter
disclosure
of his dealings and profits made in promoting
the company, has, therefore, a legitimate right to claim for both the expenses incurred
he can be compelled by the company to hand over such secret profit. by him as well as remuneration for the work done by him. The claim for
The company can also sue for the rescission of the contract of sale expenses should be supported by vouchers and should be placed before the
by the promoter where the promoter has not disclosed his interest directors of the company when formed. However, there is no contractual
therein. obligation on the part of the company to pay him for these expenses unless
(2) Non-adoption of Preliminary Contract: If a promoter enters into the company has expressly agreed to pay after its formation for the services
contracts on behalfof the company before the company was actually rendered by him. The same is true about his remuneration.
incorporated, he may be held personally liable for non-adoption of The promoter may be remunerated in any of the following ways:
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those contracts by the company provided he has purported to act as (a) Promoter may sell his own asset to the company at profit for cash
an agent and the non-existence of the company was known to both or shares in the company.
the parties.
(5) He may be given commission on the purchase price of the business
(3) Fraud in the Promotion of the Company: taken over by the company.
(}) Ifapromoter furnishes any false or incorrect particulars of any (c) He may be granted a lump sum as remuneration either in cash or in
information or suppresses any material information, of which shares or debentures.
he is aware in any of the documents filed with the Registrar
in relation to the registration of a company, he shall be liable The amount of remuneration payable or paid to the promoters is required
for action under section 447. to be disclosed in the prospectus issued by the company.
(if) Where it is found that any fraud has been committed in pro- Preliminary or Pre-incorporation Contracts
moting or forming a company, the Tribunal may order inves-
tigation against the promoters any other director or officer of Meaning
the company involved in such fraudulent activities (Section Preliminary contracts are contracts entered into by the promoters on behalf
282). of the company before its incorporation with third parties.
(i) Acompany
may proceed against a promoter
where the promoter
has wrongfully obtains possession of any property, including Validity
cash of the company or wrongfully withholds it or knowingly It is usual for the promoters to enter into these contracts of purchases of
applies it for the purposes other than those expressed or di- assets on behalf of the company about to be formed but before it is actually
rected in the articles and authorised by the Act (Section 452), formed. They generally enter into these contracts as agents or trustees of
(4) Omission in the Prospectus: Prospectus issued by a company must the company, which has not yet come into existence. Such contracts are
have the contents as laid down by Section 26 of the Companies Act. legally not binding upon the company even after it comes into existence.
In case of omission of facts, the promoter shall become liable to be
The company can neither ratify those contracts nor sue the vendors on Baxter, a promoter and a prospectivedirector of a company to be formed,
them after its incorporation because ratification requires existence of the entered into a contract with Kelner on behalf of the company. Baxter
principal at the time when the contract was entered into. signed the contract adding the words “for and on behalf of XY Co. Ltd.”
Cases On a suit by Kelner for the performance of the contract, it was held that
Baxter was liable as he had contracted on behalf of a principal who did
() N & Co. entered into an agreement with one C, who acted on behalf not exist.
of a proposed syndicate. Under the agreement N & Co. was to give the
syndicate a lease of coal mining rights. The syndicate was then registered But, if the contract is purported to be made by the company itself, the
and asked N & Co. to give these rights, which N & Co. refused. An action person so acting ie, ie promoter, cannot be held personally liable, for he
by the syndicate for specific performance of the agreement or in the shall be taken to have simply authenticated the contract and the company
alternative for damages was not maintainable as “a company cannot by shall be taken to have entered into the contract and the company being
adoption or ratification obtain the beneht of a contract purporting to non-existent the contract shall become nullity, Case of Newborne (London)
have been made on its behalf before the company came into existence.” Lite. v. Sensolia (GB) Lira. (1954) may be cited:
(if) On the request of the promoters of a company, a solicitor prepared L.N. was a promoter and a prospective director of a company to be
the Memorandum and Articles of Association of a company, paid the formed “Leopold Newborne (London) Ltd." A contract for the supply
registration fees and got the company registered. The company was not of certain goods by the company (not formed till then) to Sensolid was
held bound to pay for the services and expenses of the solicitor. “The signed thus “Leopold Newborne (London) Ltd.” and the name L.N. was
company could not be sued in law for those expenses inasmuch as it written underneath. In an action for breach of contract by L.N. against
was not in existence at the time when the expenses were incurred and Sensolid, it was held that the contract was signed in the proposed name
— giNVIVA VL
ratification was impossible.”’ of the company and LN. added his name only to authenticate it. Since the
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A company cannot adopt contracts entered into before its incorporation company was not at all in existence at the time of signing the contract,
even by passing a special resolution or with the unanimous consent of its there was no contract at all. Hence, Sensolid had no liability.
members. Thus, preliminary contracts will either have to be left as mere In case of personal liability, the promoters will continue to be liable until
“gentlemen's agreements” or the promoters will have to undertake personal the company adopts the contracts. In order to avoid their liability, the pro-
liability; which of these courses will be adopted depends largely on demands moters usually insert a clause in the original contract to the effect that if
of the other party5 ‘Since the pre-incorporation contracts purported to be the contract is not adopted by the company after its incorporation within
made by a company which does not exist is a nullity, neither the company a limited time, both the promoters and the third party will be exonerated
when formed nor the promoter whose signature is added can sue or be from liability. Some of the promoters simply agree to the draft contract to
sued on contract.” be entered into by the vendor and the company after incorporation.
Liability of the Promoter Adoption of Preliminary Contract

The nature
of the liability
of the promoter
on preliminary contracts depends A company may adopt preliminary contracts by either of the two ways:
on the tenor of such contracts. He can be held personally liable if he has (i) The company may adopt these contracts by entering into new con-
purported to act as an agent and the non-existence of the company was
traets with the third parties on the same terms as were embodied in
known to both the parties. This is because where a contract is made on the original contract, Such a new agreement of adoption may not
behalf of a principal known to both the parties to be non-existent, the con- be expressly made but may be implied by the acts of the company.
tract is deemed to have been entered into personally by the actual maker.
Case of Kelner v, Baxter (1866) provices an illustration: (i) The company may adopt these contracts under the Specific Relief
Act, 1963, Sections 15(/) and 19(e) of the Act provide that a contract
6. Natal Land and Colonisation Co. Lid_ v. Pauline Colliery & Development Syndicate Ltd, (1904) entered into by the promoters on behalf of the company before its
7. Re, English and Colonial Produce Co, Ltd. (1906) incorporation can be enforced by or against the company, if the
8. Gower LC.B, “The Principles of Modern Campany Law", Third Ed, p. 280. following two conditions are satisfied:
9, New Borne v. Sensolid (GB) Ltd. (1954).
= The contract is entered into, for the purposes of the company If proposed name is not available, the user has to apply for a fresh
and such contract is warranted by the terms of incorporation. name on the same application.
The term “for the purposes of the company" implies that the 3. The name approved will be reserved by the Registrar for a period
contract should be for the working purpose of the company. of 20 days from name approval. Within this period, the applicant
= The company accepts the contract after its incorporation and can apply for registration of the new company by filing the required
communicates such acceptance to the other party to the con- forms (£2, Forms 1, 18 and 32),
tract. 4. Before promoters begin the incorporation of a company, they have
Case to appoint chartered accountants, lawyers etc., to help them in pre-
paring various documents.
Imperial Ice Mfg. Co. v. Manchershaw - The promoters of an ice manu-
5. Arrange for the drafting of the memorandum and articles of asso-
facturing company entered into a contract with M for the purchase of
ciation by solicitors, vetting of the same by Registrar of Companies
ice manufacturing machinery for the company. The company on its for-
mation subsequently adopted the contract and sent the communication
and printing of the same.
of acceptance to Mr. M. Held, the contract was for the purposes of the The Memorandum and Articles must be signed by at least 7 subscribers
company, and was therefore, enforceable by or against the company. (2 in case of private company) along with address, description, occupation,
if any, in the presence of at least of one witness. The subscribers should
Incorporation also clearly mention the number and nature of shares subscribed by them.
Applying to the Registrar of Companies
Incorporation brings
a company into existence
as a separate corporate entity,
After having done the preliminary work, the promoters are required to
As per Sec. 3(1) a company may be formed for any lawful purpose by: make an application to the Registrar of the State in which company's reg-
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(a) seven or more persons, where the company to be formed is to be a istered office will be situated, accompanied by the following documents
public company; and information for registration [Sec. 7(1)]:
(5) two or more persons, where the company to be formed is to be a (a) the memorandum and articles of the company duly signed by all
private company; or the subscribers to the memorandum in such manner as may be
prescribed;
(c) one person, where the company to be formed is to be One Person
(6) a declaration in the prescribed form by an advocate, a chartered
Company that is to say, a private company,
accountant, cost accountant or company secretary in practice, who
by subscribing their names or his name toa memorandum and complying is engaged in the formation of the company, and by a person named
with the requirements of this Act in respect of registration. in the articles as a director, manager or secretary of the company,
that all the requirements of this Act and the rules made thereunder
Preliminary Steps inrespect of registration and matters precedent or incidental thereto
The promoters have to go through the following preliminary steps before have been complied with;
applying for incorporation of the proposed company: (¢ a declaration from each of the subscribers to the memorandum and
—
from persons named as the first directors, if any, in the articles that
1. As per Sec. 4(2) a company cannot be registered with a name he is not convicted of any offence in connection with the promotion,
which is considered to be undesirable in the opinion of the Central
formation or management of any company, or that he has not been
Government. The name should not be identical with or resemble too
found guilty of any fraud or misfeasance or of any breach of duty
nearly tothe name of an existing company or registered under this Act to any company under this Act or any previous company law during
or any previous company law. Therefore the promoters are advised the preceding five years and that all the documents filed with the
to make an application in the Form 1 A to ascertain the availability Registrar for registration of the company contain information that
of maximum six names in the order of their preference. is correct and complete and true to the best of his knowledge and
2. A fee of Rs. 500 has to be paid alongside and the digital signature of belief;
the applicant proposing the company has to be attached in the form. (d) the address for correspondence till its registered office is established;
ro
(e) the particulars of name, including surname or family name, residential Register DSC — After acquiring the DSC it is important to do the Role
address, nationality and such other particulars of every subscriber
to check to verify whether the Digital Signature affected on the e-form are
the memorandum along with proof of identity,as may be prescribed, of the Director, Manager, or Secretary and whether the Digital Signature
and in the case of a subscriber being a body corporate, such partic- is registered on the MCA Portal.
ulars as may be prescribed; Step 3: New User Registration
(/) the particulars of the persons mentioned in the articles as the first To file an e-Form or to avail any paid service on MCA portal, it is first
directors of the company, their names, including surnames or fam- required to be registered as a user in the relevant user category, such as
ily names, the Director Identification Number, residential address, registered and business user.
nationality and such other particulars including proof of identity as
may be prescribed; and Step 4: Incorporate a Company
(g) the particulars of the interests of the persons mentioned in the ar- — Select, in order of preference, at least one suitable name up toa max-
ticles as the first directors of the company in other firms or bodies imum of six names, indicative of the main objects of the company.
corporate along with their consent to act as directors of the company — Ensure that the name does not resemble the name of any other al-
in such form and manner as may be prescribed. ready registered company and also does not violate the provisions
The Registrar on the basis of the required documents and information hled of Emblems and Names (Prevention of Improper Use) Act, 1950 by
shall register all the documents and information in the register and issue availing the services of checking name availability on the portal.
a certificate of incorporation in the prescribed form to the effect that the — Apply to the concerned ROC to ascertain the availability of name
proposed company is incorporated under this Act. by filing Form INC-1 for the same in to the portal. A fee of Rs. 500
On and from the date mentioned in the certificate of incorporation, the has to be paid alongside and the digital signature of the applicant
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Registrar shall allot to the company a corporate identity number, which proposing the company has to be attached in the form. If proposed
shall be a distinct identity for the company and which shall also be included name is not available, the user has to apply for a fresh name on the
in the certificate. same application.
If any person furnishes any false or incorrect particulars
of any information — After the name approval, the applicant can apply for registration of
or suppresses any material information, of which he is aware in any of the
the new company by filing the required forms Form INC-7 or Form
documents filed with the Registrar in relation to the registration of a com- INC: Form INC-7 for Application for incorporation of a company
pany, he shall be liable for action under section 447 of the Companies Act. (Other than OPC) or Form INC-2 for Application for Incorporation
of OPC within 60 days of name approval.
ONLINE REGISTRATION OF A NEW COMPANY — Arrange for stamping of the Memorandum and Articles with the
appropriate stamp duty. It can be paid electronically on the MCA
The MCA 21 Project of the Ministry of Corporate Affairs enables online portal.
registration of a company on the portal of the MCA. The steps for online — Get the Memorandum and the Articles signed by at least two sub-
registration of a company are as follows: scribers (7 in case of public company) in his/her own hand, his/
Step 1: Acquire Director Identification Number (DIN) her father's name, occupation, address and the number of shares
Each proposed director of the company to be formed are required to obtain subscribed for and witnessed by at least one person.
DIN by filing an ¢-form DIN-1. — Ensure that the Memorandum and Article is dated on a date after
Step 2: Acquire/ Register Digital Signature Certificate (DSC) the date of stamping.
All flings done by the companies under MCA 21 e-Governance programme — Login to the portal and fill the following forms and attach the man-
are required to be filed with the use of Digital Signatures by the person datory documents listed in the e-Form:
authorised to sign the documents. # Form INC-22: Notice of situation or change of situation of
Acquire DSC — A licensed Certifying Authority (CA) issues the digital registered office based on the option chosen in Form INC-7.
signature.
wok
+ Form DIR-12: Particulars of appointment of directors and the is proved that the company has been got incorporated by furnishing any
key managerial personnel and the changes among them. false or incorrect information or representation or by suppressing any
# Declaration of compliance material fact or information in any of the documents or declaration filed
or made for incorporating such company, or by any fraudulent action, the
— After processing of the Form is complete and Corporate Identity is promoters, the persons named as the first directors of the company and the
generated, obtain Certificate of Incorporation From RoC. persons making declaration shall each be liable for action under section
447 of the Companies Act.
Certificate of Incorporation
Section 7(7) of the Act provides that where a company has been got incor-
Certificate of incorporation is a legal document relating to formation of a porated by furnishing any false or incorrect information or representation
company which confirms the name by which the company is registered or by suppressing any material fact or information in any of the documents
under the Companies Act and date of incorporation. The Registrar of or declaration filed or made for incorporating such company or by any
Companies issues certificate of incorporation in the prescribed form on fraudulent action, the Tribunal may—
the basis of submission of the required documents and information laid ( pass such orders, as it may think fit, for regulation of the manage-
down by the Companies Act. ment of the company including changes, if any, in its memorandum
From the date of incorporation mentioned in the certificate of incorporation, and articles, in public interest or in the interest of the company and
such subscribers to the memorandum and all other persons, as may, from its members and creditors; or
time to time, become members of the company, shall be a body corporate (ii) direct that liability of the members shall be unlimited; or
by the name contained in the memorandum, capable of exercising all the (ii) direct removal of the name of the company from the register of
functions of an incorporated company under this Act and having perpetual companies; or
succession and a common seal with power to acquire, hold and dispose of
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property, both movable and immovable, tangible and intangible, tocontract (iv) pass an order for the winding up of the company; or
and to sue and be sued, by the said name. (v) pass such other orders as it may deem fit.
Thus, the consequences of certificate of incorporation are:
Commencement of Business [Section 10A]
(1) The certificate of incorporation brings the company into existence
from the date mentioned in the certificate. A company incorporated after November 1, 2018 [ie. after the commence-
ment
of Companies (Amendment) Act, 2019] and having a share capital shall
(2) It grants legal personality, corporate existence and perpetual succes- have to fulfil the following procedural requirement before commencing
sion to the company. any business or exercising any borrowing powers:
(3) Thesubscribers tothe Memorandum
together with such other persons, (a) Filing of declaration to the Registrar of Companies: A declaration by
as may from time to time become members of the company, become a director within 180 days of incorporation of the company in the
a bedy corporate with a distinct entity from such members having prescribed form to the Registrar of Companies must be filed stating
a perpetual succession with a common seal and with the liability of that every subscriber to the memorandum has paid the value of
the members limited to the amount for the time being unpaid on the
shares agreed upon by them at the time of making such declaration;
shares held by them. and
(4) The Memorandum and Articles of Association become binding upon
the members and the company as if they have been signed by the
(b Verification of the registered office : The company is required to file
=
with the Registrar of Companies a verification of its registered office
company and by each member. as per section 12(2) of the Companies Act.
Validity of Certificate of Incorporation
Default
Certificate of incorporation is a legal evidence with regard to the registra- In case of default by a company in complying with the requirement of
tion and formation of a company. Section 7(6) of the Companies Act, 2013 this provision on commencement of business, the company shall be liable
provides that where at any time after the incorporation of a company, it to a penalty of Rs. 50,000 and every officer in default with a penalty of
— he
Rs. 1000 for each day during which such default continues which may go 4. Can a promoter make profit out of formation of the company?
up to Rs. 1 lakh. Discuss with relevant case laws.
Further, the Registrar of Companies may initiate action for the removal What are the documents to be filed for registration of a Company?
of the name of the company from the register of companies when the
Registrar has reasonable cause to believe that the company is not carrying 6. The Memorandum and Articles of Association a company were
on any business. delivered to the Registrar of Companies on 6th January for reg-
istration. On 8th January, the Registrar issued the Certificate of
Provisional Contract Incorporation, but by mistake dated it as 6th January. Incidentally,
on that very day (6th January), the company made allotment of its
Provisional contracts are the contract entered into by a company having shares. The said allotment was challenged on the ground that it was
share capital between the date of incorporation and the date on which the made before the actual issue of the Certificate of Incorporation.
company has fulfilled the requirement of section 10A on commencement How would you decide and why?
of business. These are valid contracts if company meets the requirements
and would be non-operative in case the company fails to do so. . Acompany was formed onthe basis of the Certificate of Incorporation
obtained by threatening the Registrarof Companies. Isthe company
IMPORTANT CASE legally formed?
. “Preliminary contracts are nullify." Comment on the statement,
@ Lydney & Wigpool Iron Ore Co. v. Bird Liability of Promoters
bringing out clearly the position of the promoters with regard to
# Enlarger v. New Sombrero Phosphate these contracts.
Co.
. “A promoter stands in a fiduciary relation towards the company
- gNNVIVK EL
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@ Kelner v. Baxter Liability of Promoters he promotes.” Explain.

# Natal Land and Colonisation Co. Ltd. Preliminary Contracts 10. “The validity of a certificate of incorporation cannot be disputed
v. Pauline Colliery & Development on any grounds whatsoever.” Comment.
Syndicate Ltd.
11. Discuss the legal effects of pre-incorporation contracts,
# Imperial Ice Mfg. Co. v. Manchershaw Preliminary Contracts
12. “The Companies Act is not against the profits made by a promoter
# Newborne (London) Ltd. v. Sensolid Preliminary Contracts but it’s non-disclosure.” Examine this statement with regard to the
(GB) Ltd. duties and obligations of promoters of a company.
* Peel's Case Certificate
of Incorporation
* MoosaGoolam Arif v.EbrahimGoolam Certificate
of Incorporation CASE PROBLEMS.
Ariff. . Few friends purchaseda property. Later, they promoted
a company
# Jubilee Cotton Mills Ltd. v. Lewis Certificate
of Incorporation and sold this property to the company at a huge profit. Can the
company recover this profit from the promoters?
REVIEW QUESTIONS Ans. |Yes, the company can recover this profit from the promoters
as this is not disclosed by them.]
1. Comment:
(a) Whether promoter is the agent of the Company? 2 Acompany was formed on the basis of a certificate
of incorporation
obtained
by threatening
the Registrar of companies.
Is the company
(6) Whether promoter is the trustee of the Company? legally formed?
(c) Whether promoter is the director of the Company? Ans. [The promoters, the persons named as the first directors of the
2. What is the legal position of a promoter? company and the persons making declaration shall each be liable
for action under section 447].
3. Discuss the liabilities of promoter in case he is found to be involved
in fraudulent activities relating to formation of the company.
Saorit
MEMORANDUM OF ASSOCIATION
* Clauses
+ Alteration
+ Doctrine
of Ultra Vires
Meaning
ge NNVACX WL
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Memorandum of Association is the main document of a company which

defines its objects. It lays down the fundamental conditions upon which
alone the company
is allowed to be formed. It may be termed as the charter
or the constitution of the company since it governs the relationship of the
company with outside world,
According to Section 2(56) of Companies Act, Memorandum means
“Memorandum of Association as originally framed or as altered from time
to time in pursue of any previous companies law or of this Act”. Any pro-
visions contained in the Memorandum of Association will be void to the
extent to which they are repugnant to the provisions of the Companies Act.
According to Palmer, the Memorandum of Association contains the objects
for which the company is formed, and therefore identifies the possible
scope of its operations beyond which its actions cannot go. It defines as well
as confines the power of the company. If anything is done beyond these
powers that will be ultra vires the company and therefore void.
Purposes of Memorandum
A memorandum serves two important purposes:
(i) It enables the intending shareholder to know the field of activity or
to what purpose his money is going to be used by the company, and
what risk he is taking in making the investment.
73
— hr
74 MEMORANDUM OF ASSOCIATION MEMORANDUM OF ASSOCIATION 75
(fi) Similarly, anyone who is dealing with the company, for example, (a) The last words of the name must end with the words ‘limited’ or
the supplier of goods or money, will know whether the transaction ‘private limited’ as the case may me. It is not necessary that the word
he intends to make with the company is within the objects of the ‘company’ should form part of the name.
company, and not witra vires its objects. (6) As per Section 4(2) no company
can be registered with a name, which
The memorandum is required to be printed, divided into paragraphs, num- in the opinion of the Central Government is undesirable. If a name is
bered consecutively and signed by at least seven persons (two in case of identical with, or closely resembles the name of an existing company,
a private company) in the presence of at least one witness, who will attest it may be deemed to be undesirable by Central Government.
the signatures. The particulars about the signatories to the memorandum (c) The name adopted by the company should not violate the provisions
as well as the witness, as to their address, description, occupation etc., must of the Emblems and Name Act, 1950.
also be entered.
(d) Thename should not connote Government participation or patronage
A Public Document unless circumstances justify the usage of such words. It should not
include the word co-operative, bank, banking, insurance, investment
Memorandum of Association is a public document, therefore, every person unless the circumstances justifies.
who deals with the company is presumed to have sufficient knowledge of
its contents. It is open for public inspection. Requirements
A company, on being required by a member, is bound to supply to him As per Section 12(3) every company should
with a copy of its memorandum on payment of the prescribed fee. The
copy must be sent within seven days. In case the company makes default @ Paint or affix its name, outside its registered office, and outside
in complying with this requirement, the company, and every officer of the every place where it carries on business, in a conspicuous position,
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company who is in default shall be punishable for each offence, witha fine in legible letters and in the language in general use in the locality;
of Rs. 1000 per day till the default continues or Rs. 1 lakh whichever is less # Have its name engraved in legible characters on its seal;
(Sec. 17), However, the right to obtain copy has not been given by law toa # Get its name, address of its registered office and corporate identity
person other than a member. number along with telephone number, fax number, if any, e-mail
and website addresses, printed in all its business letters, letter papers,
Clauses of Memorandum of Association [Sec. 4] billheads and in all its notices and other official publications; have
Memorandum must have the following clauses: its name printed on hundies, promissory notes, bills of exchange.
(1) Name Clause Default
(2) Situation Clause
If there is any default in compliance it will lead to a fine of Rs. 1000 per
(3) Objects Clause day on the company and every officer of the company who is in default
(4) Liability Clause till the default continue but not exceeding one lakh rupees.
(5) Capital Clause
Situation Clause
(6) Association Clause or Subscription Clause
Memorandum of Association must state the name of the State in which
Name Clause the registered office of the company is to be situated. The registered office
clause is important for two reasons.
A company being a distinct legal entity must have a name of its own in
order to establish its separate identity. The general rule is that a company (i) Firstly, it determines the domicile of the company. This in turn
can be registered with any name it likes subject to the following restrictions: establishes the jurisdiction of the High Court of the State in which
the registered office is situated.
Sore
(i) And secondly,it is at the registered office where the company’s Capital Clause
statutory books are normally kept, and to which notices and other Memorandum of Association of a limited company having share capital
communication
can be sent.
(ie. company limited by shares or company limited by guarantee having
Registered office of a company is the place of its residence of the purposes share capital) must also state the amount of share capital with which the
of delivering
or addressing any communications, service of any notice or company is to be registered which is usually called authorized or nominal
process of Court of Law and for determining the question of jurisdiction in capital. Further, division of registered share capital into shares of a fixed
any action against the company. A company need not carry on its business amount is also required to be given in the memorandum. Each subscriber
al its registered office, Nor there is any bar to having a registered office in must take at least one share and write opposite his name the number of
one state and carrying on business in another. But, every company must shares he takes.
have
a registered office within 30 days of its incorporation,
Association Clause
Objects Clause
This clause states that the persons subscribing their signatures at the end of
The most important clause in the memorandum of association of a com- the Memorandum are desirous of forming themselves into an association
pany is the object clause. It is object clause which lays down the objects
of in pursuance of the Memorandum. Memorandum of Association must be
the company. A company cannot do anything beyond or outside its objects signed by seven or more persons in the case of a public company and by
and any act done beyond them will be witra vires and void. A company can two or more persons in the case of a private company. Signatures shall
exercise only such powers as are either expressly stated therein or as may be attested by witnesses. There may be one witness for all signatures but
be necessary in furtherance of its objects. one subscriber cannot be a witness to the signatures of another. Full
According to Section 4(C) the Memorandum of Association of a company description, address, occupation, etc. of the subscribers and witnesses must
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must state the objects forwhich the company is proposed to be incorporated be written. In the case of a company having share capital, each subscriber
and any matter considered necessary in furtherance thereof is also required to take at least one share and to write opposite his name
the number of shares he agrees to take. Subscribers are required to pay
Liability Clause for these shares after the company is incorporated. They must also sign
articles of association of the company.
Liability clause mentions the liability of members of the company, In case
of a company limited by shares, Memorandum of Association must have
Alteration of Memorandum of Association
a clause to the effect that the liability of the members
is limited to the
extent of the amount of the unpaid portion of the shares held by him. The A company may alter the provisions of its memorandum by passing a
Memorandum of Association a company limited by guarantee must state special resolution and after complying with the procedure specified in the
the amount which each member undertakes to contribute to the assets of Act, (Sec. 13).
the company in the event of its being wound up. (Section 4(1)(d)]
In case of a company having a share capital (Sec. 4(1)(e)], the amount of Alteration in the Name Clause [Sec. 13(2)]
share capital with which the company is to be registered and the division 1. The name of a company can be changed any time by passing a special
thereof into shares of a fixed amount and the number of shares with the resolution at the general meeting of the company, and getting the
subscribers to the memorandum agree to subscribe which shall not be less approval of the Central Government in writing.
than one share and the number of shares each subscriber to the memo-
The change of name shall not be allowed to a company which has
randum intends to take indicated opposite his name. defaulted in filing its annual returns or financial statements or any
In case of One Person Company, the name of the person who, in the event document due for filing with the Registrar or which has defaulted in
— of the subscriber, shall become the member of the company [Sec. repayment of matured deposits or debentures or interest on deposits
ACCA} or debentures [Companies (Incorporation) Rules, 2014]
— Soe
Zz Achange of name which merely involves the deletion or addition of Following are the prescribed rules:
the word ‘private’ on the conversion of a public company into private (1) An application for the purpose of seeking approval for alteration of
of vice versa doesn't require the approval of Central Government. memorandum with regard to the change of place of the registered
. If, through inadvertence or otherwise, a company is registered by a office From one State or Union territory to another, shall be filed with
name which,
in the opinion of the Central Government,
is identical with the Central Government along with the fee and shall be accompanied
or too nearly resembles the name by which a company in existence by the following documents:
had been previously registered, it may direct the company to change (a) acopy of the memorandum and articles of association;
its name and the company shall change its name or new name, as
the case may be, within a period of 3 months from the issue of such (6) a copy of the special resolution sanctioning the alteration by
direction, after adopting an ordinary resolution for the purpose; the members of the company;
Where a company changes its name or obtains a new name, it shall (e) the list of creditors and debenture holders giving details of
within a period of 15 days from the date of such change, give notice their addresses and amounts dues;
of the change to the Registrar along with the order of the Central (@) an affidavit from the directors of the company that no em-
Government, who shall carry out necessary changes in the certificate ployee shall be retrenched as a consequence of shifting of the
of incorporation and the memorandum. registered office from one state to another state;
It is to be noted that change of name will neither affect any rights or obli- (e) acopy of the notice served on the Registrar, Chief Secretary of
gation of the company nor render any legal proceedings by or against the the State Government or Union territory where the registered
company defective in any way. office is situated at the time of filing the application, and tothe
SEBI in case of listed companies.
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Alteration in the Situation Clause [Sec. 13] (2) The company shall at least 14 days before the date of hearing—
Shifting of the Registered Office outside the local limits of any city, (a) advertise the application in a vernacular newspaper and an
town or village where such officeis situated requires passing
of special English newspaper circulating in that district;
resolution by the company and notice of the change shall be given (6) serve individual notice(s) on each debenture holder and credi-
to the Registrar within 15 days of the change, who shall record the tor of the company; and
same.
(c) serve a notice together with the copy of the application to the
Shifting of the registered office within the same State from the juris- Registrar and to the Securities and Exchange Board of India.
bo
.
diction of one Registrar of Companies to the jurisdiction of another

Registrar of Companies requires passing of special resolution by the (3) Before confirming the alteration, the Central Government shall ensure
company
and confirmation by the Regional Director on an application that, with respect to every creditor and debenture holder who, have
made by the company in this regard. objections tothe proposed shifting either his consent to the alteration
has been obtained or his debt or claim has been discharged or has
The shifting of registered office shall not be allowed if any inquiry, determined, or has been secured to the satisfaction of the Central
inspection or investigation has been initiated against the company Government.
or any prosecution is pending against the company under the Act.
(4) The Central Government may make an order confirming the alter-
Shifting of Registered Office from one State or Union territory to ation on such terms and conditions, if any, as it thinks fit, and may
make such order as to costs as it thinks proper:
another State
Provided that the shifting of registered office shall not be allowed if
The alteration of the memorandum relating to the place of the registered any inquiry, inspection or investigation has been initiated against the
office fram one State to another requires [Sec, 13(2)} company or any prosecution is pending against the company under
* Passing of the special resolution, and the Act.
* Approval of the Central Government
A certified copy of the order of the Central Government approving The Registrar shall register any alteration of the memorandum with respect
the alteration shall be filed by the company with the Registrar of to the objects of the company and certify the registration within a period
each of the States within such time and in such manner as may be of 30 days from the date of filing of the special resolution.
prescribed, who shall register the same, and the Registrar of the
State where
the registered office is being shifted to, shall issue a fresh Alteration in the Liability Clause
certificate of incorporation indicating the alteration.
Ordinarily it cannot be altered so as to make the liability of the members
unlimited. However, with the authority of the Articles of Association,
Alteration in the Objects Clause [Section 13(8)]
a company may pass special resolution altering liability clause of the
A company, which has raised money from public through prospectus and Memorandum of Association so as to make the liability of directors or of
still has any unutilised amount out of the money so raised, shall not change any one director or manager unlimited. But, in such a case any person
its objects for which it raised the money through prospectus unless holding office as director or manager before such alteration shall not be
@ aspecial resolution is passed by the company through postal ballot liable until the expiry of his present term or unless he has accorded his
and the notice in respect of the resolution for altering the objects consent to his liability becoming unlimited. Alterations, which are likely to
shall contain the following particulars: impose additional liability on a member or which are likely to compel a
The total money received member to buy additional shares of the company after the date on which
he became a member, not be made except with the consent of the member
= the total money utilized for the objects stated in the prospectus; concerned in writing. However, in case a company happens to be a club
= the unutilized amount out of the money so raised through or any other association and the alteration requires the member to pay
prospectus; recurring or periodical subscriptions or charges at a higher rate, the mem-
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- the particulars of the proposed alteration or change in the ber will be bound by the alteration although he does not agree in writing
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objects; to be bound by the alteration.
~ the justification for the alteration or change in the objects;
Alteration of the Capital Clause
- the amount proposed to be utilised for the new objects;
- the estimated financial impact of the proposed alteration on Alterations in the capital clause of the Memorandum of Association may
the earnings and cash flow of the company; be of the following type:
= the other relevant information whichis necessary for the mem- # Alteration of the share capital
bers to take an informed decision on the proposed resolution; # Reduction of share capital
- the place from where any interested person may obtain a copy # Variation of the rights of shareholders
of the notice of resolution to be passed.
+ the details, as may be prescribed, in respect of such resolution shall Alteration of the share capital
also be published in the newspapers (one in English and one in
Following kinds of alteration in share capital may be made by a limited
vernacular language) which is in circulation at the place where the company having a share capital, if authorised by its articles by passing of
registered office of the company is situated and shall also be placed
ordinary resolution at the general meeting (Section 61):
on the website of the company, if any, indicating therein the justifi-
cation for such change; 1. increase its authorized share capital;
the dissenting shareholders shall be given an opportunity to exit by 2. consolidate or sub-divide its share capital into shares of larger or
the promoters and shareholders having control in accordance with smaller denominations;
regulations to be specified by the Securities and Exchange Board of 3. convert its fully paid-up shares into stock, and re-convert that stock
Inclia. into fully paid-up shares of any denomination;
In case of companies which have not raised money through prospectus,
objects can be changed any time by passing of special resolution.
82 MEMORANDUM OF ASSOCIATION MEMORANDUM OF ASSOCIATION 83.
4. cancel shares which have not been taken or agreed to be taken by any his consent is obtained, make an order confirming the reduction of share
person, and diminish the amount of its share capital by the amount capital on such terms and conditions as it deems fit.
of the shares so cancelled. The order of confirmation of the reduction of share capital by the Tribunal
shall be published by the company in such manner as the Tribunal may
Reduction of the Share Capital [Sec. 66] direct.
To provide protection to interests of the investors especially creditors of (5) The company shall deliver a certified copy of the order of the Tribunal
companies, reduction of share capital is permissible with strict stipulation and of a minute approved by the Tribunal showing—
of the law. Acompany limited by shares or a company limited by guarantee (a) the amount of share capital;
and having a share capital, may, reduce its share capital by adopting any
of the following methods of reduction: (6) the number of shares into which it is to be divided;
(a) extinguish or reduce the liability on any of its shares in respect of (c) the amount of each share; and
share capital not paid-up; (d) the amount, if any, at the date of registration deemed to be
(6) either with or without extinguishing or reducing liability on any of paid-up on each share,
its shares, cancel any paid-up share capital which is lost, or is unrep- to the Registrar within thirty days of the receipt of the copy of the order,
resented by available assets; or who shall register the same and issue a certificate to that effect.
(c) either with or without extinguishing or reducing liability on any of In the following cases reduction of share capital does not require sanction
its shares, pay off any paid-up share capital which is in excess of the of the Tribunal.
wants of the company; (i) forfeiture of shares
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Procedtire af Reduction (i) surrender of shares
(i) The articles of association
of the company must authorize the compa- (ii) cancellation of unissued capital (also known as diminution of share
ny to reduce its share capital. (In case the articles does not authorize capital)
the company to do so, articles of the company has to be altered to
authorize the company for the same). (iv) buy-back of shares by the company
(i) The company must pass a special resolution referred to as “a reso- (v) redemption of preference shares, and
lution for reducing share capital". (vi) purchase by the company of shares of a member under an order of
(itt) The company has to apply, by petition to the Tribunal for an order the Tribunal for prevention of oppression and mismanagement.
confirming the reduction: If any officer of the company—
Provided that no such reduction shall be made if the company is in arrears (a) knowingly conceals the name of any creditor entitled to object to
in the repayment of any deposits accepted by it or the interest payable the reduction;
thereon. (b) knowingly misrepresents the nature or amount of the debt or claim
The Tribunal shall give notice of every application made to it for reduction of any creditor; or
of share capital to the Central Government, Registrar and to the Securities (ec) abets or is privy to any such concealment or misrepresentation as
and Exchange Board, in the case of listed companies, and the creditors of aforesaid, he shall be liable under section 447.
the company and shall take into consideration the representations, if any,
made to it by that Government, Registrar, the Securities and Exchange
Board and the creditors within a period of three months from the date of
receipt of the notice:
The Tribunal may, if it is satisfied that the debt or claim of every creditor
of the company has been discharged or determined or has been secured or
Variation in the rights of the shareholders Rationale of the Doctrine

(1) Where ashare capital of the company is divided into different classes The doctrine of witra vires is primarily developed to protect the interest of
of shares, the rights attached to the shares of any class may be varied the investors and the creditors. The doctrine prevents a company to employ
with the consent in the writing of the holders of not less than three- the money of the investors for a purpose other than those stated in the
fourths of the issued shares of that class or by means of a special objects clause of the memorandum of association. Thus the investors and
resolution passed al a separate meeting of the holders of the issued creditors may be assured by this doctrine that their investment will not be
shares of that class: directed for the activities which they did not contemplate while making
— If provision with respect to such variation is contained in the investment in the company.
memorandum or articles of the company; or The doctrine prevents the wrongful application of the company's assets to
— In the absence of any such provision in the memorandum or result in losses or insolvencyof the company.It puts a check onthe directors
articles, if such variation is not prohibited by the terms of issue of the company from deviating from the objects for which the company is
of the shares of that class: formed. A company only has the capacity to do those acts which fall within
its objects as set out in its memorandum of association or are reasonably
Provided that if variation by one class of shareholders affects the incidental to the attainment of such objects.
rights of any other class of shareholders, the consent of three-fourths
of such other class of shareholders shall also be obtained and the
Establishment of the Doctrine
provisions of this section shall apply to such variation.
(2 Where the holders of not less than 10% of the issue shares of a class The doctrine of ultra vires was established and applied in 1875 by the House
of Lords in the case of Ashbury Railway Carriage & fron Co, Lid. v. Riche.
—
did not consent to such variation or vote in favour of the special
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resolution for the variation, they may apply to the Tribunal to have The Memorandum of Association of Ashbury defined its objects as “to
the variation cancelled. In that case the variation shall not have effect
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make and sell, or lend on hire railway carriages and wagons and all kinds
unless and until it is confirmed by the Tribunal. of railway plants etc.; to carry on the business of mechanical engineering
and general contractors...". The company entered into a contract with
Differences between Reduction of Capital and Diminution of Capital M/s. Riche, a frm of railway contractors, to finance the construction of a
railway line in Belgium. On repudiation
of his contract by the company on
Reduction of Capital Diminution of Capital the ground of its being ultra vires, Riche brought an action for damages
1 Amounts to reduction of issued | Amounts to reduction of the unis- for breach of contract on the ground that the words “general contractors”
(subscribed or paid-up) capital. | sued share capital. gave power to the company to enter into such contract and, that, it was
Requires passing of special reso-| Requires passing of ordinary res- well within the powers of the company.
2 lution. olution. The House of Lords held the contract as ultra vires the company and,
therefore, declare it null and void. “The term ‘general contractors’ must
3 Interest of creditors may be ad- Interest of creditors
is not affected. be taken to indicate the making generally of such contracts as are con-
versely affected.
nected, with the business of mechanical engineers. If the term ‘general
Doctrine of Ultra vires contractors’ is not so interpreted, it would authorise the making of
contracts of any and every description, would, therefore, be altogether
‘Ultra’ means beyond, and ‘vires’ means powers. Memorandum of Association unmeaning. Hence the contract was entirely beyond the objects in the
of a company defines the powers of a company, Any act done contrary to “memorandum of association.”
or in excess of the scope of the activity of the company as laid down by its The doctrine of ltra vires was recognised in India in the case of Jahangir R.
memorandum of association is ultra vires the company, ie, beyond the
Modi v. Shamji Ladhe and has been well established by the Supreme Court
legal powers and authority of the company, and shall be wholly void and in the case of A. Laksimanaswami Mudaliar v. Life Insurance Corporation
not binding on the company. Acts witra vires the company can neither be of Tneia.
legalised nor ratified even with the unanimous consent of all the members
of the company.
The doctrine of ultra vires should not be unreasonably understood and Week v. Propert (1873) The directors of arailway company through
applied. It does not restrain a company from doing such things which an advertisement, invited applications to invest in the company
are reasonably fair and incidental to its objects or which the company is by way of loans and bonds. The limit of borrowing as put in the
authorised to do under the Companies Act. For example, a company which memorandum had been exhausted. Week lent to the company on
has been authorized by its memorandum to purchase land had implied the faith of it. Held that the loan is wlira vires but Week could sue
authority to let it and if necessary, to sell it. However, it has no power to the directors for breach of warranty of authority.
go beyond the objects or to do any act which has not a reasonable proxi-
mate connection with the object or which would only bring an indirect or 4. Contract Void. A contract which is ultra vires the company will be
remote benefit to the company. void and of no effect whatsoever. “An witra vires contract being void
ab initio, cannot become intra vires by reason of estoppel, lapse of
There is difference between objects and powers. Powers are not to be stated time, ratification, acquiescence or delay".' However, if the contract
in the memorandum. Even if stated, these can be used only to achieve the is only witra vires the powers of the directors but not ultra vires the
objects of the company. In no case, these can become independent objects company, it may be ratified in the general meeting and thereby the
by themselves. company will be bound by it.
Acts of a company may also be witra vires the Articles or ultra vires the 5. Ultra vires acquisition of Property. When money of a company is
powers of the directors. Acts ultra vires the Articles can be validated and spent ultra vires in acquiring a property, the right of the company
made binding upon the company by altering the Articles of Association with over that property would be secure. This is because the property
special resolution at a general meeting. Alteration of Article of Association represents corporate capital, though acquired wrongly.
with retrospective effect, if to the benefit of the company, shall be valid. An However, where the payment for an witra vires acquired property/
act beyond the scope of the powers of the directors may also be ratified asset has not been made, the vendor can obtain a tracing order to
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by the general body of the shareholders. recover the property from the hands of the company. A company
cannot be allowed to benefit from such transactions at the cost of
Effects of Ultra Vires Transactions the other party.
Following are the effects of ultra vires transactions: 6. Ultra vires Borrowings. A bank or other person lending to company
1. Injunction. Any member of the company can bring injunction against for purposes witra viresthe memorandum cannot recover the money
the company to restrain it from doing ultra vires acts. under that loan agreement. But nothing prevents the company from
repaying that money. The lender is also entitled to a tracing order,
2. Liability of Directors towards the Company. The directors of the and if the money lent is traced i specie or into any investment held
company are personally liable to make good those funds of the com- by the company, the lender can recover it from the company in that
pany which they have used for witra vires purposes. It is the duty farm, Further, if that money is used by the company in discharging
of the directors of the company to employ funds and properties of any debts or liabilities of the company, the lender will, on accounts
the company for the purposes laid down in the memorandum of of principleof subrogation, step into the shoes of the creditors whose
association of the company. claims have been paid off by the company and acquire rights against
3. Liability of Directors towards the Third Party. Directors
are the agents the company.
of the company. It is their duty to conduct the affairs of the company 7. Ultra vires Lending. If the money has been lent by the company
within the powers of the company as laid down in the memorandum. and the lending is witra vires, the contract would be void. No action
Where the directors represent the third party that the contract entered can be brought on it, but the company can sue for recovery of its
into by them on behalf of the company is within the powers of the money. This is because the borrower who has made a promise to
company, while in reality the company has no such powers under repay that money, cannot be allowed to refrain from paying it back
the memorandum, the directors will be personally liable to the third on the ground that it is without authority.
party for his losses on account of breach of warranty of authority. 8. Ultra vires Torts. In order to make the company liable for the torts
(civil wrongs) of its employees, it is to be proved that:
1. Ashbury Railway Company v. Riche
() the tort was committed in the course of an activity which falls 4. A company wants to shift its office from Kolkata to Mumbai, can
within the purview of the company's memorandum, and it do so?
(if) the tort was committed by the employee in the course of his What is doctrine of ultra vires? What are its consequences?
employment.
Can a company undertake a business which is legal and profitable
Case without specifically being mentioned in the memorandum of the
Acompany, having the statutory powers torun tramways, starts operating company? State the consequences.
omnibuses-a venture entirely outside its memorandum. The driver of one Discuss the statutory provisions regarding ‘reduction of share
such bus negligently injures X. The company cannot be held liable for capital’,
injury to X because the company does not have any existence outside its Explain the law relating to alteration of object clause.
corporate sphere. Therefore, X's remedy is only against the driver and
2S
not against the company. “An ulfra vires act of majority is void". Comment.
IMPORTANT CASES
# Ewing vs. Buttercup Margarine Name of company

Company Ltd.
# Society of Manufacturers and Tra- Name of company
ders Ltd. vs. Motor Manufacturers
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and Traders Mutual Insurance
Company Ltd.
@ Executive Board of the Methodist Name of company
Church in India vs. Union of India
# Orient Paper Mills Ltd. vs. The State Shifting of Registered Office
# Rank Film Distributors vs. Registrar Shifting of Registered Office
of Companies
* Minerva Mills Ltd. vs. State of Shifting of Registered Office
Maharashtra
# Ashbury Railway Carriage & Iron Doctrine of Vitra vires
Co. Ltd. vs. Riche
# Weeks vs. Propert Doctrine of Ultra vires
REVIEW QUESTIONS
1. What purpose does the memorandum of association serve?

2. Can a company change its name? What is the procedure?
3. Discuss the case law with respect to change of registered office from.
one State to another. Can a State object shifting on the ground of
loss of revenues?
| $z
ARTICLES OF ASSOCIATION 91
Articles of a company are subordinate to the provisions of the

Memorandum. Memorandum contains the area beyond which com-
pany cannot go; within that area the shareholders may make such
regulations for their internal working as they think fit.
Articles can be used to explain the objects laid down by the
Memorandum, but never to extend them. They cannot modify the
provisions of the Memorandum.
Memorandum contains conditions for the use of the creditors, share-
holders and the outside public. Articles constitute acontract between
ARTIGLES OF ASSOCIATION the company and its members in the capacity of members.
It is difficult to alter the clauses of the Memorandum. But articles
can easily be altered by passing a special resolution and may even
be altered retrospectively.
Binding Effects of Articles
Unlike Memorandum, articles need not be construed too meticulously.
@ Alteration of Articles
+ Doctrine of Constructive Notice Contents of Articles
@ Doctrine of Indoor Management The articles of Association of a company usually deal with the following
matters:
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Articles of Association is an important document ofa company. It contains (i) Definition of important terms and phrases.
rules, regulations and bye-laws for the internal administration of the com-
pany. Articles regulate the internal management of the company and also (f) Share capital and rights attached to different classes of shares.
govern the relationship between the company and its constituent members (i) Procedure as to making of calls and forfeiture of share.
by prescribing their rights and obligations. (iv) Appointment of managerial personnel e.g. directors, managing
i cane Articles of Association merely govern the internal management, busi- directors etc., their rotation, powers and duties.
ness or administration of a company. They may be binding between the (v) Rules as to—
persons affected by them but they do not have the force of statute. The
doctrine of witra vires has no application to test the validity of an action (a) transfer and transmission of shares
under the Articles of Association ofa company....” (Irrigation Development (5) issue of share certificate
Employees Association v. Government of Andhra Pradesh, 2005) (c) general meetings
Section 2(5) of the Companies Act defines articles of association as follows: (@) common seal of the company
“Articles means the articles of association as originally framed or as (e) dividend, reserves and capitalisation of profits
altered from time to time in pursuance of any previous companies
law or of this Act.” () accounts and audit
(g) lien on shares
Relationship between Memorandum and Articles (4) remuneration of managerial personnel
@ Memorandum is the charter of the company. It describes the con- (4) issue of redeemable preference shares
stitution of the company and defines the scope of its activities and (f) paying commissions and fixing rate thereof
powers. Articles lay down the rules and regulations to manage its
affairs. (k) paying interest out of capital
(4 winding up of the company.
90
92 ARTICLES OF ASSOCIATION ARTICLES OF ASSOCIATION 93.
Regulations contained in the Articles of Association must not go beyond the is whether that which is proposed to be done in the present case
powers of the company as laid down by the Memorandum of Association is in accordance with the articles of association of the company.
nor violate any of the requirements of the Companies Act. All clauses in Those articles provide that the directors may, with the sanction of
the Articles which are witra vires the Memorandum or the Act shall be null a general meeting, declare a dividend to be paid to shareholders.
and void. Prima facie that means to be paid in cash. The debenture bonds
proposed to be issued are not a payment in cash.” Accordingly the
Binding Effects of Memorandum and Articles directors were restrained from acting on the resolution.
Section 10 of the Companies Act provides: 2. Binding upon Members: Articles of Association is a ‘contract of the
“Subject to the provisions of this Act, the Memorandum and Articles most sacred character’ between the company and each member,
shall, when registered, bind the company and the members thereof ta binding the members to the company under a statutory covenant?
the same extent as if they respectively had been signed by the company Shares are applied for and purchased and membership is granted on
and by each member, and contained covenants on its and his part to the basis of company's memorandum and articles. The prospectus
observe all the provisions of the Memorandum and of the Articles.” cannot be used for changing the terms already settled between the
members and the company through the memorandum and articles
Thus, the Articles bind the company to its members, the members to the (Globe Motors Ltd. v. Globe United Engineering and Foundry Ltd,
company and the members to each other. They constitute a contract #975). All money payable by any member to the company uncer
between a company and its members in respect of their rights and liabi- the Memorandum or Articles shall be a debt due from him to the
lities as members. A member may sue the company, just as the company company [Section 10(2)], Articles are taken to be signed and agreed
may sue the members to enforce and restrain any breach of the articles. to be observed by each member. Members are bound by the articles
1. Binding upon Company: Company is bound to the members to
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just as if every one of them had contracted to conform to them. A
observe and follow the articles. Incase the company commits a breach company can sue its members for the enforcement of its Articles as
of its articles, members can restrain the company from doing so, by well as for restraining their breach. A case in point is:
bringing an injunction against the company. Members may sue to
restrain a company from doing any wiltra vires or illegal acts or from Borland's Trustees v. Steel Bros. & Co. Ltd. (1901). The articles
acting on a resolution obtained by fraud
or which is inconsistent with of association of the company provided that in the event of the
the Articles. Members may also sue the company for the enforce- bankruptcy of a member, his shares would be sold at a price to
ment of their personal rights under the Articles, eg, right to receive be fixed by the directors. Borland became bankrupt. His trustee
divided which has been declared. However, only a shareholder or in bankruptcy wanted to sell those shares at their true value. He
a member of the company, in the capacity of a member and not in contended that he was not bound by the articles. It was held that
any other capacity, can enforce the rules and regulations contained he was bound to abide by the provisions of the company’s articles.
in the Articles.' 3. Binding between Members: The contractual force given tothe articles
The case of Wood v. Odessa Waterworks Co, provides an illustration is limited to the matters arising out of company’s relationship of the
of binding of articles on the company to its members. members as members and does not extend beyond the company
relationship. The articles constitute a contract betweeneach member
The articles of the Odessa Waterworks Co. provided that ‘the di- and the company. The articles do not regulate their rights inter se.
rectors may, with the sanction of the company at general meeting, Such rights can only be enforced by or against a member through
declare a dividend to be paid to the members’. Instead of paying the the company. However, this is not without exception. Courts have
dividend in cash to the shareholders, aresolution was passed to give extended the articles to constitute a contract between individual
them debenture bonds. In an action by a member to restrain the members qua members without joining the company as a party to
directors from acting on the resolution, the Court held: “The question the action. The case of Rayfield v. Hands (1960) is a pointer to the
issue.
1, Beattie + Battie Ltd. (1939) 2. First National Bank Lid. v. Seth Sant Lid, (1959)
ARTICLES OF ASSOCIATION ARTICLES OF ASSOCIATION 95
Rayfield was a shareholderin acompany. He was required toinform Alteration of Articles

the directors in the event
of his intention
to transfer the shares. The A company has an inherent power to alter its articles. Section 14 of the
directors were required to take the shares at a fair value. Rayfield Companies Act states that a company may alter its articles by passing a
informed the directorsin accordance with the articles. The directors special resolutionto this effect.
A company may even change its Articles with
contended that they were not bound to take and pay for Rayfield’s retrospective effect. Any provision making Articles unalterable is regarded
shares and the articles could not impose such obligation on them. as bad in law, Company cannot deprive itself, by an express provision in the
The court set aside this argument by treating the directors as mem- Articles or independent contract, of the power to alter its articles. However,
bers and compelled them to take Rayfield’s shares at a fair value. there are certain limitations or restrictions on the power of the company
The court also held that it was not necessary for Rayfield to join to alter its articles of association. These are as follows:
the company for bringing a suit against the directors.
L. Articles can be altered only by a special resolution. Articles can never
4. No Binding upon the Outsiders: The memorandum and articles do be altered by an ordinary resolution even if they provide for such a
not constitute a contract between the company and the third party. procedure.
Neither the company nor the members of the company is bound to . Alteration can neither be beyond the provisions of the Companies
the outsiders to give effect to the provisions of the memorandum
Act nor the memorandum of association, Articles may, however be
and the articles. For example: altered to explain ambiguous portions or to supplement the memo-
In Browne v. La Trinidad, the articles of the company contained a randum with regard to those things upon which it is silent.
clause to the effect that Browne should be a director and should . Alteration of articles seeking to take away the company's power to
not be removable. He was, however, removed. He brought anaction alter its articles would be void as being contrary to the provisions of
to restrain the company from excluding him. It was held that there the Act. But an alteration prescribing a special method for passing
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was no contract between Browne and the company. No outsider the special resolution for altering the Articles will be valid.
can enforce articles against the company even if they purport to . Alternation seeking to impose an additional liability on a member of
ive him certain rights.
the company after the date on which he became a member (to take
Thus, an outsider cannot take advantage of the Articles to found a shares more than what he has already taken or topay any more money
claim thereon against the company. Even a member enjoying cer- than what he is liable to pay on his shares) shall not be binding upon
tain rights in a capacity other than a member cannot enforce them him unless he agrees in writing to such an alteration. However, it is
against the company. The member would be an outsider for those valid where the company is a club or any other association and the
‘outside rights’.The leading caseis that of Elley v. Positive Government alteration of Articles provides for increase in the rate of subscription
Security Life Assurance Co. by the members.
The articles of a company contained a clause that Elley would be . Alteration should not be illegal or against public policy besides not
the solicitor of the company and would not be removed except for being contrary to any other statute in force.
misconduct. He became member in the company also. He acted . The power toalter the Articles must be exercised by the shareholders
as solicitor of the company but the company removed him. He in good faith for the benefit of the company as a whole? Alterations
brought an action against the company for breach of the articles. made bona fide and in the interests of the company shall be valid
His suit was dismissed. The Court held, “An outsider to whom rights even if they are likely to affect adversely the personal interests of
purport to be given by the Articles in his capacity as such outsider, some of the members of the company. Alteration of Articles so as to
whether he is or subsequently becomes as member, cannot sue on give power to the directors torequire any shareholder who competed
those articles to enforce those rights". with the company’s business to transfer his shares at full value is
valid and binding upon the members of the company for it will be
beneficial to and in the interest of the whole company.
3. Menier v. Hoopers' Telegraph Works (1874)
4, Sidebottom v, Kershaw, Leese & Co, (1920)
Se
96 ARTICLES OF ASSOCIATION ARTICLES OF ASSOCIATION oT
7. The power conferred on the company under Section 14 of the Act to Southern Foundries v. Shirlaw. Shirlaw was appointed as a managing
alter the articles by special resolution is very wide. But the power shall director of the company for a term of ten years by an agreement dated
not be abused by the majority of shareholders to deprive
the minority December 21, 1933. In 1935 the above mentioned company amalgamated
of their rights or to oppress the minority (Mathurbumi Printing and with another company, and new articles were adopted. Those articles
Publishing Co. Ltd. v. Vardhaman Publishers Ltd, 1992). Alteration gave power to the company to dismiss any director. Shirlaw was dis-
of Articles shall not be valid if it has been made for the benefit of missed under the new articles. He sued the company for the wrongful
an aggressive, vindictive or fraudulent majority.’ The leading case repudiation of the contract. It was held that the dismissal was a breach
is Brown v. British Abrasive Wheel Coa. (1919): of the contract, and, therefore, the company was liable for damages.’ But
A company was in great need of further capital. The majority rep- a company cannot be precluded from altering its articles.
resenting 98% of the shares were willing to provide the capital if
they could buy up the two per cent minority. The majority passed Distinction between Memorandum and Articles of Association
a resolution altering the Articles to enable them to purchase the The Memorandum contains the fundamental conditions upon which alone
minority shares. The plaintiff challenged the alteration. the company is allowed to be incorporated. These are conditions intro-
duced for the benefit of the creditors, and the outside public, as well as
Held, the alteration of the Articles of Association is void as it con- of the shareholders. The Articles of Association are internal regulations of
stitutes a fraud by the majority shareholders upon the minority the company. The main points of difference between memorandum and
shareholders. articles are as follows:
8. Certain provisions of the Articles cannot be altered except with the
prior approval of the Tribunal For example, conversion of a public Basis of Memorandum of Articles of Association
company into a private company. Difference Association
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9. Acompany can alterits articles even if it causes a breach of agreement Meaning It is the charter of the com- Articles of Association
with the outsider. Company cannot be prevented by injunction from pany, contains fundamental contain the rules and
altering its articles which constitute a breach of contract although conditions upon which the regulations to govern the
the company may be liable to pay damages for breach. The remedy company is granted incorpo- internal management of
of the outsider depends on the fact whether his contract is purely ration. the company.
on the terms in the articles or it is an independent contract. In the Purpose Memorandum defines the Articles form the bye-
former case, the alteration will be operative and outsider will have objects and powers of the laws of the company and
no remedy against the company. While in the latter case, the com- company.It fixes up the scope provide those regulations
pany can repudiate the contract by altering its articles, but will be and extent of the activities of by which the objects and
liable for the damages caused to the third party on account of such the company. powers of the company
breach. This is because “a company cannot, by altering articles, cause can be carried out.
a breach of contract.” Alteration Different clauses of the In case of Articles of
Cases on alteration of Articles in breach of agreement Memorandum cannot be easily Association, a company
altered Thesecan bealtered for has inherent power to al-
C. Chettiar v. Krishna Atyanger. The Articles of a company contained a specified purposes and inaccor- ter it. Members can alter
clause that the company’s secretary would get a salary of Rs. 250 per dance with the modeprescribed the articles by passing a
month, Mr. A accepted the post on these terms. Later on, the company by the Act. Alteration of some special resolution provid-
altered its articles reducing the salary of the secretary to Rs. 25 per of these requiresthe permission ed other conditions are
month. It was held that since the contract was wholly dependent on the of the Tribunal while in other satisfied. Permission of
company’s articles, Mr. A was bound by the alteration with no remedy cases approval of the Central the Tribunal or the gov-
against the company. Government is necessary. ernment is not required
for ordinary alterations.
5. Menier v. Hooper's Telegraph Works (1874)
6. Southern Foundries Lid, v. Shirlaw (1940)
— wk
98 ARTICLES OF ASSOCIATION ARTICLES OF ASSOCIATION 99
Basis of Memorandum of Articles of Association The articles of a company provided that its deeds etc. should be signed
Difference Association by the managing director, the secretary and a working director on behalf
Subordination | Memorandum of Association | Articles of Association of the company. The plaintiff accepted a deed of mortgage executed by
cannot include any clause|is subsidiary to both the secretary and a working director only. The plaintiff could not claim
contrary to the provisions of the Companies Act his deed. It was held that the company was not liable to pay the money
the Companies Act. and the Memorandum. under the deed since the deed was not signed by the persons as required
Articles cannot be framed by the company’s articles.
in contravention of However, the ‘doctrine of constructive notice’ is more or less an unreal
the provisions of the doctrine. It does not take notice of the realities of business life. People know
Companies Act and the acompany through its officers and not through its documents. Section 9 of
Memorandum. the European Communities Act, 1972 has abrogated this doctrine. The courts
Ratification Acts done by a company | Actsofacompany beyond in India do not seem to have taken the doctrine seriously. For example, the
beyond the scope of the | the Articles are simply ir- Calcutta High Court in Charnock Collieries Co Lid. v. Bholanath enforced a
Memorandum are absolutely | regular and not void and security which was not signed in accordance with the company’s articles.
veid and cannot be ratified | can easily be confirmed
even by a unanimous vote of | or subsequently ratified Doctrine of Indoor Management
all the shareholders. by the shareholders. The doctrine of indoor management is an exception to the rule of con-
structive notice. As per the doctrine, a person dealing with a company is
Constructive Notice of the Memorandum and Articles bound to read only the public documents, He will not be affected by any
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The doctrine of constructive notice is based on the rule laid down in Ernest irregularity in the internal management of the company.
v. Nicholls (1857), whereby a person dealing with a company is deemed The doctrine of indoor management seeks to provide a protection to the
to know the contents of the company’s memorandum of association and outsiders by requiring the persons in charge of the management of the
articles of association. The memorandum and the articles of association company to do all the things according to the procedure prescribed by the
of every company are registered with the Registrar of Companies. The Articles of Association. It affords the outsiders to assume that the things
office of the Registrar is a public office. Hence, the memorandum and the have been done in accordance with the provisions and the procedures as
articles of association become public documents. It is therefore the duty of laid down in the Articles of Association. The duty of observing internal
person dealing with a company to inspect its public documents and make managerial procedure such as regarding constitution of the Board, quorum,
sure that his contract is in conformity with their provisions. As observed voting, internal resolutions and regulations etc., has been imposed upon those
by Lord Hatherley, *...whether a person actually reads them or not, he is who are responsible for the management of the affairs of the company’
to be in the same position as if he had read them". Every person will be Company in all such cases shall continue to be liable to third parties even
presumed to know the contents of the documents. if the internal formalities are found not to have been completed.
Another effect of this rule is that a person dealing with the company is As per the doctrine of indoor management, “persons dealing with the com-
taken not only to have read the documents but also to have understood pany are bound to read the registered documents and to see that the pro-
them according to their proper meaning. Further there is a constructive posed dealings are apparently regular
and consistent with the Memorandum
notice not merely of the memorandum and articles, but also of all the and Articles, therewith. But they are not bound to do any more, they need
documents, such as special resolutions and particulars of charges which not enquire into the regularity of internal proceedings of the company.”®
are required by the Act to be registered with the Registrar. But there is no They need not enquire whether proper procedure has been followed for
notice of documents which are filed only for the sake of record, such as the delegation of the authority to the person with whom the outsider is
returns and account. dealing. An outsider is not required to investigate into the compliance of
The practical effect of this rule can be observed in the case of Kotla
7. Royal British Bank v. Turquand (1856)
Venkatswamy v. C Rammurthy:
§. Bagger Staff v. Rowatt's Wharf Lad. (1896)
all the rules of internal management. This is because a person can be pre- 2. Negligence in Suspicion of Irregularity
sumed to know the constitution of the company as revealed by the public Where a person dealing with a company could discover the irregu-
documents, but not what may or may not have taken place within doors larity had he made proper inquiries, he cannot claim the benefit of
that are closed to him. the rule of indoor management. The protection of the rule is also
The doctrine had its genesis in the case of Royal British Bank v. Turquaned not available where the circumstances surrounding the contract are
(£856), so suspicious as to invite inquiry, and the outsider dealing with the
company does not make proper inquiry. Suspicion may arise owing
The directors of the company had issued bonds to Turquand. They had to unusual magnitude of transaction or unusual haste to finalise a
power under the Articles to issue such bonds provided they were autho- transaction, or officer of the company acting beyond his apparent
rized by a resolution of the company. No such resolution was, however, authority. In Anand Bihari Lal v. Dinshaw & Co., the plaintiff accept-
passed by the company. The court held that Turquand could recover ed a transfer of property of the company from its accountant. The
the amount of the bonds from the company on the ground that he was transfer was held to be void. In the absence of properly executed
entitled to assume that the resolution has been duly passed. power of attorney, the plaintiff could not assume that the accountant
Thus, the outsiders are bound to know only the external position of the has the power to sell property of the company.
company and are not bound to know the ‘indoor management’, Inthe absence 3. Forgery
of the aforesaid rule the people in business would feel shy in dealing with
The doctrine of indoor management is not applicable to forgeries
companies. If the persons dealing with the company are compelled to see
committed by the employees of the company. This is because the
the internal management of the company to ensure that nothing has been
doctrine regularizes the irregularities not the illegalities. Forgery is
done wrong, then it would cause a great hindrance to the smooth running
illegal and therefore void ab initio, The case of Ruben v. Great Fingall
of the wheels of commerce. The doctrine also known as the Turquand rule
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Consolidated provides clarity on the issue.
has been applied in number of cases, Some of these are: Pudturijee & Co, v.
NOH. Moos; Premier Industrial Bark Ltd. v. Carlion Mfg. Co. Lid; Houghton Secretary of the company forged the signatures of the two direc-
& Co, v. Northard, Lowe & Wills Lid: and P V. Damodara Reddy v, Indian tors and after affixing the seal of the company, issued it to Ruben.
National Agencies Lid. The Company denied the Certificate. The plaintiff contended that
he had ne means to know whether the signatures are genuine or
Exceptions to the Doctrine forged, and therefore it is a part of the internal management of the
company. But it was held that the rule of indoor management has
The doctrine of indoor management is subject to the following exceptions never been extended to a forgery.
when the protection under the rule may not be given to the person dealing
with the company: 4. No Knowledge of Articles
1. Knowledge of Irregularity Knowledge of articles is considered essential for claiming protec-
tion of the rule of ‘indoor management’. This is because the rule is
Aperson who has actual knowledge of the internal irregularity cannot based upon the principle of estoppel. A person who does not have
claim the protection of this rule. This is because in that case he could actual knowledge of the company’s articles cannot claim as against
have taken steps for self-protection. A person who himself is a party the company that he was entitled to assume that a power which
to the inside procedure, such as a director is deemed to know the could have been delegated to the directors was in fact so delegated.
irregularities, if any. In Howard v. Patent Ivory Ca, for example, the However, the conflicting aspect is that everybody is deemed to have
directors of the company had the authority to borrow up to £ 1000 constructive notice of the articles.
without sanction of the resolution at the general meeting. Directors
The question of knowledge of Articles came up in the case of Rare
lent to the company £3500 without any resolution being passed. It was Corporation v. Proved Tin and General Investment Company. In that case,
held that the company would be bound only by £ 1000, The Turquand
one T was the active director of the defendant company. He, purporting
rule was not applied as the directors ought to know that the resolution
to act on behalf of his company, entered into a contract with the plaintiff
was not passed so they could not claim ignorance andl protection, company under which he took a cheque from the plaintiffs. The company's
9, Pacific Const Coal Mines Ltd. v. Arbuthnot (1917) article contained a clause providing that “the directors may delegate any
of their powers, other than the power to borrow and make calls to com- REVIEW QUESTIONS
mittees, consisting of such members of their body as they think fit". The
board had not in fact delegated any of their powers to T and the plaintiff “Articles
of Association of acompany constitutes
a contract between
had not inspected the defendant's articles and, therefore, did not know of the members iter se and between the company and the members
the existence of power to delegate. It was held that the defendant company qua members.” Elucidate.
was not bound by the agreement. “A person who at the time of entering 2 What happens when any part of the Articles of Association (i con-
into a contract with a company has no knowledge of the company’s arti- flicts with the Memorandum, (if) deals with a point about which
cles of association, cannot rely on those articles as conferring ostensible the Memorandum is silent?
or apparent authority on the agent of the company with whom he dealt.” Enunciate the Doctrines of Constructive Notice and Indoor
Se
He could have relied on the power of delegation only if he knew that it Management. What are the exceptions if any to the doctrine of
existed and had acted on the belief that it must have been duly exercised. incloor management?
IMPORTANT CASES 4 Whatare the legal effects of the Articles of Association of acompany?
Examine the validity of the provision in the Articles of Association
+ Irrigation Development Employees Meaning of Articles depriving a company of its powers to amend Articles.
Association vs. Government of Andhra How far do you agree with the statement that the power to alter
Pradesh articles conferred by the companies Actis very wide yet it is subject
# Wood vs. Odessa Waterworks Ltd. Binding Effect of Articles to a large number of limitations?
# Globe Motors Lid. vs. Globe United Binding Effect of Articles 6. Explain Turquand’s rule. State its exceptions.
Engineering and Foundry Ltd.
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7 (@) ‘While the power to alter Articles of Association is wide, the

# Borland's Trustees vs. Steel Bros. & Co. Binding Effect of Articles Memorandum of Association is an unalterable document of a
Ltd. company.’ Explain.
# Rayfield vs. Hands Binding Effect (&) Explain the Doctrine of Indoor Management and state its
Browne vs. La Trinidad Binding Effect exceptions.
+
Elley vs. Positive Government Security Binding Effect (c) ‘A company cannot, by altering its articles, justify a breach of
*
Life Assurance Co, contract.’ Explain.

MathurbumiPrintingand PublishingCo. Alteration of Articles 8 Discuss the limits upon the powers ofa company to alter its articles
*
Ltd. vs, Vardhaman Publishers Ltd of association.

# Brown vs. British Abrasive Wheel Co. — Alteration of Articles Distinguish between Memorandum and Articles of Association.
* C. Chettiar vs. Krishna Aiyanger Alteration of Articles 10. A company can't by altering its Articles, justify a breach of contract.
Explain.
# Southern Foundries vs. Shirlaw Alteration of Articles
it, Discuss the rule laid down in Royal British Bank v. Turguand. Are
# Ernest vs, Nicholls Constructive Notice
there any exceptions to the rule?
+ Kotla Venkatswamy vs.C. Rammurthy Constructive Notice
# Royal British Bank vs. Turquand Doctrine of Indoor Mgt. CASE PROBLEMS
@ Howard vs. Patent Ivory Co. Doctrine of Indoor Met.
Acompany atits extraordinary general meeting passed a resolution,
# Anand Bihari Lal vs. Dinshaw & Co. Doctrine of Indoor Mgt. altering its articles, and vesting in the Board of Directors blanket
# Ruben vs. Great Fingall Consolidated Doctrine of Indoor Met. power to call upon any one or more members, where the Board
was of the prima facie view that act or conduct of such a member
* Rama Corporation vs. Proved Tin and Doctrine of Indoor Mgt.
General Investment Company or members were prejudicial to the interest of the company, to
ary
transfer his or her shares to such other members as may be nom- 7. Articles of a limited company state that A shall be the law officer
inated by the Board in that behalf. Discuss the legality of such an of the company and shall not be removed except on the ground of
alteration. proved misconduct. The company removed him even though he
Ans. [Such an alteration may be declared by Tribunal on a petition was not guilty of misconduct. State whether company’s action is
by aggrieved party as illegal and wlira viresif not found to be bona valid or not.
fide}. Ans. [Company has the right to amend its Articles. Company is
2 The directors of a company had power to borrow money up to’ not liable for breach because Articles do not confer any right on
Rs. 20,000 without the consent of members in general meeting. outsiders.]
The directors’ themselves lent Rs. 40,000 to the company and took
debentures. Is the company liable for Rs. 40,000.
Ans. [Company is liable only to the extent of Rs. 20,000].
. The common seal of company has been affixed by the company
ona document without due compliance with the provisions of the
Companies Act. Does this affect the validity of the document?
Ans. [The outsiders will be protected on the ground of Doctrine of
Indoor Management]
4 The Articles of a company empowered the directors to determine
who should have the authority to draw bills on behalf of the com-
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pany. ‘C’, the manager of a branch of the company, drew bills on
behalf of the company in favour of ‘K’, who took them in good faith
believing that ‘C’ was authorized to draw them. In fact, 'C’ had no
such authority. Is the company liable on the said bill? Will it make
any difference if ‘C’ had been a director of the company?
Ans. [Yes, the company would be liable in both the situations on
account of doctrine of indoor management.]|
. The directors of a company borrowed Rs. 5,00,000 from Tarun.
They had the power to borrow such money, but only subject to the
ordinary resolution, passed at the general meeting of the company.
In fact no such resolution had been passed. Is the company bound
to repay the loan to Tarun? Give reasons.
Ans. [Yes, since Tarun is protected by the Doctrine of Indoor
Management]
. The secretary of a company issued a share certificate in favour of
Mr. Cook which apparently complied with the company’s articles:
as it is purported to be signed by two directors and the secretary,
and it had the company’s seal affixed to it. In fact, the secretary had
forged the signatures of the directors and affixed the seal without
authority. Is the certificate binding on the company?
Ans. [Company is not bound by the forgeries committed by its
officers.]
wow
PROSPECTUS 107
In offer for sale method, a company allots shares to issue houses or other
intermediaries or the promoters with a view to such shares being offered
for sale to the public by such issue houses or the promoters. In certain
situations, this offer for sale is deemed as a public offer by the company.
Right issue is the offer for subscription of shares made by a public compa-
ny to its existing equity shareholders as a matter of their right. In fact, it is
obligatory for a public company to make such an offer in case of further
issue of shares.
Private placement is issuing of shares privately to the friends, relatives or
PROSPECTUS acquiesces of the promoters.
A private company is, by its very constitution, prohibited from inviting
the monetary participation of the public, and, therefore, it need not issue
a prospectus.
# Meaning of Prospectus
Issue of securities (shares& de-
# Types of Prospectus bentures) by a Public Company
# Misleading Prospectus
@ Book Building
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A public company may raise its capital by way of: Public Offer Offer for Right issue or Private
*# Public Offer (PO/FPO) Sale Bonus Issue Placement
* Offer for Sale
@ Right Issue or Bonus Issue See Private
Fixed price Prospectus
by
* Private Placement offer ee Implication Gace
A private company may issue securities by way of:
# Rights issue or Bonus issue, or
# Private Placement Prospectu
na
\_\
s and/ | | Rce
Red- Shelf
pel
A public offer may be Initial Public Offer (IPO)
or Further/Follow-on Public
Offer (FPO). It is the selling of securities by the company to the public
in the
primary market, It is essential for a public company to issue a prospectus Meaning of Prospectus
if it intends to appeal to the public for capital to carry out the objects for
which it has been constituted. Prospectus is a document which gives all According to section 2(70), “prospectus” means any document described
the details about the company and the proposed issue of shares to enable or issued as a prospectus and includes a red herring prospectus referred
informed decision by the intending investor of shares in the company. It to in section 32 or shelf prospectus referred to in section 31 or any notice,
is, in fact a ‘market show’ so as to attract investors for putting money into circular, advertisement or other document inviting offers from the public
the securities of the company. A public offer can be made through: fixed for the subscription or purchase of any securities of a body corporate;
price method or book building method. Thus, prospectus is a document inviting general public to subscribe to the
share capital of a public company. Any document which has the object
of securing the required capital or public deposits for a company comes
106 within the definition of prospectus.
108 PROSPECTUS PROSPECTUS 109
Invitation to public. Where acompany allots or agrees to allot any securities offer as such is to be open to anyone who brings his money and
of the company with a view to all or any of those securities being offered applies in due form, whether the prospectus was addressed to him
for sale to the public, any document by which the offer for sale to the on behalf of the company or not. A private communications is not
public is made shall, for all purposes, be deemed to be a prospectus issued thus open and does not construe to be a prospectus’.
by the company. The term ‘public’, therefore, includes any section of the
public howsoever selected. It connotes persons not personally known to (iif) If shares are offered to a few issue houses or Qualified Institutional
the promoter as distinguished from his own friends, relatives, connections Investors (OID or to employees of the company under a scheme of
and acquaintances. Even an offer to a limited class of people shall be an employees stock option.
offer to public. (iv) If the shares are offered exclusively to the existing members of the
company.
Case
(v) If the offer is made in connection with a bona fide invitation to a
Re. South of England Natural Gas and Petroleum Co. Ltd. (1911) 3,000 person to enter into an underwriting agreement with respect to the
copies of documentin the form of a prospectus were sent out and distrib- shares.
uted among the members of certain gas companies only. It was held that
though the offer was only to limited class, it was nevertheless an “offer to
the public,” as those persons were nonetheless “the public’, vis-a-vis the Offer for Sale or Prospectus by Implication
company, although they were not public at large, but selected portion Meaning of Offer for Sale In this method entire share capital ofa company
of it. It must, therefore, contain the particulars as required by the Act. is allotted to an intermediary called ‘Issue House’. The ‘house’ then offers
In the following cases, however, the offer shall not be treated as made to the shares to the public by means of an advertisement of its own. On an
the public: application being made by a member of the public, the issue house renounces
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the allotment of the number of shares mentioned in the application, usually
(i If it is not made in a way so as to result, directly or indirectly in the at a higher price, in favour of the applicant purchaser, who then becomes
shares
or debentures becoming available for subscription or purchase a direct allottee of the shares or debentures. Company, thus, is ensured of
by persons other than those receiving the offer or invitation provided the whole issue and is also relieved of a lot of administrative work.
the offer is made to not more than 200 persons in a Financial year.
[Section 42(2) read with rule 14 of the Companies (Prospectus and Prospectus by Implication
Allotment of Securities) Rules, 2014]
(1) Itis only a domestic concern of the persons making and receiving the As per the provisions of section 25, where a company allots or agrees to
offer or invitation provided the offer is made to not more than 200 allot any securities of the company with a view to these being offered by
persons and each offer is made separately to a particular addressee. the allottees for sale to the public, the document by which such an offer
for sale to the public is made, shall be taken as a prospectus by implication
Case issued by the company if:
Nash v. Lynde (1929) Nash applied for certain shares
in a company (a) the allottee (issue house or other person) offers these shares or
on the basis of a document sent to him by Lynde, the managing debentures tothe public for sale within six months. after the allotment
director
of the company.
The document was marked “strictly private or agreement to allot, or
and confidential.” The document did not contain all the material (6) at the date of offer to the public the company has not received the
facts required by the Act to be disclosed. Nash's filed a suit for whole consideration in respect of the shares or debentures.
compensation for loss suffered by him by reason of the omissions.
It was dismissed. The court observed, ‘The “public” is of course a Thus, sale of shares through an ‘issue house’ does not in any way reduce
general word. No particular numbers are prescribed. Anything from the liability of the company’s directors, promoters or other officers. On the
other hand, in addition to them, the issue house incurs its own liabilities.
two to infinity may serve: perhaps even one, if he is intended to be
the first of a series of subscribers, but make further proceedings It shall have effect as if the persons making the offer were persons named
in a prospectus as directors of a company.
needless by himself subscribing the whole. The point is that the
Requirements as to Prospectus The prospectus must be issued within 90 days after the date on which
Issue of prospectus, in order to be valid, must satisfy the following legal a copy thereof has been delivered for registration. If a prospectus is
requirements:— issued subsequently after the expiry of this period, it shall be deemed
to be a prospectus a copy of which has not been delivered to the
1, Obligations of SEBI (Issue of Capital and Disclosure Requirements) Registrar for registration. This default will make liable, the com-
Regulations, 2018. pany, and every person who is knowingly a party to such an issue
These regulations inter aliacdeal with appointment of Lead Merchant of prospectus, to a fine which may extend up to three lakh rupees.
Banker, Bankers to the issue, Registrar to the issue, filing of various Expert to be unconnected with the formation or management of the
documents along with a draft prospectus, pricing of the securities, company.
promoters contribution, minimum public offer, and disclosure in
A prospectus must not include a statement purporting to be made
the offer document. The company is required to file a draft offer
by an expert such as an engineer, valuer, accountant, etc., unless
document through the lead merchant banker, at least 30 days prior
the expert is a person who has never been engaged or interested in
to registering the prospectus with the Registrar of Companies.
the formation or promotion or in the management of the company
It must be dated. [See. 26(5)].
*
Every prospectus must be dated. The date given in the prospectus 5 i” Expert’s consent to be obtained.
shall be taken to be the date of its publication unless proved to the If the prospectus includes a statement purporting to be made by an
contrary. Date of filing of the prospectus with the Registrar is taken expert, it must not be issued, unless the expert was an independent
to be the date of its issue. Date of issue of the prospectus may, how- person competent to make such reports and had given his written
ever, be different from the date of its publication. consent to the issue thereof and has net withdrawn such consent
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3 It must be registered. before the delivery of a copy of the prospectus for registration and
.
A copy of every prospectus must be signed by every director or pro- astatement to that effect appears in the prospectus.
posed director and filed with the Registrar for registration before it Every application form to be accompanied with a copy of prospectus
is issued to the public. Subsequent issues of copies of the prospectus or abridged prospectus. [Section 33(1)]
must state on their face that a copy has been so filed. This copy must Every form of application for subscribing the shares or debentures
be accompanied with the following documents: of a company shall not be issued unless it is accompanied by a pro-
(a) if the report of an expert is to be published, his written consent spectus or an abridged prospectus, unless the offer or invitation has
to such publication; not been made to the public.
(6) written consent of all those persons whose names are men- 7 Punishment
for personation for acquisition,
etc., of securities [Section
38].
*
tioned in the prospectus as auditors, legal advisors, solicitors,
bankers, ete.; # Any person who—
(c a copy of every contract relating to appointment and remu- (a) Makes or abets making of an application in a fictitious
a
neration of managerial personnel and their consent to act as name toa company for acquiring, or subscribing for, its
such; securities; or
(¢@) a copy of every material contract unless entered into in the (b) Makes or abets making of multiple applications to a
ordinary course of business or two years before the date of company in different names or in different combinations
the issue of the prospectus; of his name or surname for acquiring or subscribing for
(¢€ where the persons making any report required by section 26 ils securities; or
>
have made any adjustments as regards the “figures of profitsor (c) Otherwise induces directly or indirectly a company to
lossesor assets and liabilities dealt with by the report”, without allot, or register any transfer of, securities to him, or to
giving the reasons,a written statement signed by those persons any other person in a fictitious name, shall be liable for
setting out the adjustments and giving the reasons therefor. action under section 447.
# The above provisions shall be prominently reproduced in “A statement included in a prospectus shall be deemed to be untrue, if the
every prospectus issued by a company and in every form of statement is misleading in the form and context in which it is included; or
application for securities. where any inclusion or omission of any matter is likely to mislead"(Sec-
8. Disclosure Requirement and Contents as per Section 26. tion 34). A statement can also become false because it produces a wrong
impression of actual facts. However, an untrue statement will not include
Every prospectus issued by a company must state the matters and in its definition a mere expression of opinion or expectation,
contain reports specified in section 26 of the Act.
Rex v. Klysant In the prospectus ofa company it was stated that the com-|
Abridged Prospectus pany had regularly paid dividends during the last several years when the |
company had actually been incurring substantial losses during all those |
As per section 2(1), abridged prospectus is a memorandum containing
such salient features of a prospectus as may be prescribed. Thus, it a brief years. Company had converted its losses into profits by writing back some |
version of the salient features of a prospectus to cut the cost involved in
of the past provisions to the credit of the profit and loss account. It was
the publication of large number of prospectus which has to accompany the held that the prospectus did not disclose the true picture of the company. |
application forms for shares or debentures in case of public offer. Shiromani Sugar Mills Ltd. v. Debi Prasad A prospectus contained state-
Section 33(1) provides that every application form for shares or debentures ments that the managing agents and their friends had promised to take|
has to be accompanied with the abridged prospectus, proviced that a full shares and thatthe company would go into production soon. Subsequently, |
prospectus is to be made available to a person who asks for it before the it transpired that the managing agents and their friends did not keep up|
closing of the subscription list. their promise and that the company did not go into production soon.|
The statement was held to be only a puff and not a statement fact and |
In the following cases, however, the requirement of abridged prospectus further that the failure to keep up their promise by managing agents did |
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does not apply: not amount to a misrepresentation of fact.

# when application form is issued in connection with a bona fide in-
Henderson v. Lacon The prospectus of acompany contained astatement., |
vitation to a person to enter into an underwriting agreement with
respect to shares or debentures; “the directors and their friends have subscribed a large portion of the|
capital and they now offer to the public the remaining shares.” Actually |
* in relation to shares or debentures which were not offered to the each director had subscribed only ten shares. The statement was held |
public; or to be misleading.
@ where offer is made only to existing members of the company. Smith v. Chadwick The prospectus of a manufacturing company con- |
If a company makes any default in complying with the provisions of this tained the statement, “the present value of turnover
is £ 10,00,000 sterling |
section, it shall be liable to a penalty of Rs. 50,000 for each default. [See per annum.” The statement was true if it meant the present capacity of |
33/3)]. the works. But it was untrue if it meant the present production of the|
work. It was held that if the directors put forth a statement which they |
Misleading Prospectus knew may bear two meanings, one of which is false to their knowledge |
and thereby the plaintiff putting the meaning on its misled they cannot |
A contract of shares in a company is an uberriniae fedei ie. “wimost good
escape by saying that he “ought to have put the other."
faith contract. The intending purchasers of shares are entitled to true and
correct disclosures of all the facts in the prospectus, Neither any information
which the law requires to be disclosed to the public be concealed
or omitted Effect of Misleading Prospectus
to be stated from the prospectus nor should the information given be false If the prospectus contains a misleading or false statement or omits to dis-
and misleading. A prospectus must make all statements with scrupulous close a material fact which amounts to misrepresentation, the aggrieved
accuracy and not state facts which are not strictly correct. A statement shareholder has the remedies:
may be false not only because of what it states but also because of what it
(a) Against the directors and other persons responsible for the issue of
conceals, omits or implies. Suppression of facts will be as bad as disclosure the prospectus, and
of wrong facts. “Truth, whole truth and nothing but truth must be disclosed,
Haif-truth is no better than a downright falsehood." (Rex v. Kylsant) (5) Against the company.
@ Shall also be liable to fine which shall not be less than the amount
Remedies in case of
Misrepresentation in the Prospectus involved in the fraud, but which may extend tothree times the amount
involved in the fraud; and
* In case the fraud in question involves public interest, the term of
imprisonment shall not be less than three years:
Provided that nothing in this section shall apply to a person if he proves
that such statement or omission was immaterial or that he had reasonable
Against the Against the grounds to believe, and did up to the time of issue of the prospectus believe,
oN Directors& Others that the statement was true or the inclusion or omission was necessary.
Civil Liability [Sec. 35]

Where a person has subscribed for securities of a company acting on
eee amages Compensation Criminal Action for
x 2 (civil liability) Liability Deceit any statement included, or the inclusion or omission of any matter, in the
prospectus which is misleading and has sustained any loss or damage as a
consequence thereof, the company and every person who:-
Liability of Directors, Promoters, etc. in case of Misleading Prospectus * isadirector of the companyat the time of the issue of the prospectus;
The persons liable in case of the issue of the prospectus containing false has authorised himself to be named and is named in the prospectus
or misleading statements are: as a director of the company, or has agreed to become such director,
a NNVIVA EL
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# every person who is a director of the company at the time of the either immediately or after an interval of time;
issue of the prospectus; # isa promoter of the company;
@ every person who has authorised himself to be named and is named # has authorised the issue of the prospectus; and
in the prospectus as a director;
# is an expert referred to in sub-section (5) of section 26,
# every person who is a promoter of the company; and
shall, without prejudice to any punishment to which any person may be
# every person who has authorised the issue of the prospectus, liable under section 36, be liable to pay compensation to every person who
The liability of the directors, promoters and others falls under the following has sustained such loss or damage.
heads:
# Criminal Liability. Defenses available
# Civil Liability. The person sued for damages can escape liability for damages by success-
fully pleading any of the following defenses.
+ Liability under the general law of contracts.
(a) Authority of an expert. He made the statement on the authority of
Criminal liability [Sec. 34] an expert whom he believed to be competent and that the expert
had given his consent and had not withdrawn it.
Where a prospectus, issued, circulated or distributed,
includes any statement (b) Reasonable ground for belief. He had reasonable grounds for be-
which is untrue or misleading in form or context in which it is included or
lieving the statement to be true and that he did believe it to be true
where any inclusion or omission of any matter is likely to mislead, every
up to the time of allotment.
person who authorizes the issue of such prospectus shall be liable under
section 447; (c) Correct copy of an extract.The statement was a correct copy of some
extract from an official document and that he had in fact believed
# Any person who is found to be guilty, shall be punishable with im-
it to be true.
prisonment for a term which shall not be less than six months but
which may extend to ten years;
eo
(d@) Consent withdrawn. That having consented to become a director, he those shares upon the stock exchange.”! The leading case is that of
withdrew his consent to become a director before the issue of the Peek v Gurney:
prospectus and the prospectus was issued without his authority or
consent. Gurney issued a fraudulent prospectus on behalf of a company.
No shares were purchased by Peek at that time. Several months
(e) Issued without knowledge. The prospectus was issued without his afterwards, Peek purchased 2,000 shares of the company from the
knowledge or consent and that on knowing the fact he forthwith gave stock exchange. He brought an action against the directors for
a reasonable public notice that it was issued without his knowledge deceit. Held, the directors were not liable.
or consent.
(@) He has been actually deceived. There can be no action unless the
Further, an expert or a person who has given his consent to his name being shareholder has actually been deceived. A deceit which does not
mentioned in the prospectus in the capacity of an auditor, legal adviser deceive is no fraud. Besides mere misreading ofa prospectus cannot
etc., is liable only to the extent of any untrue statement, if any, purporting form the basis of an action for deceit?
to have been made by him as an expert.
Liability of the Company
Liability under General Law
The shareholder, who has purchased shares on the basis of a misleading
Persons responsible for the issue of prospectus can also be held liable in an or false prospectus has two rights against the company under general law
action for deceit, under general law as provided by section 19 of the Indian of contracts:-
Contract Act. This remedy shall be available even where the remedy by
way of rescission as against the company is lost either through latches or (a) Right of rescission
negligence or even if the company goes into liquidation. But the plaintiff (5) Right of action for damages
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will have to prove the following:
(a) There was a fraudulent mis-statement. A fraud is said to have been Right of Rescission
committed if a false representation is made knowingly or without A person who has purchased shares from the company on the basis of the
belief in its truth or recklessly, whether it be true or false. From this prospectus containing untrue and misleading statement of material facts
it follows that there is no fraud if the person makinga false statement is entitled under the general law to apply to the court for the rescission of
honestly believes it to be a true one. the contract. The agreement to take up shares is voidable at the option of
(b) Representation related to some existing material facts. Material facts the subscriber to the shares, It will remain valid unless he actually rescinds
mean facts which are important for the contract. it. If the court accepts his application for the repudiation of the contract,
(ce) He had seen the prospectus and is the original allottee. A person who company will remove his name from the register of members and return
had not purchased the shares on the basic of the prospectus, which his money with interest and other incident costs.
contained false and misleading statements, shall not be entitled to Right to claim damages from the company or to rescind allotment of
any remedy, either that of rescinding the contract or that of claiming shares will not be available to the subsequent purchasers of shares from
the damages. A man cannot be said to have purchased on the basis of the market. They cannot claim any relief unless the prospectus was
the prospectus when he has purchased those shares from an existing issued to induce them to buy shares. A subscriber to the Memorandum of
shareholder. Similarly, a purchaser of shares from the share market Association cannot also seek any relief, as the company cannot be consid-
cannot be looked upon as one to whom the prospectus is addressed ered to be in existence at the time when he appended his signatures to the
and is precluded from bringing an action of deceit because “the Memorandum of Association. He cannot be said to have been influenced
object of a prospectus is to invite persons to become allottees and by any statement in the prospectus.
the allotment having been completed, such object is exhausted and
the liabilities to allottees do not follow the shares into the hands of
subsequent transferees. Directors cannot be made liable infiniti
for all the subsequent dealings which may take place with regard to 1. Peek v. Gurney (1873)
2, Banshidhar ». The Tata Power Co, Lud,
hy
Conditions for the exercise of the Right of Rescission Right of Action for Damages
Right of rescinding the contract for the purpose of shares can be exercised In cases where mis-statement amounts
to fraud, aggrieved investor also gets
only when the following conditions are satistied: a right of action for damages against the company. This right is available
even after the company has gone into liquidation.
(a) Material fact. The statement which induced the shareholders to
subscribe for the shares must relate to a material fact and not an In order to claim damages, from the company the claimant shall have to
expression of opinion or expectations. Further, misrepresentation of prove that:
law will not give any remedy to the aggrieved party. (a) the misrepresentation in the prospectus was made fraudulently,
(6) False representation. The statement which had induced the other (4) it related to a material fact and not a mere promise, forecast or ex-
party tosubscribe for the shares must have been untrue
or misleading pression of opinion or expectation,
both in form and context in which it had been included. (ce) he was a class of person intended to act upon it and that
(c) Reliance and inducement. Shareholder must have actually relied (@) he had actually acted upon it and suffered damages. Allottee cannot,
upon the statement while applying for the shares and must have however, both retain the shares and get damages against the com-
been induced by it to purchase the shares. It is not necessary that pany.
he should have verified it before relying upon it.
(d) By or on behalf of the company. No only that the false statement Shelf Prospectus [Sec. 31]
should be addressed to the plaintiff who seeks to rescind the con- Need
tract but it must also be addressed to him by someone who has the
company's authority to do so. A company is required to issue a prospectus each time it accesses the
capital market. It leads to unnecessary repetition for a company which
TAXMANN®™
giNWWXWL
(e) Reasonable time. Proceedings for rescission must have been started makes more than one offer of securities in a year to mobiles funds from
by the shareholders within reasonable time before the company goes the public. A way out is ‘shelf prospectus’ which remains valid (on the shelf)
into liquidation, for a specified time period during which offers for securities may be made
by a company to the public without going through the arduous exercise of
Loss of the Right of Rescission issuing fresh prospectus every time.
The right of rescinding the contract will be lost and cannot be taken advan-
tage of by the purchaser of shares who relied on a prospectus containing Meaning
mis-statement of material facts under the following circumstances: Shelf prospectus means a prospectus issued by any financial institution or
(a) Unreasonable delay. When the shareholder fails to take any bank for one or more issues of the securities or class of securities specified
action within a reasonable time after he comes to know of the in that prospectus.
untrue statement.
Provisions of the Act
(b) Affirmation. When the allottee, expressly or impliedly, ratifies
or adopts the contract even after he comes to know of the 1. Any class orclasses of companies, as prescribed by the Securities and
untrue statement, e.g. acceptance of dividend, executing a Exchange Board may file a shelf prospectus with the Registrar at the
transfer, etc# stage of the first offer of securities indicating a period not exceeding
one year as the period of validity of such prospectus.
{c) Commencement of the winding up. A shareholder will not be
2. The period of validity of shelf prospectus shall be one year from the
entitled to exercise his right of rescission after the company
goes into liquidation. The shareholder will continue to pay the date of opening of the first offer of securities under the prospectus.
In respect of a second or subsequent offer of such securities issued
purchase price of the shares so long as he does not rescind the during the period
of validity of that prospectus, no further prospectus
contract of purchase of shares. is required,
3, Crowley's Case (1867) LR.4 Ch. App. 322. 3. A company filing a shelf prospectus shall be required to file an
information memorandum containing all material facts relating to
— So
new charges created, changes in the financial position of the com- Conditions for issue of Global Depository Receipts
pany as have occurred between the previous offer of securities and
Section 41 of the Companies Act permits a company to issue depository
the succeeding offer of securities and such other changes with the
Registrar within the prescribed time, prior to the issue of a second receipts in any foreign country. The rules in this regard have been laid
or subsequent offer of securities under the shelf prospectus. down by the Companies (Issue of Global Depository Receipts) Rules, 2014
which provide as under:
4, Where an information memorandum is filed, every time an offer
of securities is made, such memorandum together with the shelf (1) The Board of Directors of the company intending to issue depository
prospectus shall be deemed to be a prospectus. receipts shall pass a resolution authorising the company to do so.
(2) The company shall take approval of its shareholders by a special
Private Placement [Sec. 42] resalution to be passed at a general meeting.
Private Placement means any offer of securities or invitation to subscribe (3) The depository receipts shall be issued by an overseas depository
securities to a select group of persons by a company (other than by way of bank appointed by the company and the underlying shares shall be
public offer) through issue of a private placement offer letter and which kept in the custody of a domestic custodian bank.
satishes the conditions specified in this section. (4) The company shall ensure that all the applicable provisions of the
¢ the offer of securities or invitation to subscribe securities, shall be Scheme and the rules or regulations or guidelines issued by the
made to persons not exceeding 200 [excluding qualified institutional Reserve Bank of India are complied with before and after the issue
buyers and employees of the company being offered securities under of depository receipts.
a scheme of employees stock option], in a financial year. (5) The company shall appoint a merchant banker or a practising char-
« No fresh offer or invitation under private placement shall be made tered accountant or a practising cost accountant or a practising
WL
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@NNVAX
unless the allotments with respect to any offer or invitation made company secretary to oversee all the compliances relating to issue
earlier have been completed or that offer or invitation has been of depository receipts and the compliance report shall be placed
withdrawn or abandoned by the company. at the meeting of the Board of Directors of the company or of the
committee of the Board of directors. The committee of the Board
@ Any offer or invitation not in compliance with the provisions of this
section shall be treated as a public offer and all provisions of this of directors shall have at least one independent director in case the
company is required to have independent directors.
Act, and the Securities Contracts (Regulation) Act, 1956 and the
Securities and Exchange Board of India Act, 1992 shall be required (6) A holder of depository receipts may become a member of the com-
to be complied with. pany and shall be entitled to vote as such only on conversion of the
depository receipts into underlying shares after following the pro-
# All monies payable towards subscription of securities under this sec-
tion shall be paid through cheque or demand draft or other banking cedure provided in the Scheme and the provisions of this Act.
channels but not by cash.
Book-Building
# Proceeds from a private placement cannot be utilised till the filing
of return of allotment. A company may raise capital in the primary capital market through Initial
Public Offers (IPOs), rights issues and private placement. IPOs, the largest
Global Depository Receipts (GDR) sources of funds in the primary capital market, are basically an invitation
by a company to the public to subscribe to its securities offered through
Global depository receipt (GDR) also known as international depository prospectus. A company can make public offering through:
receipt (IDR), is a certificate issued by a depository bank which purchases
@ Fixed Price Method
shares of foreign companies and deposits it on the account. GDRs represent
an ownership interest in the ordinary shares of stock of a company which # Book Building Method, or
are used to invest in companies from developing countries by investors in @ Combination of Both.
developed markets. The issuing company has the advantage of accessibility
to foreign capital markets.
wo
Fixed Price Method (4) 75% of the net offer to the public through book-building process
Fixed price issues are issues in which the issuer is allowed to price the and the remaining 25% of the net offer to the public at the price
determined through book building process.
sharesas it wishes. The basis for the price is explained in an offer document
through qualitative and quantitative statements. This offer document is
filed with the stock exchanges and the Registrar of Companies. Characteristics of Book-Building
1. Price Band: The range of price (the highest and the lowest price) at
Book Building Method which offer for the subscription of securities is made, is known as
Book Building is essentially a process used by companies raising capital ‘price band’, Investors may bid any price within the price band.
through Public Offerings - either Initial Public Offers (IPOs) or Follow-on 2 Floor Price: Floor price is the minimum price set by the lead manager
+
Public Offers (FPOs) to aid price and demand discovery. The issuer sets in consultation with the issuer. This is the price at which the issue is
a base price and a band within which the investor is allowed to bid for open for subscription. Investors are free to place a bid at any price
shares. It is a mechanism where, during the period for which the book for higher than the floor price.
the offer is open, the bids are collected from investors at various prices, 3 Tendering Process: Book building involves inviting subscriptions to
which are within the price band specified by the issuer. The process is
+
a public offer of securities, essentially through a tendering process.
directed towards both the institutional as well as the retail investors. The Eligible investors are required to place their bids for the number of
issue price is determined after the bid closure based on the demand gen- shares to be issued and the price at which they are willing to invest,
erated in the process. with the lead manager running the book. At the end of the cut off
Book building process is a common practice used in most developed coun- period, the lead manager determines the response tothe issue in terms
tries for marketing a public offer of equity shares of a company. Book of the quantum of shares and the highest price at which demand is
TAXMANN®
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building is a transparent and flexible price discovery method of Initial sufficient to match the size of the issue.
Public Offerings (IPOs) in which price of securities is fixed by the issuer 4. Bid: The investor can place a bid with the authorized lead manager.
company along with the Book Running Lead Manager (BRLM) on the basis In the case of equity shares, usually several brokers in the stock
of feedback received from the investors and market intermediary. exchange are also authorized by the lead manager. The investor fills
up a bid-cum-application form, which gives a choice to bid for up to
Meaning of Book-Building three optional prices. The price and demand options submitted by
Book building as “a process undertaken by which a demand for the secu- the bidder are treated as optional demands and are not cumulated.
rities proposed to be issued by a body corporate is elicited and built up 5 Allotment: The lead manager,in consultation with the issuer, decides
+
and the price for such securities is assessed for the determination of the the price at which the issue will be subscribed and proceeds to allot
quantum of such securities to be issued by means of a notice, circular, shares to investors who have bid at or above the fixed price. All
advertisement, document or information memoranda or offer document.” investors are allotted shares at the same fixed price. For any allottee,
As per the SEBI Guidelines, a public issue through Book Building may have therefore the price would be equal to or less than the price bid.
the following routes: 6. Participants: There are 3 kinds of investors in a Book Building Issue:
1. Offer through 75% Book Building Process: Under this process, 25% of () Retail Individual Investors (RI) - Rilis an investor who applies
the issue is to be sold at a fixed price and the balance 75% through for securities for a value of not more than Rs. 2,00,000.
the Book Building process. (i) Non Institutional Investors (NID) - Any bid exceeding
Rs. 2,00,000
2. Offer through 100% Book building Process:
In this, an issuer company amount is considered in the NI category. NIIs are commonly
may make an issue of securities in the following manner: referred to as high net-worth individuals.
(a) 100% of the net offer to the public through book-building pro- (iif) Qualified Institutional Buyers (QDB) - OIBs are institutional
cess, or investors who possess the expertise and funcs to invest in
the securities market. Mutual funds, financial institutions,
Sok
scheduled commercial banks, insurance companies, provident @ Final Prospectus specifying the price and size of the offer is issued.
funds, state industrial development corporations come in this # Allocation of securities is made to the successful bidders. The rest
category. get refund orders.
Generally, allinvestors, including individuals, eligible to invest ina particular Every public offer through the book-building process has a Book Running
issue of securities can participate in the book building process. However, if Lead Manager (BRLM), a merchant banker, who manages the issue.
the issue is restricted to qualified institutional, as in the case of government
securities, then, only those eligible can participate. The investor had to bid for a quantity of shares he wished to subscribe to
within this band. The upper price of the band can be a maximum of 1.2
The Principal parties/ intermediaries involved ina book building process: times the floor price.
(i) The issuer/company. Further, an order book, in which the investors can state the quantity of
(ij) The Book Running Lead Manager (BRLM) whois a Merchant Banker the stock they are willing to buy, at a price within the band, is built. Thus
registered with SEBI the term ‘book-building."
(iii) The Syndicate Members who are intermediaries registered with An issue through the book-building route remains open for a period of 3
SEBI and who are permitted to carry on activities as underwriters. to 7 days and can be extended by another three days if the issuer decides
Syndicate Members are appointed by Book Running Lead Manager. to revise the floor price and the band.
The Process of Book Building Determination of Cut-off Price: MMustration

@ The Issuer who is planning an offer nominates lead merchant bank- A Company issues 10 lakh shares of face value Rs. 10/ each. The Floor Price
er(s) as ‘book runners’. is Rs. 48, anc the Price Band is Rs. 48 - Rs. 55.
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@ Adraft offer document is sent to the SEBL If at Rs. 55, bids for2 lakh shares are received, the price can't be fixed at
@ Circulation of Information Memorandum. Rs. 55.
@ Filing of Red herring Prospectus at least three days before the opening At Rs. 54, bids for 5lakhshares are received;
the price can't be fixed at Rs. 54.
of the offer. The Cut-off price will be Rs. 53 when bids at this price are for at least 3
@ The Issuer specifies the number of securities to be issued and the lakh shares. At this price the book would be completed/built as 10 lakh
price band for the bids. shares are placed.
@ The Issuer also appoints syndicate members with whom orders are Difference between Book Building and Normal Public Issue
to be placed by the investors.
The syndicate members input the orders into an ‘electronic book’. In fixed price process, allotments of shares to all the investors are made
on proportionate basis. Institutional investors normally are not interested
@¢ #¢
This process is called ‘bidding’ and is similar to open auction.

to participate in fixed price public issues due to uncertainty of allotment
The book normally remains open for a period of 5 days. and lack of opportunity cost. On the other, they like to participate largely
*¢
Bids have to be entered within the specified price band. in book built transactions as in this process the costs of public issue and
¢
Bids can be revised by the bidders before the book closes. the time taken for the completion of the entire process are much lesser
than the fixed price issues. In Book Building, the price is determined on
On the close of the book building period, the book runners evaluate the basis of demand received or at price above or equal to the floor price
the bids on the basis of the demand at various price levels. whereas in fixed price option the price of issues is fixed first and then the
The book runners and the Issuer decide the final price at which the securities are offered to the investors. In case of Book Building process,
*
securities shall be issued. book is built by Book Runner Lead Manager (BRLM) to know the every-
# Generally, the number of shares is fixed; the issue size gets frozen day demand whereas in case of fixed price of public issues, the demand is
based on the final price per share. known at the close of the issue.
Fixed Price Process Book Building Process Limitations of the Book-Building System
Price at which the securities are of- Price at which securities will be While many big issues of the companies in India are coming through book
fered/allotted is known in advance offered/allotted is not known in building, book-buildingis appropriate for mega issues only. The issuer
com-
to the investor. advance to the investor. Only an pany should be fundamentally strong and well known to the investors. It
indicative price range is known. works efficiently in matured market conditions as there is a possibility of
emand for the securities offered Demand for the securities offered]
price rigging on listing as promoters may try to bail out syndicate members:
is known only after the closure of can be known everyday as the book 1. Book-buildingis appropriate for megaissues only where the companies
the issue. _ _is built. can adjust the attributes of the offer according to the preferences of
the potential investors. It may not be possible in all kinds of public
Payment is made at the time of Payment is made only after allo-
issues.
subscription wherein refund is given cation
after allocation. 2. Book-building system is suitable only for the issuer companies which
are fundamentally strong and well known to the investors.
Book-Building Process
3. The book-building system works very efficiently in matured market
| Nominate Book Runner (BRLM) | conditions.
4. The system works where the investors are aware of the various
| Form Syndicate of Brokers, Arrangers, Underwriters, Financial Institutions, etc, | parameters affecting the market price of the securities. Retail inves-
tors find it difficult to participate in the issue on account of lack of
Submit Draft Offer Document to SEBI Indicating the Price Band expertise.
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5. There is a possibility of price rigging
on listing as promoters may try
to bail out syndicate members.
| Circulate Offer Document among the Syndicate Members |
Red Herring Prospectus [Sec. 32]
| _Ask for Bids on Price (within the Price Band) and Quantity of Securities | Red Herring Prospectus means a prospectus which does not include com-
plete particulars of the quantum or price of the securities included therein:
| Aggregate and forward all offers to BRLM | 1. Acompany proposing to make an offer of securities may issue a red
herring prospectus prior to the issue of a prospectus.
| Run the Book to maintain a record of Subscribers, their Offer Price and Orders _| 2. A company proposing to issue a red herring prospectus shall file
it with the Registrar at least three days prior to the opening of the
Consult with issuer and BRLM to determine the Final Issue Price based on the subscription list and the offer.
‘Offers Received 3. Ared herring prospectus shall carry the same obligations as are ap-
& plicable to a prospectus and any variation between the red herring
prospectus and a prospectus shall be highlighted as variations in the
| Firm up Underwriting Commitments |
prospectus.
4. Upon the closing of the offer of securities under this section, the
| Issue final prospectus specifying the Price and Size of the Offer |
prospectus stating therein the total capital raised, whether by way of
debt or share capital, and the closing price of the securities and any
| Allot Securities to the successful Bidders/Syndicate Members | other details as are not included in the red herring prospectus shall
be filed with the Registrar and the Securities and Exchange Board.
| Securities Issued and Listed |
Soto
Green Shoe Option (GSO) a What is abridged prospectus? What are the cases when abridged
A Company making an initial public offer of equity shares through the prospectus is not to be issued?
book-building mechanism can availof the GSO for stabilizing
the post-listing What is book-building method of issuing securities? Explain the
price of its shares. The GSO means “an option of allotting shares in excess process of book-building.
of the shares included in the public issue and operating a post-listing price
9. How the cut-off price is determined in book-building?
stabilizing mechanism through a Stabilizing Agent (SA).” GSO in the sys-
tem of IPO using book-building method was recognized by SEBI in India 10. Who are the principal parties involved in book-building process?
through its new guidelines issued in 2003. According to the SEBI guidelines, 11. “A prospectus must state truth and nothing but truth”. Do you
“a company desirous of availing the GSO shall in the resolution of the gen- agree? Explain.
eral meeting authorizing the public issue, seek authorization also for the
possibility of allotment of further shares to the management team, as the
12. What are the remedies open to an allottee of shares against the
company in case of misleading prospectus?
SA", who will be responsible for the price stabilization process, if required.
It owes its origin to the Green Shoe Company, which used this option for 13. Write a note on shelf prospectus.
the frst time in the world. 14. Write a note on the concept of ‘Book Building’.
15. Distinguish between Shelf and Red Herring Prospectus.
IMPORTANT CASES
Re. South of England Natural Gas and Public Offer CASE PROBLEMS
+
Petroleum Co, Ltd,

. Aapplied for certain shares of a company onthe basis of a prospectus
= gNNVAX WL
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Nash vs. Lynde Public Offer containing the names of the directors. Some of the directors retired
+¢ @ ¢
Rex vs. Klysant Misleading Prospectus before the shares could be allotted. Can A set aside the contract?
Shiromani Sugar Mills Ltd. vs. Debi Prasad Misleading Prospectus Ans. [Yes. If a statement becomes untrue when allotment is made
Smith vs. Chadwick Misleading Prospectus the contract can be rescinded.]
Peek vs. Gurney Misleading Prospectus . Adeceitful prospectus containing an untrue statement was issued
by the defendant on behalf of a company. The plaintiff received
a copy of it but did not take any shares originally in the company.
REVIEW QUESTIONS The allotment was completed and after several months the plain-
1. What are the effectsof omissions and mis-statements in a prospec- tiff bought 200 shares in the open market. The plaintiff sues the
tus? defendant for rescission on the ground of untrue statement in the
prospectus. Decide stating reasons.
2, State the remedies available to a person who has been induced
to take shares by mis-statements in a prospectus, specifying the Ans. [The plaintiff cannot succeed. The effect of prospectus is
conditions under which and persons against whom such remedies exhausted as soon as allotment is made. Moreover, he is not the
are available. original allottee.]
3. What are the cases when the offer made by a company for sub- . A public company has issued a prospectus but the subscription
scription of its share shall not be treated as made to the public? list has not opened as yet. The company received a letter from a
prospective buyer of the company's shares requesting it to furnish
4, What do you understand by “Prospectus by Implication”? him certain particulars which were not mentioned in the prospectus.
5. What are the differences between fixed price issue and book-build- How should the secretary of the company deal with this request?
ing?
6. What are the salient features of book-building method of issuing
shares?
‘i
Ans. [Prospectus has been issued. Furnishing additional informa- 8. Bogo Ltd. issued a prospectus which contained some misleading
tion only to selected persons may amount to discrimination. The statements. Mr. Yogi knowing the fact, did not subscribe to the
secretary
is advised not to furnish additional information till closing | issue. But he purchased
some shares from open market and claimed
of the subscription list.] compensation from the company on the ground that the prospec-
. Aprospectus contained a material false statement. Mr.P purchased tus issued for the shares contained misleading statements. Can he
the share inthe company in good faith on thestock exchange relying succeed? Give reasons.
on that statement. The company was wound up. Mr. P's name was Ans. [No, as he is not an original allottee of shares. Peekv. Gurney]
put in the list of contributories. Is P liable to pay? He wants to sue
the directors to recover damages for mis-statement. Advise him.
Ans. [A purchaser of share in the open market has no remedy for
mis-statement in the prospectus. Hence, Mr. P is liable to the com-
pany. He cannot recover damages from the directors.]
. Amit purchased from Bimal 10,00,000 shares of XYZ Ltd. on the
basis of prospectus containing wrong statement. What remedies
are available to Amit against the company?
Ans. [Since Amit did not buy the shares on the basis of the pro-
spectus, he has ne remedy against the company. Peek v. Gurney.|
6 A company issued a prospectus advertising that the company has’
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a great “potential turnover" of a million bags of cement in a year.
It is discovered later that while the company did have the installed
capacity of one million bags, it had never produced more than six
lakh bags of cement in a year. Buyers of the shares seek remedy
against the misleading statement. Will they succeed?
Ans. No. For any prospectus to be termed misleading, there should
be a mis-statement of a material fact. It should be distinguished
from the statement of a promise or opinion.]
7. All statements in a prospectus issued by a public limited company
were literally true, but it failed to disclose that the dividends stated
in itas paid were not paid out of her realised profits. The statement
that the company had paid dividend fora number of years was true.
But the fact that company had incurred losses for all these years
was not disclosed in the prospectus. An allottee of shares wanted
to avoid the contract on the ground that the prospectus did not
disclose this fact, which in his opinion, was very material. Will he
succeed? Give reasons.
Ans. [He will succeed. Concealment of a material fact makes the
prospectus misleading. ]
wo
SHARES AND SHARE CAPITAL 133
to its owner the right to receive a proportionate part of the profits, if any,
and proportionate part of the assets of the company upon liquidation. On
the other hand, the shareholder may also be required to pay the full value
in winding up.
Nature of Share
According to section 44 of the Companies Act, shares or other interest of
any member in a company is movable property, transferable in the man-
ner provided by the articles of the company. A share is not a negotiable
SHARES AND SHARE CAPITAL instrument. The shareholder also cannot be regarded as part owner of the
undertaking. The undertaking is something different from the totality of
the shareholding+
Shares are considered goods within the provisions of the Indian Contract
+ Meaning, Nature and Types of Shares Act (Maneckji v. Wadilal Sarabhai and Company, 1926). Like goods or
Allotment of Shares properties, shares of a company can be bought, sold, hypothecated and
# Buy-back of Securities bequeathed as per the provisions of the Sale of Goods Act, 1930.
@ Issue of Shares Each share in a company having a share capital is distinguished by its
appropriate number, called distinctive number unless the shares held are
Calls on Shares with a depository in a demat form (See. 45), A share cannot be further
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Forfeiture of Share sub-divided.
Transfer and Transmission of Shares Directors have the power to issue shares on behalf of the company subject
to the provisions of the Articles of Association. They must, however, use
Meaning of Share this power bona fide for the benefit of the company.
Capital of a company termed as share capital, is divided into units. Each Kinds of Shares
unit is called share. The Companies Act defines a share as “share in the As per the Companies Act, 2013, the kinds of shares which a company
share capital of a company, and includes stock" [ Sec. 2(84)]. According to/
limited by shares (both public company and private company) may issue
Farwella share is “the interest of a shareholder in the company measured
(Section 43) are:
by asum of money, for the purpose of liability in the first place and of inter-
est in the second, and also consists of a series of mutual covenants entered Equity shares
into by all the shareholders inter se in accordance with the provisions of () with voting rights; or
the Companies Act and the Articles of Association.” “A share is not a sum (i) with differential rights as to dividend, voting or otherwise in
of money..., but is an interest measured in a sum of money, and made up accordance with such rules and subject to such conditions as
of various rights, contained in the contract, including the right to. a sum of may be prescribed:
money of a more or less amount.”
¢ Preference shares.
Thus, share is the interest of a shareholder in the company measured by
asum of money for the purposes of liability and interest thereto. A person Preference Shares
holding a share is entitled to enjoy not only the contractual rights but also
those rights, which have been given to him by the Companies Act. It secures Preference shares, with reference to any company limited by shares, are
those which carry a preferential right over other classes of shares with
1. Borland’s Trustee v. Steel Bros, Co. Lid. (101) respect to:
2 Re Paulin (1935)
132 3. Short v Treasury Commisstoners (1948)
—S Is
134 SHARES AND SHARE CAPITAL SHARES AND SHARE CAPITAL. 135
= Payment of dividend, either as a fixed amount or an amount calcu- dividend to equity shareholders up to a certain limit. They may also
lated at a fixed rate; and be entitled to get a share in the surplus assets of the company on
= Repayment, in case of winding up or repayment of capital, of the its winding up. Unless expressly provided in the articles, preference
amount of share capital paid up or deemed to be paid up. shares shall be presumed to be non-participating.
Tt may be noted that while a company may have only equity share capital 4, Non-participating preference shares. The holders of these shares
butit cannot have only preference share capital. This is because preference are entitled only to a fixed rate of dividend and do not share in the
shareholders have certain ‘preferential rights’ over the equity shareholders. surplus profits. The whole of the surplus profits will, thus, go to the
Thus, in the absence of equity share capital, there cannot be preferential equity shareholders.
share capital [Bihar State Financial Corporation v. CIT, Bihar (1976)}. 5. Convertible preference shares. The holders of the shares have a right
to get converted their preference shares into equity shares within a
Shares certain period.
6. Non-convertible preference shares. These preference shares do not
[ carry the right of conversion into equity shares.
Equity 7. Redeemable preference shares. Shares which can be redeemed after
Shares
a fixed period or after giving a certain notice at any time at the will of
the company out of the profits of the company or the sale proceeds
G of the new shares are called redeemable shares.

8. Irredeemable preference shares. They are of the nature of a perma-
nent and perpetual liability which cannot be redeemed during the
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aNNVAXVL
(With Voting Rights) Rights lifetime of the company. According to the Companies Act (section
55), no company can now issue any preference shares which are
irredeemable or are redeemable after 20 years from the date of the
issue.
Preference shares are of different types:
Equity or Ordinary Shares
1. Cumulative preference shares. A cumulative preference share has a
right to claim the fixed dividend of the current year out of the future Equity shares, with reference to any company limited by shares, are those
profits. The dividend, in these shares, accumulates unless paid. The which are not preference shares. They do not carry any preferential rights.
accumulated arrears of dividend is to be paid before anything is paid For the purposes of dividend and repayment of capital, they rank after
out of the profits to the holders of any other class of shares. If a com- the preference shares. They have the right to participate in the decision
pany is unable to earn sufficient profits in any vear to pay dividend making of the company. They are entitled to voting rights. They receive
on preference shares, the deficiency is made good out of the profits dividends out of profits as declared in the annual general meeting, only
of the subsequent years. Preference shares are always cumulative after preference shares have been paid their fixed dividend.
unless otherwise expressly stated in the Articles of Association.
Equity Shares with Differential Rights
2. Non-cumulative preference shares. Dividend on non-cumulative
preference shares can be paid only out of the profits of that very As per the Companies (Share Capital and Debentures) Rules, 2014, a
year, and is not allowed to accumulate to be paid out of the profits company limited by shares may issue shares with differential rights as to
of the future years. The right to claim dividend will lapse if there are dividend, voting or otherwise subject to the following conditions:
no profit in a particular year. (1) The articles of association of the company authorize the issue of
3. Participating preference shares. Besides a fixed rate of dividend, these shares;
the holders of these shares are also entitled to participate with the
equity shareholders in the surplus profits which remain after paying
— Se
136 SHARES AND SHARE CAPITAL. SHARES AND SHARE CAPITAL 137
(2) A company is allowed to issue equity shares with differential rights 3. A share cannot be transferred in small fractions, while a stock can
only to the extent of 25% of the total issued share capital; be transferred in any fractions.
(3) Approval of the shareholders is obtained by passing of ordinary res- 4. All shares bear distinctive numbers (except when held in the demat
olution at the general meeting. A listed public company is required form), while stocks disclose the consolidated value of the share cap-
to pass the resolution through postal ballot; ital. Fractions of the stock do not bear any number.
(4) The company has distributable profits in terms of section 123 of the 5. All shares are of equal denomination. Stock may be of unequal
Companies Act, for the 3 financial years preceding the year in which amounts.
it was decided to issue such shares; 6. Unlike shares, stock cannot be directly issued in the first instance.
(5) The company has not defaulted in filing annual accounts and annual Only fully paid up shares can be converted into stock.
returns for the 3 financial years preceding the year in which it was
decided to issue such shares; Allotment of Shares
(6) The company did not fail to repay its deposits or interest thereon Prospectus issued by a company is an invitation to the public to make offer
on the due date or redeem its debentures on the due date or pay (ie, to apply) for the company's shares. Application for shares is the offer
dividend; from the applicant to purchase shares. Allotment of share is acceptance by
(7) The company has not been convicted of an offence under the SEBI the company of the offer. The communication of acceptance of this offer
Act, Securities Contracts (Regulation) Act or the FEMA Act; and by an allotment letter or notice gives rise to a valid contract between the
(8) The company has not defaulted in meeting investors’ grievances. company and the shareholder.
Allotment means “the appropriation out of the previously unappropriated
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Stock share capital of the company”. Allotment is the acceptance of the offer to
take up shares. Allotment of shares is usually done by a resolution of the
Stock is the aggregate consolidated holding of the share capital ofa person Board of Directors. It is to be noted that reissue of forfeited shares is not
in the company. It can be divided and transferred in any fractions and allotment. It is simply taken as a resale of existing shares.’
sub-divisions without regard to the original face value of the share. Fully
paid up share capital may, if the Articles so permit, be converted into stock A valid allotment of share has to comply with the principles of the law of
by passing an ordinary resolution in the general meeting of the company. contract and the statutory provisions laid down by the Companies Act.
Conversion of shares into stock does not alter the relationship between the
General Principles regarding Allotment
holder and the company. The holder still remains a member. The holders of
stock shall, according to the amount of stock held by them, have the same 1. Allotment should be made by proper authority. The duty of allotting
rights, privileges and advantages as regards dividends, voting at meetings shares is of the Board of Directors of the company. The board should
of the company and other matters, as if they held the shares from which pass a resolution of allotment at its meeting.
the stock arose, but no such privilege or advantage (except participation in 2. It should be made within reasonable time. Allotment must be made
the dividends and profits of the company and in the assets on the winding within a reasonable period of time otherwise the offerer may refuse
up) shall be conferred by an amount of stock which, if existing in shares, to take the shares. What is ‘reasonable time’ is a question of fact in
would not have conferred the privilege or advantage. each case.
Stock may be reconverted into shares again by an ordinary resolution. It must be communicated. There can be no binding contract unless
Conversion of shares into stocks or vice versa is not prevalent in India, no acceptance to the offer is properly communicated to the applicant.
In the leading Gunn's case (Re. Universal Banking Corporation, 1867),
Difference between Share and Stock Gunn applied for shares in a company and remitted money also. The
1. Ashare may not be fully paid up, but a stock is always fully paid up.
2. Ashare has a nominal value, whereas a stock has no nominal value. 4. Gopal Jalan & Ca. v. Calcutta Stock Exchange Asseciation Lid
5. Indian Co-operative Steam Navigation Co. + Padamsey.
¢
138 SHARES AND SHARE CAPITAL SHARES AND SHARE CAPITAL 139
company allotted shares to him but no intimation was sent to Gunn. shall be kept in a separate bank account in a scheduled bank and
It was held that no contract of allotment existed between him and shall be utilized only for:
the company. (a) for adjustment against allotment of securities where the
Posting of a properly addressed letter of allotment will be taken as securities have been permitted to be dealt with in the stock
a valid communication even if it is delayed or lost in the course of exchanges specified in the prospectus; or
transit.
For example, in the case of Changa Malv. Provincial
Bank Ltd. (4) for the repayment of monies received from applicants within
(1914), it was held that posting of notice of allotment will be deemed the time specified by the Securities and Exchange Board, where
that allotment has been notified. the company is for any other reason unable to allot securities.
. Itshould be absolute and unconditional. Allotment must be absolute, . Return of Application Money [Sec. 39(3)]. If the stated minimum
unconditional and must conform to the terms and conditions of the amount has not been subscribed and the sum payable on application
application otherwise the applicant will not be bound by the allot- is not received within a period of thirty days from the date of issue
ment. For example, in the case of Ramanbhat v. Ghasi Ram (1918) of the prospectus, the amount received from applicants. shall be
Ramanbhai applied for 400 shares in a company on the condition returned within a period of 15 days from the closure of such issue.
that he be appointed a branch manager of the company. Shares were In case of default in refund within that period, directors and other
allotted to him but he was net appointed the branch manager. It was officers responsible for default shall be jointly and severally liable
held that he was not bound by the allotment. to repay that money with interest at the rate of 15% p.a.
Statutory Provisions on Allotment of Shares . Return of Allotment [Sec. 39(4)]. Whenever a company having a
share capital makes any allotment of securities, it shall file with
Following are the provisions applicable for allotment of securities in case the Registrar a return of allotment in the prescribed manner. The
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of public offer as laid down by the Companies Act, 2013: return of allotment should state the number and nominal amount
1. Registration of Prospectus. In case of public offer of shares, a com- of the shares comprised in the allotment, the names, addresses and
pany is required to file a copy of prospectus with the Registrar of occupations of the allottees, and the amount, if any, paid or due or
Companies for registration. [Sec. 26/4)/ payable on each share.
2 Minimum Subscription. The amount stated in the prospectus as min- . Penalty. In case of any default the company and its officer who is
imum subscription must have been subscribed for within a period of in default shall be liable to a penalty for each default, of Rs. 1,000
30 days of the issue of prospectus or such other period as prescribed for each day during which such default continues or Rs. one lakh,
by the SEBI [ Sec. 39(/)], As per the SEBI Guidelines, the minimum whichever is less.
subscription is 90% of the entire issue. But SEBI Guidelines require . Securities to be dealt with in Stock Exchanges [Section 40]. Listing
this amount to be raised within 60 days of the closure of the issue. of all public issues with any of the recognised stock exchange(s) is
3 Application Money. A sum of at least 5% of the nominal value of compulsory. Section 40 provides that every company intending to
offer shares or debentures to the public for subscription shall have to
=
shares must be received in cash by the company as application mon-

ey [Sec. 3% 2)]. In the case of Mutual Bank of India v. Sohan Singh make an application to one or more recognised stock exchanges for
(1936) itwas clarified that a company cannot make allotment without permission of such shares or debentures to be dealt in on the stock
receiving application money. It has been held in a number of cases exchange(s). The prospectus issued by the company has to state the
that though any means of remittance may be used but all remittances name of the stock exchange(s) where such application for listing is
must be cleared and actual cash received by the company before made,
proceeding with the allotment.® Any condition purporting to require or bind any applicant for secu-
Money to be kept ina Scheduled Bank [Section 40(3)].
All application rities to waive compliance with any of the requirements of section
money received from the public for subscription to the securities 40 shall be void:
Penalty if a default is made in complying with the provisions of this
6 Re, Malabar fron & Steel Works Lad, (1964) section, the company shall be punishable with a fine which shall
not be less than Rs. 5 lakh but which may extend to Rs. 25 lakh and right on a poll shall be in proportion to his share of the paid up equity capital
every officer of the company who is in default shall be punishable of the company. [See. 471]
with fine which may extend up to Rs. 3 lakh. Preference Shareholders, Company law does not give any right to preference
9. Issue of securities in Dematerialised
form [Sec.29(1)]. Every company shareholders to vote on any resolution except those which directly affect
making public offer of any security shall issue the securities only in the rights attached to their shareholdings. In this connection, any resolu-
dematerialised form by complying with the requisite provisions of tion for the winding up of the company or for the repayment or reduction
the Depositories Act, 1996. of its share capital shall be deemed to affect the rights of the preference
shareholders directly.
Share Capital However, such class of preference shareholders will have the right to vote
The sum total of the nominal value of shares of a company is called as its on all resolutions placed before the company when the dividends in respect
share capital, In case of companies, the terms ‘capital’ and ‘share capital’ of that class of preference shareholders are in arrears for a period of two
have been held to be synonymous.’ The share capital of a company may years or more [Sec. 47/2)].
be of two kinds: The right of the preference shareholders to vote in these cases shall be in
(a) Preference Share Capital. [t is the sum total of the nominal value of the proportion in which the preference capital paid up bears to the total
preference shares of a company. paid up equity capital of the company.
(b) Equity Share Capital. It is the sum total of the nominal value of
equity shares of a company.
Buy-Back of Securities
As per the Schedule II of the Companies Act, 2013, the following dis- Meaning
aN NVAEL
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closures should be made in the Balance Sheet of a company: Purchase by the company of its own shares (or other securities) is known
(a) Authorised Share Capital. It is the maximum amount of share capital popularly as buy-back of shares (or buy-back of securities). It refers to
which acompany can raise for the time being. This means the number buying back by a company its own shares (or other securities).
and par value of each class of shares that a company may issue. It
is mentioned in the company’s memorandum and is also termed as Background and Rationale
‘Nominal’ or ‘Registered’ capital. Till 1998, the Companies Act had strictly prohibited companies from
(b) Issued Share Capital. It is the nominal value of shares which are of- purchasing their own shares as it amount of reduction of share capital
fered for subscription within the limit of the authorised share capital. adversely affecting the interest of the creditors. Around 1996, the Indian
(c) Subscribed Share Capital.[tis that portion of the ‘issued share capital’ Government and corporate houses became greatly concerned about the
which has actually been subscribed and allotted. This includes any prolonged depression in the stock market. Share buy-back was believed to
bonus shares issued to the shareholders. inject buoyancy into share prices because share buy-back priceis invariably
higher than the prevailing market price. Share buy-back is an international
(d) Paid up Share Capital. It is that portion of the subscribed share cap- practice prevailing in most parts
of the world, Besides supporting the market
ital for which consideration in cash or otherwise has been received.
price of the shares, buy-back of shares may have a positive impact on the
This includes bonus shares allotted by the company.
earning per share (EPS) of the company because with the same level of
earnings (assuming that the total earnings of the company remains intact
Shareholders’ Voting Rights after the buy-back), the number of outstanding shares gets reduced due
Equity Shareholders, Every member of a company, limited by shares, and to buy-back.
holding equity share capital therein shall have a right to vote, in respect of
such capital, on every resolution placed before the company. His voting Provisions of the Comipanies Act
(1) Conditions of buy-back [Section 68]. A company can purchase its
7, Jeevan Singhji v. Balbhadra Singhji (1963)
own shares or other specified securities when:
(a) The buy-back is authorised by its articles; redemption reserve account may be applied by the company, in
(6) A special resolution has been passed in general meeting of the paying up unissued shares of the company to be issued to members
company authorising the buy-back. However, if the buy-backis of the company as fully paid bonus shares. ( Section 69)
up to 10% of the total paid-up equity capital and free reserves (3) Methods of buy-back [Sec. 58(5)]. The buy-back may be -
of the company, the Board of Directors by passing a resolution - from the existing security holders on a proportionate basis: or
at its meeting may authorize the company for such buy-back;
- from the open market; or
(c The notice of the meeting at which special resolution
is proposed
- by purchasing the securities issued to employees of the com-
—
to be passed shall be accompanied by an explanatory statement

stating: a full and complete disclosure of all material facts; the pany pursuant to a scheme of stock option or sweat equity.
necessity for the buy-back; the class of security intended to (4) Completion of buy-back. Buy-back must be completed within 12
be purchased under the buy-back; the amount to be invested months from the date of passing the special resolution or a resolution
under the buy-back; and the time limit for completion of buy- passed by the Board.
back;
(5) Declaration of Solvency. Before passing the resolution of buy-back,
(d@) The amount involved in the buy-back must not be more than the company is required to file with the Registrar and the SEBI a
25% of the total paid-up capital and free reserves of the com- declaration of solvency in the prescribed form and verified by an
pany. Further, in case of buy-back of equity shares, the limit is affidavit to the effect that the Board has made a full inquiry into
25% of the total paid-up equity capital of the company in that the affairs of the company as a result of which they have formed
financial year; an opinion that it is capable of meeting its liabilities and will not be
(e) The debt-equity ratio of the company must not be more than rendered insolvent within a period of one year of the date of decla-
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2:1 after such buy-back: ration adopted by the Board. The declaration is to be signed by at
least two directors of the company, one of whom shall be the man-
(f) All the shares or other specified securities for buy-back are aging director, if any. However, in case of unlisted company, such
fully paid-up; declaration is to be filed only with the Registrar.
(g) The buy-back of the shares or other specified securities listed (6) Extinguishing the Securities. The companyis required to extinguish
on any recognised stock exchange must be in accordance with and physically destroy the securities so bought-back within 7 days
the SEBI Guidelines in this behalf ; and of the last date of completion of buy-back.
(4) The buy-back in respect of unlisted shares or other specified (7) Further Issue of Securities. Where a company completes a buy-
securities must be in accordance with the prescribed Central back of its shares and other specified securities, it shall not make
Government Guidelines. further issue of the same kind of shares or other specified securities
(2) Sources of buy-back. A company may purchase its own shares or within a period of 6 months except by way of bonus issue or in the
other specified securities out of: discharge of subsisting obligations such as conversion of warrants,
(8) its free reserves; or stock option schemes, sweat equity or conversion of preference
shares or debentures into equity shares.
(i) the securities premium account: or
(8) Register of Securities bought back. The company is required to
(iii) the proceeds of any shares or other specified securities: maintain a register of the securities
so bought, the consideration paid
Provided that no buy-back of any kind of shares or other specified for the securities bought-back, the date of cancellation of securities,
securities shall be made out of the proceeds of an earlier issue of the the date of extinguishing and physically destroying of securities and
same kind of shares or same kind of other specified securities. such other particulars as may be prescribed.
Where a company purchases its own shares out of free reserves, then (9) Filing of Return. A company shall, after the completion of the buy-
a sum equal to the nominal value of the share so purchased shall back file with the Registrar and the SEBI (only to the Registrar
in case
be transferred to the capital redemption reserve account and details of unlisted company), a return containing the prescribed particulars
of such transfer shall be disclosed in the balance sheet. The capital relating to the buy-back within 30 days of such completion.
— Sos
(10) Default. If a company makes any default in complying with the pro- {e) in writing off the expenses of, or the commission paid or discount
visions of this section or any regulation made by the Securities and allowed on, any issue of shares or debentures of the company;
Exchange Board the company shall be punishable with fine which (@) in providing for the premium payable on the redemption of any re-
shall not be less than one lakh rupees but which may extend to three deemable preference shares or of any debentures of the company;
lakh rupees and every officer of the company who is in default shall or
be punishable with fine which shall not be less than Rs. one lakh but
which may extend to Rs. 3 lakh. {e) for the purchase of its own shares or other securities under section
68,
Prohibition for Buy-Back in certain circumstances (Section 70)
Prohibition on Issue of Shares at Discount [Sec. 53]
(1) Ne company shall directly or indirectly purchase its own shares or
other specified securities - (/) Acompany can issue shares at a discount to its creditors when debt
is converted into shares in pursuance of insolvency resolution plan
(a) through any subsidiary company including its own subsidiary
companies; or or debt restructuring scheme as per the guidelines of RBI
(b) through any investment company or group of investment (2) Any other issue of share (except sweat equity share under section
companies; or 54) issued by a company at a discounted price shall be vot.
(c) ifa default, by the company, in repayment of deposit or inter- (3) Where a company contravenes the provisions of this section, the
est payable thereon, redemption of debentures or preference company and every defaulting officer of the company shall be pun-
shares or payment of dividend toany shareholderor repayment ishable with fine which may extend to five lakh rupees or amount
raised through issue of shares at discount, whichever is less’.
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of any term loan or interest payable thereon to any financial
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institution or bank is, subsisting. The company shall also be liable to refund all money received from
(2) No company shall directly or indirectly purchase its own shares or such issue along with 12% interest p.a. to the allottee of such shares,
other specified securities in case, such company has not complied
with the provisions of sections 92, 123, 127 and 129 concerning filing Employees Stock Option (ESOP)
of annual return, default in payment of dividend and preparation of
financial statements.
Section 2(37) of the Companies Act, 2013 defines Employees’ Stock Option
means (ESOP) as: “The option given to the directors, officers or employees
of a company or of its holding company or subsidiary company or compa-
Issue of Securities at a Premium [Sec. 52]
nies, if any, which gives such directors, officers or employees, the benefit
A company can always issue its securities al a premium ie, for a value or right to purchase, or to subscribe for, the shares of the company at a
higher than the face value of the security. The power to issue securities ata future date at a pre-determined price.” As per section 62(1)(4) of the Act,
premium need not be given inthe Articles of Association, Where a company where at any time, a company having a share capital proposes to increase
issues shares at a premium, whether for cash or otherwise, a sum equal to its subscribed capital by the issue of further shares, such shares can be
the aggregate amount of the premium received on those shares shall be offered to employees under a scheme of employees’ stock option, subject
transferred to a “securities premium account” and the provisions of this to special resolution passed by company and subject to such conditions
Act relating to reduction of share capital of a company shall apply as if the as may be prescribed.
securities premium account were the paid-up share capital
of the company. The provisions relating to issue of ESOPs are as follows:
The securities premium account may be applied by the company— 1. Employee under an ESOP Scheme - “Employee” as per rule 12 of
(a) towards the issue of unissued shares of the company to the members the Companies (Share Capital and Debentures) Rules, 2014, means:
of the company as fully paid bonus shares; () apermanent employee of the company who has been working
(6) in writing off the preliminary expenses of the company; in India or outside India; or
8. As amended by Companies (Amendment) Act, 2019.
(if) a director of the company, whether a whole-time director or Issue of Sweat Equity Shares [Sec. 54]
net but excluding an independent director; or “Sweat equity shares” means equity shares issued by a company to
(iif) an employee as defined in clause (a) or (5) of a subsidiary, in its employees or directors at a discount (to the market price) or for
India or outside India, or of a holding company of the company consideration other than cash for providing know-how or making available
or of an associate company but does not include— rights in the nature of intellectual property rights or value additions, by
# an employee who is a promoter or a person belonging whatever name called.”
to the promoter group; or According to section 54,a company may issue sweat equity shares ofa class
# a director who either himself or through his relative or of shares already issued, if the following conditions are fulfilled,
through any body corporate, directly or indirectly, holds (a) the issueis authorised by a special resolution passed by the company;
more than ten per cent of the outstanding equity shares (5) the resolution specifies the number of shares, the current market
of the company. price, consideration, if any, and the class or classes of directors or
2. Procedural Requirements - Rule 12(1), 12(2) and 12(4), read with employees to whom such equity shares are to be issued; and
section 62(1)() of the Companies Act, 2013 require: (ce) where the equity shares of the company are listed on a recognised
(i) Approvalof the ESOP Scheme by the members of the Company stock exchange, the sweat equity shares should be issued in accor-
by way of a special resolution; dance with the regulations made by SEBI and if they are not so listed,
(i) A separate resolutions in case of grant of ESOPs to employees the sweat equity shares are issued in accordance with such rules as
of the subsidiary or holding company or in case of grant of may be prescribed.
ESOPs to identified employees equal to or exceeding 1% of the The rights, limitations, restrictions and provisions applicable to equity
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issued capital; and shares are applicable to the sweat equity shares issued and the holders of
(iti) The explanatory statementto disclose prescribed details name- such shares rank pari passw with other equity shareholders.
ly total number of ESOPs to be granted, appraisal process, Difference between the Sweat Equity Shares and Employees Stock Option
requirements of vesting, exercise price or pricing formula, (ESOP)
exercise period, lock-in period, method of accounting, etc.
1, Sweat equity is issue of shares at discount or without monetary
3. Other Requirements- Rule 12 while providing flexibility toa company considerations whereas Employee Stock Option is grant of option
to determine the exercise price and lock-in of shares, require: to purchase share at pre-determined price given to employees.
(i) Variation of terms of the ESOPs to be carried out by way of 2. Sweat equity is issued as consideration for creation or transfer of
members’ approval by way of a special resolution provided it IPRs to the company or as other value addition. These can be issued
is not prejudicial to the interests of the employees; to employees, officers and directors of the company. ESOP are given
(1) Minimum vesting period of 1 year; in the nature of incentive and retention plan. These can be issued to
employees and officers.
(iti) Non-transferability of the ESOPs;
3. Sweat equity can be issued to the promoters of the company
(iv) Unvested ESOPs to vest in case of death or permanent inca-
pacity of an employee: whereas ESOS cannot be issued to the promoters or promoter group.
4. Sweat equity shares are mainly intended to be issued to build up
(v) Disclosure of prescribed details in the Directors’ Report; and
equity for directors or promoters with technical capability, Whereas
(vi) Maintenance of an ESOP Register. ESOP are generally issued based on a scheme formulated by the
4. In case of the listed companies Securities and Exchange Board of company stipulating the eligibility criteria such as number of years
India (Share Based Employee Benefits) Regulations, 2014 is appli- of services, employee grade ete.
cable. 5. There is minimum lock-in period of 3 years for sweat equity whereas
for ESOP minimum lock-in period is 1 year.
Issue and Redemption of Preference Shares [Sec. 55] redeemed. The Tribunal while giving such approval shall order the
(1) A company limited by shares cannot issue any preference shares redemption forthwith of preference shares held by such persons who
which are irredeemable. have not consented to the issue of further redeemable preference
shares.
(2) Acompany limited by shares may, if so authorised by its articles, issue (4) The capital redemption reserve account may be applied by the com-
preference shares which are liable to be redeemed within a period pany, in paying up unissued shares of the company to be issued to
not exceeding 20 years. However a company may issue preference members of the company as fully paid bonus shares.
shares for a period exceeding 20 years for infrastructure projects,
subject to the redemption of such percentage of shares as may be Further issue of capital or Right Offer [Sec. 62]
prescribed on an annual basis at the option of such preferential (1) Where at any time, a company having a share capital proposes to
shareholders. increase its subscribed capital by the issue of further shares, such
Redemption shares shall be offered:
(a) Such shares shall be redeemed only out of the profits of the (a) to persons who, at the date of the offer, are holders of equity
company which would otherwise be available for dividend shares of the company in proportion, as nearly as circum-
or out of the proceeds of a fresh issue of shares made for the stances admit, to the paid-up share capital on those shares by
purposes of such redemption; sending a letter of offer subject to the following conditions,
namely:—
(4) no such shares shall be redeemed unless they are fully paid;
(i) the offer shall be made by notice specifying the number
(¢) where such shares are proposed to be redeemed out of the of shares offered and limiting a time not being less than
profits of the company, out of such profits, a sum equal to fifteen days (or such lesser number of days as may be pre-
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the nominal amount of the shares to be redeemed, shall be scribed) from the date of the offer within which the offer,
transferred to a reserve, to be called the Capital Redemption if not accepted, shall be deemed to have been declined;
Reserve Account, The provisions of the Act relating to reduc- (i) unless the articles of the company otherwise provide, the
tion of share capital of a company shall apply to the Capital offer shall be deemed to include a right exercisable by
Redemption Reserve Account; and the person concerned to renounce the shares offered to
(@) in case of such class of companies, as may be prescribed and him or any of them in Favour of any other person. The
whose financial statement comply with the prescribed account- notice of the offer shall contain a statement of this right;
ing standards the premium, ifany, payable on redemption shall (iti) the notice shall be dispatched through registered post
be provided for out of the profits of the company, before the or speed post or through electronic mode or through
shares are redeemed. In case of other companies the premi- courier or any other mode having proof of delivery to
um, if any, payable on redemption shall be provided for out of all the existing shareholders at least three days before
the profits of the company or out of the company’s securities the opening of the issue;
premium account, before such shares are redeemed. (iv) after the expiry of the time specified in the notice afore-
(3) Where a company is not in a position to redeem any preference said, or on receipt of earlier intimation from the person
shares or to pay dividend, if any, on such shares in accordance with to whom such notice is given that he declines to accept
the terms of issue(such shares hereinafter referred to as unredeemed the shares offered, the Board of Directors may dispose
preference shares), it may, with the consent of the holders of three- of them in such manner which is not dis-advantageous
fourths in value of such preference shares and with the approval to the shareholders and the company.
of the Tribunal on a petition made by it in this behalf, issue further (5) to employees under a scheme of employees’ stock option,
redeemable preference shares equal tothe amount due, including the subject to special resolution passed by company and subject
dividend thereon, in respect of the unredeemed preference shares, to such conditions as may be prescribed; or
and on the issue of such further redeemable preference shares,
(ec) to any persons, if it is authorised by a special resolution, either
the unredeemed preference shares shall be deemed to have been
for cash or for a consideration other than cash, if the price of
— so
such shares is determined by the valuation report of a regis- Issue of Bonus Shares [Section 63]
tered valuer subject to such conditions as may be prescribed. Sources of Bonus Shares
Exception /Exclusion
A company may issue fully paid-up bonus shares to its members, in any
(1) The requirement of section 62 shall not apply to the manner whatsoever, aut of—
increase of the subscribed capital of a company caused
by the exercise of an option as a term attached to the (é Its free reserves
debentures issued or loan raised by the company to (i) The securities premium account; or
convert such debentures or loans into shares in the (ii) The capital redemption reserve account:
company:
Provided that no issue of bonus shares shall be made by capitalising
Provided that the terms of issue of such debentures or reserves created by the revaluation of assets.
loan containing such an option have been approved be-
fore the issue of such debentures or the raising of loan Conditions on Issue of Bonus Shares
by aspecial resolution passed by the company in general A company may capitalise its profits or reserves for the purpose of issuing
meeting. fully paid-up bonus shares when—
(2) However, this requirement (regarding approval of loan or debenture (a) itis authorised by its articles;
by passing of special resolution) shall not be applicable where any (>) it has, on the recommendation of the Board, been authorised in the
debentures have been issued, or loan has been obtained from any general meeting of the company;
Government by a company, and if that Government considers it
necessary in the public interest so to do, it may, by order, direct that (c) it has not defaulted in payment of interest or principal in respect of
fixed deposits or debt securities issued by it;
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such debentures or loans or any part thereof shall be converted into
shares in the company on such terms and conditions as appear to (@) it has not defaulted in respect of the payment of statutory dues of
the Government to be reasonable in the circumstances of the case’. the employees, such as, contribution to provident fund, gratuity and
bonus;
Bonus Shares (e) the partly paid-up shares, if any outstanding on the date of allotment,
When a company accumulates a large surplus, it may convert this surplus are made fully paid-up;
into capital and divide it among the members in proportion to their rights. (f) it complies with such conditions as may be prescribed.
This is done by issuing fully paid shares representing the increased capital.
Such shares are termed as bonus shares. The shareholders to whom the It may be noted that the bonus shares shall not be issued in lieu of dividend.
bonus shares are allotted have to pay nothing. The purpose of bonus shares
is to capitalize profits which are otherwise available for distribution. Difference between Bonus Shares and Right Shares
If the articles of association permits, a company can capitalize its surplus Basis Right Shares Bonus Shares
profits and reserves and issue fully paid shares of a nominal value, equal
Meaning Offer of new shares to the | Conversion of undistributed
to the amount capitalized, to its shareholders. Fully paid “bonus shares" are
existing shareholders of the | profits and reserves into
thus nota gift; they are merely a distributionof capitalized undivided profit.
company, shares.
It would be a misnomer to call the recipients of bonus shares as donees of
shares from the company. When fully paid-up bonus shares are issued to Issue Price =| Right sharesare offered and | Bonus shares are absolutely
the shareholders, the profits are capitalized and the existing shareholders, issued at a price decided by | free for which the share-
instead of receiving any moneys out of the undistributed profits receive thedirectorsof
the company. | holders pay nothing.
pro rata fresh shares. Paid-up Right shares may be partly | Bonus shares are always
8. Provided that where the terms and conditions of such conversion are not accepiable to the paid up or fully paid up. fully paid-up.
company, it may, within sixty days from the date of communication of such order, appeal to
the Tribunal which shall afier hearing the company and the Government pass such order as
it deems fii.
won
Basis Right Shares Bonus Shares board's meeting. In order to prevent trifling irregularities from inval-
idating a call, the articles usually contain a clause that some defect
Purpose Purpose of right shares is to | Purpose
of bonusshares isto in the appointment or qualifications of the directors, will not render
raise funds for the company. | capitalize the undistributed
the call invalid. If such a clause exists in the articles, call made by
profits and reserves.
the directors will be valid even if some of them may be subsequently
Applicability | Rightshares are mandatory. | There isnosuch compulsion, found to be disqualified."
Acompany may issue bonus
2. In accordance with the Articles. A call must be made in accordance
shares provided the articles
of the company permit and with the provisions of the Articles of Association of the company.
company has sufficient 3. The amount, place and time of payment. The resolution must state
reserves and prolits. the amount, time and the place of payment. If this is not done, the
resolution is defective and the call made thereon shall be invalid.
Call on Shares 4. Bona fide and in the interest of the company. The power to make
Often, entire amount on shares is not called along with application. The calls is in the nature ofa trust and must be exercised bona fide by the
applicant pays certain amount as ‘application money’. After shares are allot- directors for the benefit of the company. If the call is made by the
ted, he may be asked to pay allotment money. If the applicant has applied directors for their own personal advantage, the call shall be taken to
for larger number of shares and if issue was over-subscribed, he may not have been improperly made. Shareholders, in such a case, can either
be allotted full shares for which he had applied. In such cases, the extra prevent its enforcement by an injunction of the court of compel the
application money may be appropriated towards call money, if specified directors, by an order of the court, to hand over the benefit received
by them to the company.
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in terms of issue of shares in the prospectus.
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After allotment, balance amount payable on shares can be called in one or Case
more instalments. The company has to send notices for payment of such Alexander v, Automatic Telephone Co. (1900) The directors of
amount. These are termed as ‘calls’. Demand made by a company towards Automatic Telephone Co. Ltd. paid nothing on their shares and
the payment of value of shares in pursuance of resolution of the Board without disclosing this fact to the shareholders, called on them to
and the terms of the Articles is termed as call. However, money payable on pay certain amount partly as allotment money and partly as call. It
application and allotment are not calls.*'° Payment made by a shareholder was held that the directorswere guilty of breach of trust, therefore,
by instalments is not calls. A call can be made only after the minimum the call was invalid.
subscription has been allotted and the company is entitled to commence
business. Call may also be made by the liquidator in the course of winding 5. Uniformly. As per section 49, calls on shares must be made on a
up of the company. Articles usually provide the rules regarding making of uniform basis, on all shares falling under the same class. Hence, a
calls and these are to be strictly followed. call cannot be made on some members only unless they constitute
aseparate class. If the directors made a call on the shareholders and
Section 10 of the Companies Act provides that all money payable by any
pay nothing on their own shares in respect of such call, they are guilty
member to the company under memorandum or articles, shall be a debt
due from him to the company. But this is when a valid call has been made. of breach of trust."
Following are the essentials of a valid call: If a call is invalidly made, a shareholder is not bound to pay it. He
1. Resolution at Board's meeting. A call must be made under a reso- can restrain the directors by injunction from forfeiting his shares for
the non-payment of such a call or defend an action brought against
lution of the Board of Directors. The resolution must be passed by
him by the directors to recover such call.
a competent Board of Directors, at a properly called and convened
Li. Shiromani Sugar Mills Ltd. ». Devi Prasad (1950)

9-10. Croskey v. Bank of Wales (1863) 12. Hindu Iron Bank Lid. v. Raizada Jagannath Bali (1959)
The joint holders of a share are jointly and severally liable to pay calls. of association of the company. The grounds on which shares can be
Articles usually provide for charging from shareholders interest on calls forfeited have to be explicitly stated in the articles and forfeiture
in arrears. According to Article 16 of Table A, the rate of interest shall be has to be on those grounds only. Generally the ground mentioned
5% p.a. or such lower rate as the Board may determine. Money payable on in Articles is non-payment of a call(s). But if the articles provide, a
allotment is not deemed to be a call but the articles may provide that the company can forfeit fully paid-up shares on grounds other than the
provisions relating to payment of calls will also apply to such cases. non-payment of a call.'*
2. Notice Precedent to Forfeiture. A default in the payment of calls does
Advance payment of calls not ipso facto bring about forfeiture. A notice of demand requiring
A company may, if so authorised by its articles, accept from any member, the member to pay calls within a fixed period of the notice must be
the whole or a part of the amount remaining unpaid on any shares held given to the holder of shares. The notice shall also state that in the
by him, even if no part of that amount has been called up. A member of event of non-payment of calls shares shall be forfeited. The amount
the company limited by shares shall not be entitled to any voting rights in to be paid by way of interest or expenses besides the amount due
respect of the advance call amount paid by him until that amount has been on the call must be stated specifically in the notice, otherwise the
called up (Section 50). A company may, if so authorised by its articles, pay forfeiture will be invalid.
dividends in proportion to the amount paid-up on each share (Section 51). 3. Resolution of Forfeiture. The board must also pass a resolution for
the forfeiture of shares. “A declared intention to forfeit not carried
Illustration
into effect is no forfeiture at all". Forfeiture without a board's reso-
Acompany had no money to pay the directors’ fees. The directors, there- lution is invalid.
fore, paid into the company’s bank account the money unpaid on their
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4. Bone fide. The power to forfeit shares is in the nature of a trust.
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shares in advance. On the same day, they withdrew this money in order
=
to pay off their fees. Held, that this payment was not for the benefit of Directors must exercise this power bona fide for the benefit of the
the company and the directors continued to be liable to pay the amount company. It should not be exercised to expel a member or to get rid
that had remained unpaid on their shares. of him, nor should it be exercised to relieve a friend from liability.
Case Law
Forfeiture of Shares Re. Esparato Trading Co, (1879). Certain directors of a company took
Forfeiture is withdrawal of shares due to non-payment of any call by the up shares in the company only to qualify themselves for appointment
shareholder or for any other ground as may be provided in the Articles. as directors. They paid nothing on their shares. When the company was
On forfeiture of shares the member loses the amount paid thereon and his in difficulties, they got their shares forfeited and cancelled. It was held
interest in the ownership of the shares. The power to forfeit shares must that the forfeiture was invalid, and therefore, the directors were still the
be expressly given in the company’s articles. It cannot be implied. In order shareholders of the company.
that the forfeiture of shares is valid, the procedure expressly prescribed by
the articles must be strictly adhered to. The technicalities must be strictly Effects of Forfeiture of Shares
complied with as even a little inaccuracy may be as fatal as the greatest (i) Termination of Membership. The shareholder, whose shares have
one.” Even the whole body of shareholders or creditors cannot ratify a been forfeited, shall cease to be member of the company and his
defective forfeiture. name shall be struck out from the Register of Members.
The procedure to be followed for the forfeiture of shares is as follows: (ii) Liability. If the articles of the company permit, the company can sue
1. In Accordance with the Articles of Association, Shares can be [orfeit- the member whose shares have been forfeited for unpaid calls even
after forfeiture. In such a case the ex-shareholder will be liable as
ed only in accordance with the provisions laid down in the articles
an ordinary debtor and not as a contributory. Suit for the recovery
"13, Kanduri Lakshmiah Chetty v Adoni Electric Supply Co. Ltd. (1944) 14, Naresh Chandra Sanyal « Ramani Kanta Ray (1949)
aon
of the calls must be filed within three years of the date of forfeiture. any case, be surrendered to the company in consideration of payment of
The company in such a case cannot recover more than the difference money or money's worth by the company.
between the amount due on shares on the date of the forfeiture of Cases where surrender of shares will be valid
shares and the amount received from the subsequent allottee" (in
case the forfeited shares have been re-issued). /. When shares are surrendered in exchange of new shares of the same
nominal value. There would be no reduction of share capital in such
(iii) List ‘B’ Contributory. Where the company goes into liquidation a case; and
within one year of the forfeiture of shares, the ex-shareholder can
be put on “List B” of the contributories. 2. When shares are surrendered as a short cut to forfeiture of shares
when all the circumstances for forfeiture have arisen. Reduction of
(iv) Disposal
/ Re-isswe of Forfeited Shares. Forfeited shares can be either capital in such a case shall be valid.
cancelled by the company or re-issued, These can be re-issued at any
price— premium, par value or discount. But the amount of discount Provisions in the articles, for the acceptance of surrender of shares in all
on the re-issue of forfeited shares cannot exceed the amount forfeit- other cases except the above two, will be void.
ed on these shares. The purchaser of forfeited shares will acquire A member validly surrendering his shares to the company shall be held
good title to the shares reissued to him. His title to the shares shall liable as a list B contributory in the event of winding up of the company
not be affected by any irregularity or invalidity in the proceedings within twelve months of his surrender of shares.
in reference to the forfeiture and sale of the shares.
The Board of Directors is required to pass a resolution of the board for Lien on Shares
reissuing these shares. Re-issue of forfeited shares is not an allotment'* of Lien means ‘a claim or charge on property for payment of some debt
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fresh shares but resale of old shares, and therefore, the company is not or obligation’. A lien on shares is a security which makes the company a
required to file any return of allotment with the Registrar regarding these secured creditor for the debts due from a member. Unless the Articles of
shares. the company provide for lien, a company has primarily no lien on mem-
Forfeiture once made is conclusive and irrevocable and severe all con- ber’s shares.
nections between the company and its shareholder.” An illegal forfeiture In case of lien on shares the member who is indebted to the company
cannot be validated by lapse of time or acquiescence. In the case of wrong shall not be permitted to transfer his shares without paying the debts of
forfeiture of shares, the shareholder can bring action for setting aside of the company.
such forfeiture. If, however, it is not possible on account of resale of for- Alien on share attaches not only the shares in question but it also extends
feited shares, he can sue the company for damages." to the dividends payable on the shares and to any assets which in winding
up may come to the shareholders in respect thereof. Company has a prior
Surrender of Shares
right to claim its debt over all other creditors. However, the company’s right
Surrender of shares means the return of shares by the shareholder to the to lien will be postponed to any mortgage or pledge of shares, of which
company for cancellation. Holder in this case voluntarily abandons his the company has notice. Even notice of any such mortgage or pledge of
shares in favour of the company. A mere refusal to take up newly issued shares to any director of the company, in private capacity, shall be held to
shares, to which a shareholder is entitled to, is not surrender
of shares. The be a notice to company.
power to accept surrender of shares cannot be exercised by a company Usually, the Articles also authorise the company to dispose of those shares
unless expressly given by the Articles of Association. But no shares can, in on which right to lien has been exercised by the company. But in no case,
Articles can empower the company to forfeit shares in the process of en-
forcing the right of lien. Such a provision, if made in the Articles, would
15, Re Bolton (1930) be ineffective since it will amount to unauthorised reduction of capital.
16. Sri Gopal Jalan & Co. ». Calcutta Stock Exchange Assoriation (1964) On the exercise of the right of lien, the member ceases to be a member in
V7, Dhunraj 1. Wadia, the company.
18. Balvant Gopal v. Ceramic Industries (1950)
Sao
Difference between Forfeiture and Lien on Shares of shares is in contravention of any of the provisions of the Securities and
Exchange Board of India Act, 1992, or regulations made thereunder or
Basis Lien Forfeiture the Sick Industrial Companies (Special Provisions) Act, or any other law
Nature Lien is a security for a debt. | Forfeiture is a penal action for the time being in force, then a depository, company, participant or
for the default of the share- investor or SEBI can preferred an application to the Tribunal to enquire
holder. a about the contraventions. After conducting the inquiry, if the Tribunal is
Exercise of — | Debts due on shares or other | Call remaining unpaid. of the opinion that such contravention has taken place, it shall direct the
Right | dues,
depository or the company to rectify its register or record.
Enforcement Enforced by selling the| Enforced by forfeiting the Pending the enquiry, the Tribunal may suspend the voting rights of the
| sis Shares, _ amount paid on shares.| transferee of shares. However, transferee will continue to have the right
to receive dividend and bonus shares, if declared by the company in the
Impact Noreductionofsharecapital Reduces the share capital period pending enquiry. Transferee of shares may also transfer those
assharesunderlienaresold. when forfeited shares are shares to another person while the enquiry is pending.
| _not issued.
Surplus Surplus from sale of shares Surplus from the sale of Transmission of Shares
after deducting debts be- forfeited shares belongs to
longs to the former holder the company. 1. Transfer of shares on account of operation of law is termed trans-
mission of shares. Transmission of shares occurs in case of death,
| of shares.
insanity or insolvency of an individual member or, if the member
is a limited company, on its liquidation. In all such cases the legal
Transfer of Share
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representative, administrator or the official assignee or receiver
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Shares of a company are movable property and can be transferred by the respectively shall be entitled to the shares. It also includes devolution
shareholders in the manner prescribed by the Articles Right to transfer of title of the shares on account of constitutional changes.
shares is absolute and inherent in the ownership of the shares. Articles 2. The person claiming the title to the shares has to make an application
cannot, absolutely take away the rights of members to transfer shares thus, tothe company for transfer of shares in his name. Formal instrument
making shares non-transferable. of transfer is not required but the company may ask for probate,
Shares ofa public company are freely transferable (Section 58), whereas a succession certificate, letter of administration, certificate of death
private company is required to restrict the right of the members to transfer etc.
the shares. The articles of association of private companies contain the kind 3. The transfer of any security or other interest of a deceased person
of restrictions on the transterability of shares. Generally, the restriction put in a company made by his legal representative shall, even if the legal
by a private company is that of pre-emption whereby the members are representative is not a holder thereof, be valid as if he had been the
required to offer their shares first to the existing members of the company holder at the time of the execution of the instrument of transfer.
before offering them to the outsiders. He is also entitled to dividends declared by the company, but he is
In demat transfer of shares, the procedures and formalities of transfer not entitled to vote at the meetings of the company. However, if the
as laid down by the Companies Act (sections 56-58) are not applicable. company’s articles permit, the directors may withhold payment of
dividend to compel a legal representative to elect whether he will or
will not be a member of the company.
Free Transferability of Shares of a Public Company
4 A company can refuse to register a transmission if there is a provi-
Section 58 of the Companies Act provides that shares of a public company
+
sion to that effect in the Articles. But the power must be exercised
(both listed and non-listed)
are freely transferable. A public company cannot by the directors in good faith. The aggrieved party can appeal to the
pul any restriction on transferability of shares. The Boards of Directors Tribunal for relief.
of a public company, or a depository in case shares are in demat form,
cannot refuse or withhold transfer of securities. However, if the transfer
—S oS
Difference between Transfer and Transmission of Shares held in demat form, their transfer would be through book entry transfers
in accounts maintained by the Depository Participant.
Transfer Transmission
1. | Transferofsharesisavoluntary | Transmission is by operation of Share certificate
act of a shareholder. law which takes place in the event
A‘share certificate’ is a certificate issued by the company under its com-
of death, insolvency, lunacy of a
mon seal, specifying the shares held by any member (See. 46) It is a prima
member or on the insolvency of
facie evidence of the title of the person to such shares. It is not a negotiable
the company in case company is
instrument. Its form is governed by the Articles of Association. Number of
the member.
shares, their distinctive numbers, mame and other particulars of the holder,
2. | In case of transfer of shares, a | Transmission does not require any nominal value of shares and the amount actually paid up, are the details
formal instrument of transfer | formal instrument. Only intimation mentioned in a share certificate. Company shall issue only one share cer-
is required to be executed by | is to be given to the company along tificate in all those cases where shares are held by more than one person
both transferor and transferee | with the supporting proof of title. jointly with others and delivery of share certificate to any one of them will
of shares unless shares are held amount to delivery to all of them.
in demat form.
Tt must be noted that share certificate is in vozue in case of shares which
3. | Stamp duty is to be paid on | Stamp duty is not payable on trans-
are held in the physical form, not in the demat form (under the deposi-
transfer of shares unless it is in | mission of shares.
tory mode).
demat form,
4. | Transfer
of sharesis not possible | No such prohibition is applicable in Rules regarding issue of Share Certificates
gNNWVICX WL
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in case of restrictions being put | case of transmission of shares.

by any regulation or law, «eg. () Ashare certificate can be issued only under the authority of a reso-
lock-in-period lution of the Board of Directors; and on surrender to the company
of the letter of allotment or fractional coupons of requisite value.
Holding of shares in physical form and demat form If the letter of allotment is lost or destroyed, the Board may impose
such reasonable terms as it may think fit.
Shares of a public company may be held in physical form wherein share (i) Every share certificate shall be issued under the seal of the company,
certificate is issued by the company to the holder of shares as evidence
which shall be affixed in the presence of, and signed by two direc-
to the title of specified shares in the company. Public companies may get
the share certificate (in respect of fully paid shares) converted into share tors duly authorized by the Board of Directors of the company for
warrant with the approval of the Central Government Share warrant is a the purpase or the committee of the Board, if so authorized by the
Board; and the secretary or in absence of Company Secretary, any
negotiable instrument and the shares under it can be transferred merely person authorised by the Board for the purpose.
by delivery without undergoing any procedure or formalities.
(iii) If the composition of the Board permits of it, at least one of the
Ashareholder of a public company may shares (and other securities also)
in
aforesaid two directors shall be a person other than the managing
non-physical form ie. dematerialise form (Demat,
in short). Dematerialisation
or whole-time director.
is a process by which the physical share certificates of an investor are
taken back by the company and an equivalent number of shares are cred- (iv) In case of a One Person Company, every share certificate shall be
ited in electronic form at the request of the investor. Dematerialisation of issued under the seal of the company, which shall be affixed in the
shares is optional and an investor can still hold shares in physical form, presence of and signed by one director or a person authorized by
The Depositories Act, 1996, which came into force from 20th September, the Board of Directors of the company for the purpose, and the
1995, provides a legal framework for establishment of depositories to Company Secretary, or any other person authorized by the Board
facilitate holding of securities
including shares in the demat form (electronic for the purpose,
form) and to effect transfer of shares through book entry by a Depository (v] A director shall be deemed to have signed the share certificate if his
a
Participants (DP), who is an agent of the depository. Once the shares are signature is printed thereon as a facsimile signature by means of any
machine, equipment or other mechanical means such as engraving pany from denying the title of person to the shares, whose name is
in metal or lithography, or digitally signed, but not by means of a mentioned therein. In other words, itis a declaration by the company
rubber stamp. The director shall be personally responsible for per- to the whole world that the person in whose name the certificate is
mitting the affixation of his signature thus and the safe custody of made out, and to whom it is given, is a shareholder in the company.
any machine, equipment or other material used for the purpose.
Case
(vi) Every certificate of share or shares shall be in Form SH -1 or as near
thereto as possible and shall specify the name(s) of the person(s) in Dixon v. Kennaway Dixon applied for 300 shares in a company
whose favour the certificate is issued, the shares to which it relates and paid for them. A clerk in the company who owned no shares
and the amount paid-up thereon. in the company executed a transfer of 300 shares in favour of the
plaintiff. The company registered the transfer and issued a new
(vii) Particulars of all share certificates issued shall be recorded in the certificate to the plaintiff without requiring clerk's certificates to be
Register of Members. produced. It was held that the company was estopped from denying
the validity of certificate in favour of the plaintiff.
Time limit for delivering Share Certificates
(2) Estoppel as to payment. Further, if the certificate states that the
Under section 56(4) of the Companies Act, 2013, unless prohibited by Law shares are fully paid up, the company shall be estopped, as against a
or any other order of Court or other authority, the company shall deliver bona fide purchaser of shares for value, from alleging that they are
the share certificates: not fully paid up,
- within a period two months from the date of incorporation in the
Case
case of subscribers to the Memorandum of Association.
Bloomenthal v. Ford Bloomenthal lent £ 1,000 toa company on the
eg NNVAXKVL
TAXMANN®
within a period of two months from the date of allotment in the case
security of 10,000 shares which were issued to him as fully paid.
of allotment of Shares.
In fact nothing was paid on these shares. In the winding up of the
within a period of one month from the date of receipt of by the company it was held that company could not deny that shares
Company the instrument of transfer and the relevant Documents were fully paid-up.
in the case of a share transfer.
within a period of one month from the date of intimation of trans- REVIEW QUESTIONS
mission in the case of transmission.
. Differentiate between:
Penalty
In case of default, the company and every officer of the company (a) Stocks and shares.
responsible for the default shall be liable to a penalty of Rs. 50,000. (6) Equity Share and Preference Share.
Duplicate copy. A share certificate may be renewed or duplicate of a cer- (ce) Sweat Equity Share and Employees Stock Option
tificate may be issued if such certificate: What are the provisions of the Companies Act, 2013 which must be
(a) is proved to have been lost or destroyed or complied with by a public company before making a valid allotment
(5) having been defaced or mutilated or torn is surrendered to the com- of shares?
pany. Can new shares be offered by a company to outsiders without
offering the same first to the existing shareholders? If so state the
Legal Effects of Share Certificate circumstances under which it can be done.
4 Can a company purchase its own shares? How and under what
Share certificate has two legal effects:
conditions?
(1) Estoppel as to title. A share certificate is a prima facie evidence of
the title of the member to the shares. It, therefore, estops the com- . What do you mean by ‘buy-back of shares’? Explain the legal pro-
visions relating to buy-back of shares by a company.
Se
6. What are the conditions to be fulfilled by a company proposing

to its last balance sheet, is heavily losing. A shareholder surrenders 50
issue “Sweat equity shares”? shares to the company and the Board of Directors of the company
7. What do you mean by employees stock option? What are the pre- accepts the surrender. Discuss the legality of the surrender.
scribed conditions for issuing employees stock option? Ans. [Acceptance of surrender by the Board of Directors is not
8. When and how shares may be forfeited? What is the legal effect valid because partly paid shares can only be surrendered under
of forfeiture? conditions when forfeiture would be justified. In this problem nei-
ther a call has been made by the company nor has the shareholder
9. ‘Surrender is a shortcut to forfeiture’, Comment. committed any default in the payment of the call. Acceptance of
10. What are the essentials of a valid call? Can a company accept surrender in this case would mean reduction of capital and the
advance payment of call? surrender shall, therefore, be invalid.}
11. Whiatis lien on shares? How itis different from forfeiture
of shares? 4. Directors of a company forfeit fully paid shares of B to recover
12. Under what conditions, a company can issue equity shares with some amount due from B. The Articles of Association of the com-
differential rights? pany provide for forfeiture of shares in such a case. The shares are
resold at a much higher amount than the amount due from B and
13. Differentiate between transferof shares and transmission of shares. the company retains the excess as provided in the article, Advise B.
14 * What is share certificate? What are the rules for issuing share Ans. [Forfeiture is valid. The excess money realised must be paid
certificate? to B]
CASE PROBLEMS
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aNNVAXWL
. The capital of Atlanta Manufacturing Ltd. is Rs. 2 crores consist-
ing of equity shares capital of Rs. 1.50 crores and Rs. 50 lakhs of
redeemable preference share capital. The preference share capital
is to be redeemed before 31st March 2012. The company is running
into losses and its accumulated losses aggregate to Rs. 50 lakhs. The
company wants to borrow Rs. | crore from financial institutions
to improve its working and also to redeem the preference share
capital. Advise.
Ans. [Preference shares can be redeemed only either out of
accumulated profits or out of a fresh issue made for the purpose
of redemption. Hence company can borrow for working capital
and not for redemption.]
2 In the prospectus for issue of shares of Krishna Steels Ltd., it had
been mentioned that applications to two stock exchanges had been
made for permission for the shares to be dealt in these two stock
exchanges. While one stock exchange gave permission, the other
did not give it. How will you act?
Ans. [In the event of refusal by one stock exchange, the application
money received must be refunded to the applicants forthwith.]
3 The nominal value of a share in a limited company is Rs. 100 out of
which Rs. 40 were called and paid up. The company, as disclosed by
MEMBERS AND SHAREHOLDERS 167
liable for the payment of the unpaid portion of the share money on
the unpaid value of shares held by them in the case of default of the
present shareholders.
3. Companies limited by guarantee having no share capital will have
only members but no shareholders.
4. Membership by acquiescence. A person, who misrepresents himself as
a member, shall be estopped from denying his position subsequently
and shall be held liable as a member though he is not a shareholder
of the company.
MEMBERS AND SHAREHOLDERS 5. Transfer of shares. A transferor of shares continues to be the mem-
ber of the company until his name is replaced by the name of the
transferee though he is no more a shareholder of the company.
The words “member” and “shareholder” are used interchangeably and 6. By an order or decree of a court of law. A person may be made held
except for a few exceptions these are synonymous. Persons holding shares liable as a member of the company by an order or decree of the
ina company are ‘shareholders’. ‘Member’ denotes a person whose name court.
is entered on the Register of Members of the company and it includes a
holder of equity share in the company whose name is entered as beneficial Shareholders without being members
owner in the records of the Depository. Generally shareholding in a
Transferee or the legal representatives of the deceased are shareholders
company is the medium through which a person becomes member in a
TAXMANN®
- gNNVAXYL
company by having the name on the Register of Members. But there may and receive dividends thereon without his name being entered in the
be companies without share capital (for example, a company limited by
Register of Members.
guarantee and unlimited companies may not have share capital). These
companies cannot have shareholders but have members. Similarly, a holder Methods of becoming a Member
of share warrant is not a member of the company unless the articles of Section 2(55)
of the Companies Act, 2013 provides that a person may become
the company provides otherwise. Thus, every member of a company is a memberin a company by any of the following ways:
shareholder and similarly, every shareholderis also a member is not true in 1. By subscribing tothe memorandum. The subscribers of the memoran-
all cases. There are certain cases when a person is member of a company
dum of a company are deemed to have agreed to become members
without being a shareholder. Similarly in a few other cases a person may of the company and on its registration, are entered as members in
be a shareholder without being member. A member might be a holder of
the register of members of the company.
shares but a ‘shareholder’ might not be a member.
2. By application and allotment. “Every person who agrees in writing
Members without being shareholders to become a member of the company and whose name is entered
in me register of members, shall be a member of the company.” The
1. Signatories to the memorandum. They become members in the person intending to become a member in the company has to make
company by reason of their having signed the Memorandum, Their an application and his offer will be said to have been accepted when
names are immediately put on the Registerof Members on the regis- letter of allotment is posted to him. His name is then put on the reg-
tration of the company, even before any allotment of shares is made ister of members of the company.
to them. 3. By holding equity shares in demat form. A person holding equity
2. List B contributories. Persons who ceased to be members of the shares of a company (may be through original allotment of shares
company during the period of 12 months preceding the winding up or purchasing from the market) and whose name is entered as ben-
by reason of forfeiture, surrender or transfer of shares can be held eficial owners in the records of the Depository, shall be deemed to
be a member of the concerned company even though there is no
166
eon
168 MEMBERS AND SHAREHOLDERS MEMBERS AND SHAREHOLDERS 169
agreement in writing with the company nor his name appears in the 4. when his shares are expropriated;
register of members of the company. 5. when his shares are sold by the company in exercise of its right of
4, By transfer. Shares of a company are transferable-freely in case of lien over them or in the execution of a decree of the court;
public companies and with certain restrictions in private companies. A 6. when he dies or is declared insolvent and the Official Assignee dis-
person may purchase shares from an existing member from the open claims or transfers the shares;
market or otherwise and, then apply to the company for registration
af the transfer. After the transfer being registered, the transferee of 7. when he repudiates his, contract to subscribe for the shares of the
shares becomes member in the company as his name would be put company due tothe misleading and false statements in the prospectus
on the register of members of the company. of the company or irregularities in the allotment of shares;
5. By transmission of shares. Transfer of shares on account of the 8. when he was holding the redeemable preference shares which are
operation
of law is termed as transmission of shares. Death, insolvency being redeemed;
or insanity of a member will entitle the legal representative, official 9. when he has tendered or sold his shares in buy-back offer made by
receiver and administrator respectively to get his name substituted the company;
in the company's Register of Members in place of the deceased, 10. when the Tribunal directs under section 242 of the Companies Act
insolvent or insane member. transfer of shares of a member to another member of the company;
6. Nominee of OPC. In case of One Person Company, the nominee 11. when the affairs of the company are wound up.
whose name is mentioned in the memorandum of association of the
company shall become member in the event of death of the member Expulsion of a member
(one and only one) of the company [Section 4(1)(/)].
TAXMANN®
A company limited by guarantee such as a social club, professional,
eNNVWXEL
7. By acquiescence. Ordinarily, a person can acquire membership of a cultural, religious or other such associations may expel any member of the
company only by an agreement in writing, however sometimes he
company in accordance with the regulations and provisions contained in
may be deemed to be a member of a company by conduct, if he:
the articles of association.' Expulsion on the ground such as mis-conduct
(a) allows his name, apart from an agreement to become a mem- of the members is also possible. But the requisite in such case would be
ber, to be on the register of members, or exercise of the power in the interest of the company as a whole not for a
(6) holds himself out to be a member, or particular group of the members.
(c) allows himself to be held out as a member. In the case of companies having share capital any provision in the articles
In case, the name of a person is improperly entered in the company’s of the company would be against the principle of corporate democracy
Register of Members, he should take prompt action for getting his name and in violation of provisions of the Companies Act.
removed from the company’s Register of Members. This can be done either
by taking action for the rectification of the Register of Members under Who can be a member?
section 155 or by instituting a suit for the purpose. Delay in taking action, A contract to purchase shares is a contract; therefore, membership of a
after knowledge, may make him liable as a member. company is open to every person who is competent to contract, We are
discussing below the membership rights of certain categories of persons.
Termination of Membership Minor. A minor being incompetent to enter into a contract; a contract by
A person will cease to be a member of the company in any of the following a minor is void ab initio. So a minor by himself/herself cannot become
ways: member of a company. On account of the same reasons a minor cannot
l. when he transfers his shares;
also subscribe to the company’s memorandum.
2. when shares allotted to him are validly forfeited by the company;
3. when he makes a valid surrender of his shares to the company;
lL. A Ramaiya, Guide to Companies Act, 17th Edition, Part I p.646
worn
In case the directors of a company have entered the name of a minor in Miss Nandita Jain v. Bannett Colman & Co. In this case the appellant
the company’s register of members in ignorance of his, minority, they can Miss Jain applied for registration in her name of 10,000 fully paid-up eq-
remove his name when the fact of his minority comes to their knowledge. uity shares in the respondent company through her father and natural
Similarly, the minor can also repudiate the allotment any time during guardian. The transferor Mr. Manoj Kumar Jain and the transferee Miss
minority. The company will have to return to the minor all money received Jain through her father executed the necessary transfer deed and lodged
from him in respect of the shares in both the cases.
The question whether the the same with the company on June 3, 1972 for registration of transfer
minor is or is not bound to return the benefits received from the company of shares. Board of Directors did not approve of the transfer.
will be decided by the court taking into consideration the circumstances
of each case. Company Law Board held the rejection of the transfer by the Board
invalid. It was held that a minor can be admitted to the membership of
But incompetency of a minor does not debar a company from allotting a company limited by shares by means of transfer or transmission of
shares to a minor, if it so chooses. The minor’s name may remain on the shares in his name. The shares in question must be fully paid-up with
company’s register of members, but he will have no contractual liability. no additional liability or obligation attached thereto. The execution of
On attaining majority and becoming aware of the presence of his name in the transfer deed can be made by the guardian of the minor on his or
the company's register of members he may repudiate the shares within her behalf and the company can register the name of the minor on its
reasonable time. But if he fails to do so or does something which shows Register of Members accordingly.
that he has decided to be a member of the company, he will be liable as
a member. Company. A company can be member of another company. But the
company must be authorized by its Memorandum to invest in the shares
Since contracts with a minor are void ab initio, he cannot be a member of other companies.
of a company whose liability is limited by guarantee or a company whose
WL
liability is unlimited because in the case of both these companies future Subsidiary Company. A subsidiary company cannot become member of
TAXMANN®
- gNNVIWN
assets would be attached. However, it will be advisable for the companies its holding company and any allotment or transfer of holding company's
to allot only fully paid up shares to a minor since neither he nor his legal shares to it, shall be void. However, this provision shall not be applicable
guardian can be made responsible for payment of calls, in the following circumstances:
Thereis nothing
in law to prevent a minor acquiring or holding fully paid-up 1, When the subsidiary companyis the legal representative
of adeceased
shares with no further financial obligations in a company if he is properly member of the holding company.
represented and acts through his lawful guardian.’ Section 8 of the Hindu 2. When the subsidiary company is a trustee and the holding company
Minority and Guardianship Act, 1956, empowers the natural guardian to or any of its subsidiaries is not beneficially interested under the trust.
enter into a contract on behalf of the minor having binding force provided 3. When the allotment or transfer of shares is by way of security for the
the contract is to the benefit of the minor. A contract entered into by the purposes of a transaction entered into by it in the ordinary course
guardian on behalf of the minor to his benefit is valid and enforceable by or of its business which includes the lending of money.
against the minor if the same is within the competency of the guardian to
enter into on his behalf. In such a case the entry in the register of members Partnership Firm. A firm cannot become a member of a company since
will be made as follows, “A, (a minor) through guardian B.” it is not recognised by law as an entity different from its members. A firm
can, however, be a member of a companies not for profit which have
A minor can become a member of a company by transfer or transmission been granted licence by the Central Government under section 8 of the
of shares. It has been held that the registration of transfer of shares in the Companies Act.
name of minors especially when the shares are fully paid cannot be refused
on the ground that the transferee is a minor. The leading case is: Limited Liability Partnership (LLP). A LLP being a juristic person may
become member of a company - by subscribing to the memorandum of
association of the company, or by subsequent purchase of shares of the
company,
2. Dewan Singh v. Minerva Films Lud, (1958) 28 Comp. Cas. 191 (Punj.)
3. Miss Nandita Jain v. Bannett Colman & Company Lid., Appeal Ne. 27 of 1972 before Company Co-operative Society, A co-operative society may become a member of a
Law Board; see also R. Balaramy, Buckingam & Carmatic Company Led. (1969) 1 Comp, L. company provided it isa registered society and is recognised
asa legal entity.
S81.
Hindu Undivided Family (HUF). The Companies Act does not prohibit The provisions relating to joint shareholders can be summarised
as follows:
membership of HUF. But shares can be registered a only in the name of (7) Joint shareholders are counted as one member for determining
wheth-
the ‘Karta’. er the number of members of a private company does not exceed
Fictitious persons. A person who takes shares in the name of a fictitious 200 and also for determining the number of members required for
person, besides being liable to be punished for impersonation under section making application under section 397 or 398 (regarding prevention
447, can also be held liable as a member and his name may be entered on of oppression and mismanagement).
the register of members. (2) Signature of any one of them is sufficient for signing a requisition
Non-resident. A person who is not resident in India (even if he is an Indian or notice under section 169 (re. extraordinary general meeting).
citizen) cannot become a member of a company registered in India, without (3) The company is not bound to deliver more than one share certificate.
the general or special permission of the Reserve Bank. Thus, no shares can The delivery of the certificate to one of the joint-holders will mean
be issued or transferred to him without such permission under the Foreign delivery to all.
Exchange Management Act, 1999.
(4) The company may serve the notices and other documents on the
Insolvent. An insolvent can be the member of a company till his name joint-holder named first in the register of members.
appears in the register of the company, but the beneficial right goes in the
hands of the Official Assignee or the Official Receiver. He is entitled to vote (5) The company may pay dividend to the first named of the joint-share-
though dividend will be paid to the official Assignee. holders on the register of members unless they have all given in
writing to pay dividend to any other person.
Beneficial Holding of Shares, Where the name ofa person is entered in the
register
of members of a company as the holder of shares in that company (6) As regards rights of the joint shareholders to attend and vote at
but who does not hold the beneficial interest in such shares, such person general meeting, a company may make its own provisions in its
TAXMANN®
a NNVAXKVL
shall make a declaration within such time and in such form as may be Articles provided that such provision is not restrictive of any rights
prescribed to the company specifying the name and other particulars of given to the shareholders under the Act or is otherwise repugnant
the person who holds the beneficial interest in such shares [Section 89(2)]. to any provision in the act. In the absence of any such provision in
the articles, joint-holders may claim the following rights:
Every person who holds or acquires a beneficial interest in share of a
company shall make a declaration to the company specifying the nature (a) to be individually present and take part in the debate at the
of his interest, particulars of the person in whose name the shares stand meeting and vote on resolutions decided on a show of hands
registered in the books of the company and such other particulars as may but on a poll, the voting rights can be exercised only by all of
be prescribed [Section 89(2)]. them acting together;
(6) to appoint proxy only by all of them jointly.
Joint shareholders (7) Joint-holders will be counted as only one member for purposes of
In case two or more persons jointly apply for and are allotted shares in a quorum,
company, they are termed as joint shareholders. In the case of a public (8) Transfer of shares will be effective only if it is made by all the
company, every joint holder of shares is considered as amember. Moreover, joint-holders. In the case of transmission of shares by operation of
joint shareholders do not constitute an entity, and, therefore, cannot be law, the right devolves on the representative of the deceased jointly
entered in the Register of Members as a single entity. But in the case of a with the survivor or survivors.
private company, joint shareholders are treated only as a single member Rights of Members.
and all of them are not counted as members for determining whether
number of members exceeds 200. Members of a company have been conferred rights by the Companies Act.
Broadly, these are:
(1) Right of access to Documents and Books. Members of a company
has the right to obtain copies of Memorandum of Association; Articles
of Association; Annual Report including Director’ Report; Balance
4. Naraindas Manmehandas Ramji v. Indian Mfg. Co. Lid. (1953) Sheet and Profit and Loss Account. Members have been given right
by the Companies Act to inspect Register of Members; Register of at the annual general meeting of the company. Members have the
Debenture-holders; Register of Charges; Register of Investments; right to receive the dividend within 30 days of the declaration.
Minute Books of general meetings; Proxies lodged for the general (7) Shareholding Rights. Members have the right to receive share cer-
meeting; and all returns filed by the company. Shareholders may tificate (in case shares are held in physical form); to transfer shares;
inspect the minutes of the Annual General Meeting (AGM). to receive right offer of shares; and to receive bonus share.
(2) Right to make Fundamental Corporate Decisions. Certain funda- (8) Right of Class Action Suit. The Companies Act confers rights of
mental corporate decisions are the exclusive power of the meetings class-action suit to members against the company or its directors for
of the members of the company wherein decisions are made by the any fraudulent, unlawful or wrongful act or omission; or an auditor
members by passing of resolution (ordinary or special as the case including audit firm of a company for any improper or misleading
may be): changing registered office; authorizing capital increases; statement of particulars made in the audit report or for any unlawful
waiving pre-emptive rights; buying back shares; amending articles or fraudulent conduct. Any 100 members or those holding 10 per
of association; delisting; acquisitions, disposals, mergers and take- cent of voting rights can apply to the Tribunal for redress. Members
overs; changes to company business or objectives; making loans and can ask for investigation in the affairs of the company. They can also
investments bevond prescribed limits; authorizing the board to: sell file petition to the Tribunal for winding up of the company.
or lease major assets; borrow money in excess of paid-up capital and
free reserves, and appoint sole selling agents and apply to the court Liability of Members
for the winding up of the company.
The liability of amember depends upon the type of the company. In the case
(3) Right of participation in General Meeting. Members have the right of an unlimited company, each member is liable personally for payment of
to receive the notice of the general meetings specifying the meeting
all debts due by the company. Inthe case of acompany limited by guarantee,
AX VL
place and time and the agenda of the meeting. They have the right
TAXMANN®
the liability of a member shall not exceed the amount which he had agreed
to attend the general meeting in person or through proxy. Members
to contribute towards the assets of the company in the event of its winding
can speak at the meeting, vote by show of hands or demand a poll.
— gh
up. In the case of a company limited by shares, the liability of a member
They have the right to vote in case of voting by poll. The Companies will be limited to the face value of the shares that he has purchased. In
Act gives right of postal voting for certain fundamental decisions.
case, he has paid the full value of the share, he is not liable to contribute
Any member may apply to the Company Law Board (CLB) to call any more. Most of the companies are of this category.
an AGM if the company has defaulted in conducting an AGM.
Shareholders may also demand calling of Extraordinary General REVIEW QUESTIONS
Meeting (EGM) for discussing any emergent item. The requisition
for an EGM must be signed by shareholders holding at least 10 per 1. Differentiate between a “shareholder” and a "member" of the
cent of the paid up voting capital. company. Is every shareholder a member of the company or vice
(4 Right to appoint Directors. Members have the right to appoint the versa?
—
directors (at least two third of directors of a public company is re- 2 (a) Definea member, Distinguish him from a shareholder.
quired to be appointed by members of the company). They also have
.
the right to remove the director(s). (4) Briefly explain the provisions relating to Joint shareholders of
a company.
Right as to accounts and Audit. Members have the right to appoint
—
the auditor and fix his remuneration. Auditors can be removed by 3. How can person become a member and cease to be a member
the members of the company by passing a resolution at the general of a company? Can the following persons or institutions become
meeting. The annual accounts of the company are required to be members of a company
passed at the annual general meeting of the company. (a) Minor
(6 Right to participate in the profits of the company, The dividend to (5) Company
=
be paid is required to be approved by the members of the company (c) Partnership Firm
176 MEMBERS AND SHAREHOLDERS
4. ‘Allshareholders are members of a company but all members need

not be shareholders of the company.’ Discuss.
What are the several ways in which a person can become member
of a company? Are all holders of share of a company necessarily
members of the company?
. Can a minor be a shareholder of company? If the answer is ‘Yes’
what should be the correct form of indorsement of the name of
the shareholder in the Register of members.
PROBLEMS DIRECTORS AND KEY MANAGERIAL PERSONNEL

. The name of Xis found entered in the register of members of a
company. But X contends that he is not a member of the compa- Meaning, Types and Legal Position
ny. The company maintains that X had orally agreed to become a
6
member and hence, his name was entered in the register and so Disqualification of Directors
+
he is a member. Is the contention of X valid? Director Identity Number
@
Ans. [Contention of Xis valid. A person should agree to become Appointment and Removal of Directors
@
member in writing.] Powers and Duties of Directors
VL
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. A company amends its Articles of Association to provide for Meeting of Board of Directors
e+
expulsion of a “member” by the Board of directors, if in the
opinion of the Board of directors the conduct of the person Key Managerial Personnel
concerned is prejudicial, to the interests of the company, and
thereafter the Board of directors expels the “Member” by passing Meaning of Directors
a resolution. Is the expulsion valid? Directors are the persons appointed to direct and supervise the affairs of a
Ans. [No] company. As per section 2(34) of the Companies Act, 2013 director means
a director appointed to the board ofa company.
Section 149 of the Companies Act states that every company shall have a
Board of Directors consisting of individuals as directors and shall have-
(a) Aminimum number of 3 directors in the case of a public company,
2 directors in the case of a private company, and one director in the
case of a One Person Company.
(b) A maximum of 15 directors. A company may appoint more than 15
directors after passing a special resolution.
(ce) Such class or classes of companies as may be prescribed, shall have
at least one woman director.
(@) Every company shall have at least one director who has stayed in
India for a total period of not less than 182 days in a financial year.
177
178 DIRECTORS AND KEY MANAGERIAL PERSONNEL DIRECTORS AND KEY MANAGERIAL PERSONNEL 179
(e) Every listed public company shall have at least one-third of the director exercises real control (but clandestine) over the nominal directors
total number of directors as independent directors and the Central of the company’.
Government may prescribe the minimum number of independent
directors in case of any class or classes of public companies. First Directors
These are the directors who act as the directors of the company immediately
Classification of Directors after the formation of the company. They are appointed by the promoters
Any person occupying the position of director by whatever name called of the company.
may be termed as director in law. Types of director are:
Rotational Director
Shadow Director These are the directors who are liable to retire by rotation ie. by turn.
Any person, other than a professional adviser, whose instructions the However, they may be re-appointed again after the retirement.
directors of a company normally comply is a shadow director. In other
Permanent Director
words, where a person who is not a director exerts such an influence
over the company’s directors that those directors are accustomed to actin These directors are not liable to retire by rotation. While a public company
accordance with that person's instructions,
thal person
is a shadow director. may appoint 1/3rd of the total directors as permanent directors, private
The significance of being a shadow director is that a shadow director has companies may have all of their directors as permanent directors.
many of the legal responsibilities of a director.
Case Law: Secretary of State for Trade and Industry v. Deverell (200]) - Any Additional Director
person exerting real influence over the affairs of a company (apart from a Additional directors are in addition to the directors
of the company appoint-
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professional advisor) is the shadow director. It is not necessary: ed at the annual general meeting. Powers, rights and duties of additional
- that the influence (instructions and directions) is over the whole field directors are at par with other directors. They hold the position of directors
of the company’s activities; till the ensuing annual general meeting of the company.
that there is any degree of compulsion in accepting the influence; Alternate Director
and
Alternate director means a person who is nominated to act in place of
- that the shadow director is really in the shadow.
another director during his/her absence. The articles of association of a
Shadow director may not be an individual. A holding company may be company may allow such an appointment with the agreement of a majority
shadow director of its subsidiary company. That will be so when the of the directors. An alternate director is not a representative
or agent of the
directors of the subsidiary company are accustomed to act in accordance absentee director. While acting as a director, the alternate has the same
with the instructions of its holding company. rights and duties as other directors have under the law.
De facto Director Woman Director on the Board

A de factodirector is a person who has not been formally appointed or who The following class of companies shall appoint at least one woman director
is disqualified to be appointed as director but who is holding himself out [as laid down by section 149(1) of the Companies Act, 2013 and Companies
as a director. Such director in effect occupies the position of, and acts as (Appointment and Qualification of Directors) Rules, 2014];
if he were, a director. () every listed company;
Difference between Shadow Director and De facto Director (i) every other public company having -
De facto director is different from shadow director. De factodirector makes (a) paid-up share capital of Rs. 100 crore or more; or
it appear as if he is the director, discharges functions of a director. Shadow (6) turnover of Rs. 300 crore or more:
director, on the other hand is in the background, giving instructions to the
directors who in turn are accustomed to follow those directions. Shadow 1. Ramaiva, A. (2010) (7th Edithon Gite to tie Companies Act Page 206.
—— oe
Provided thata company, which has been incorporated under the Act, shall Independent Director
comply with the provisions of section 149(1) within a period of six months An independent director in relation to a company, means a director other
from the date of its incorporation. than a managing director or a whole-time director or a nominee director
A casual vacancy of a woman director shall be filled-up by the Board at the [Section 149(6)
earliest-but not later than immediate next Board meeting or three months
(a) who, in the opinion of the Board, isa person of integrity and possesses
from the date of such vacancy whichever is later, relevant expertise and experience;
Nominee Director (6) (i) who is or was not a promoter of the company or its holding, sub-
sidiary or associate company;
Anominee directoris a director who is nominated to the board by a major/ (i) who is not related to promoters or directors in the company, its
dominant shareholder or other contractual stakeholder such as a bank or holding, subsidiary or associate company;
financial institution to represent and safeguard their interests. The ‘nomi-
nee directors’, appointed by the public financial institutions (such as IDBI, (c) whe has or had no pecuniary relationship other than remuneration
IFCI, ICICI, LIC, UTL and public sector banks) have been widely prevalent as such director or having transactions not exceeding 10% of his total
in the boards of most companies in India till recently. income with the company, its holding, subsidiary or associate com-
pany, or their promoters, or directors, during the two immediately
Executive Directors preceding financial years or during the current financial year;
Executive directors are the directors who are also involved in the day to (d@) none of whose relatives has or had pecuniary relationshipor transac-
day management of the company. Also termed as whole-time directors, tion with the company, its holding, subsidiary or associate company,
they are in full time employment with the company. As they are involved in or their promoters, or directors, amounting to two per cent or more
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the management of the company they may, in practice, have specific titles of its gross turnover or total income or fifty lakh rupees or such
and managerial responsibilities within the company, for example, finance higher amount as may be prescribed, whichever is lower, during
director, marketing director etc. the two immediately preceding financial years or during the current
financial year;
Managing Director (e) who, neither himself nor any of his relatives—
Managing director is one who is entrusted with substantial powersof man- (9 holds or has held the position of a key managerial personnel
agement. He is generally the chief executive
of the company. In cases when or is or has been employee of the company or its holding,
in a company there is more than one managing directors, each managing subsidiary or associate company in any of the three financial
director is an executive-in-charge of a division or branch of the company, years immediately preceding the financial year in which he is
A managing director of a company has to exercise his powers subject to proposed to be appointed;
the superintendence, control and direction of the Board of directors. (if) isor has been an employee or proprietor or a partner, in any of
the three financial years immediately preceding the financial
Non-Executive Directors year in which he is proposed to be appointed, of—
Non-executive directors are not involved in the day to day management of (A) a firm of auditors or company secretaries in practice or
the company and do not hold any executive management positions within cost auditors of the company or its holding, subsidiary
the company. The rationale behind appointing non-executive directors or associate company; or
is that, as they are not involved in the day to day management, they can (8) any legal or a consulting firm that has or had any
bring an independent voice and perspective to the board. A non-executive transaction with the company, its holding, subsidiary or
director is also termed as outside director being not part of the internal associate company amounting to ten per cent or more
management of the company. of the gross turnover of such firm;
(iif) holds together with his relatives 2 per cent or more of the total
voting power of the company; or
— So
182 DIRECTORS AND KEY MANAGERIAL PERSONNEL DIRECTORS AND KEY MANAGERIAL PERSONNEL. 183
(iv) is a Chief Executive or director, by whatever name called, of Manner of Selection of Independent Directors
any non-profit organisation that receives 25 per cent or more
of its receipts from the company, any of its promoters, directors Section 150 provides that an independent director may be selected from
a data bank containing names, addresses and qualifications of persons
or its holding, subsidiary or associate company or that holds
who are eligible and willing to act as independent directors, maintained
2 per cent or more of the total voting power of the company;
by any body, institute or association, as may be notified by the Central
or
Government. The appointment of independent director shall be approved
(v) who possesses such other qualifications as may be prescribed. by the company in general meeting. The Central Government may prescribe
the manner and procedure of selection of independent directors who fulfil
Term of Independent Director the qualifications and requirements specified under section 149.
(j An independent director shall hold office for a term up to 5 con-
secutive years on the Board of a company, but shall be eligible for Small Shareholders’ Director
reappointment on passing of a special resolution by the company Section 151 of the Companies Act, 2013 provides that a listed company
and disclosure of such appointment in the Board's report. may have one director elected by small shareholders. “Small Shareholder"
(i) No independent director shall hold office for more than two con- means a shareholder holding shares of nominal value of Rs. 20,000 or less
secutive terms, but such independent director shall be eligible for in a public company,
appointment after the expiration of three years of ceasing to become The appointment of small shareholders’ director is not mandatory. The
an independent director, provided that an independent director shall Companies (Appointment and Qualification of Directors) Rules, 2014 (Rule
not, during the said period of three years, be appointed in or be as- 7) provides that:
sociated with the company in any other capacity, either directly or
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(1) Alisted company may opt to have adirector representing small share-
indirectly.
holders so mate or upon notice of not less than one thousand small
shareholders or one-tenth of the total number of such shareholders,
Qualification of Independent Director whichever is lower.
As perrule5 of the Companies (Appointment and Qualification of Directors) (2) The small shareholders intending
to propose a person as a candidate
Rules, 2014, an independent director shall possess appropriate skills, expe- for the pest of small shareholders’ director shall have to give a no-
rience and knowledge in one or two fields of finance, law, management, tice of their intention with the company at least 14 days before the
sales, market, corporate governance, research, administration, or technical meeting under their signatures specifying the name and other details
operations related to company’s business. of the person whose name is being proposed for the post of director
and of the small shareholders who are proposing such person for
Number of Independent Directors the office of director.
Section 149(4) of the Companies Act, 2013 requires every listed public (3) The notice shall be accompanied by a statement signed by the person
company to have at least one-third of the total number of directors as whose name is being proposed for the post of small shareholders’
inclependent directors, As per rule 4 of the Companies (Appointment and director stating his DIN and his consent to act as director of the
Qualification of Directors) Rules, 2014, the following class or classes of company.
companies shall have at least two directors as independent directors — (4) Such director shall be considered as an independent director in
() the Public Companies having paid-up share capital of Rs, 10 crore accordance of section 149(6) and is required to give a declaration of
or more; or his independence.
(ij) the Public Companies having turnover of Rs. 100 crore or more; or (5) Small shareholders’ director shall not be liable to retire by rotation.
(iii) the Public Companies which have, in aggregate, outstanding loans, (6) Small shareholders’ tenure shall not exceed a period of three con-
debentures and deposits, exceeding Rs. 50 crore. secutive years; and on the expiry of the tenure, such director shall
not be eligible for re-appointment.
—— oe
(7) A person shall not be appointed as small shareholders’ director of Directors as Trustees
a company, if the person is not eligible for appointment in terms of Directors are also described as trustees of the company. They must ac-
section 164.
count for all the moneys over which they exercise control. Their acts and
(8) No person shall hold the position of small shareholders’ director in dealings must be for the benefit of the company. They must exercise their
more than two companies at the same time, The second company powers honestly in the interest of the company and all the shareholders,
in which he has been appointed as director shall not be in a business and not their own sectional interest. The directors of a company are trust-
which is competing or is in conflict with the business of the first ees for the company with reference to their power of applying funds of
company. the company. For misuse of the power they could be liable as trustees.
(9) Asmall shareholders’ director shall not, for a period of three years “Directors are the persons selected to manage the affairs of the company
from the date on which he ceases to hold office as a small share- for the benefit of shareholders, It is an office of trust, which it is their duty
holders’ director in a company, be appointed in or be associated with to perform fully and entirely.” Directors cannot exercise their powers of
such company in any other capacity, either directly or indirectly. management against the interests of the company (Shubh Shanti Services
Ltd. v. Manjula Agarwalla, 2005).
Legal Position of Directors
Directors as Managing Partners
Directors are the persons duly appointed by the company to direct and man-
age the affairs of the company. Their legal position is sometimes described Directors represent the shareholders to conduct
the business of the company
as agents, sometimes as trustees, and sometimes as managing partners. But on their behalf. They enjoy vast power of management over the company
each of these is not exhaustive of their powers and responsibilities, but as and perform many functions which are in the nature of the proprietary, for
indicating useful points of view from which they may for the moment and example allotment of shares, raising of loans, investment of funds of the
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for the particular purpose be considered. So, the different points of view company. This gives the impression of directors being the active partners
of legal position of directors are as follows: and the shareholders appointing them as dormant partners. The very fact
that most of the times, directors themselves are the significant shareholders
Directors as Agents in the company strengthens the argument that directors are the manag-
ing partners of the company. But this may be true only partially as unlike
Directors are viewed as agents of the company for the conduct
of its business. partners directors cannot bind other shareholders by their dealing, and
A company cannot act by itself; it acts only through its directors. Directors dissimilar
to partners directors are elected and are subject to retirement also.
act on behalf of the company and acting on behalf of the company make
the company liable on it and not themselves. The directors cannot be held Conclusion
personally liable for any default of the company. Like agents, directors
should conduct business of the company with care, skill and diligence In the real sense the directors are not the agents completely nor the trust-
possessed by them. They are accountable for all of company’s assets under ees nor the managing partners. The position of directors combines all the
their control, and the profits from assets of the company. Directors cannot three and more than that also. Directors are paid agents or officers of the
deal on their own, and are required to disclose their personal interest, if company and conduct business for the company without being the legal
any, in any transaction of the company. The position of directors is defined owners. In fact, the directors are commercial men managing a trading
by Cairns L. J. in Ferguson v. Wilson: concern for the benefit of themselves and of all the shareholders in it.
“They are merely agents of the company. The company itself cannot act Directors of a company have fiduciary relationship with the company as
in its own person, for it has no person, it can only act through directors, well as the shareholders when they act as agents or officers of a company.
and the case is as regards those directors merely the ordinary case of The position of directors being in the nature of fiduciary was affirmed by
principal and agent, for wherever an agent is liable, those directors would the Supreme Court of India in the case of Dale and Carrington Investment
be liable. Where the liability is of principal and principal only, the liability Put. Ltd. v. PK. Prathapan (2004), Being in the fiduciary capacity utmost
is the liability of the company.” good Faith is expected from the directors a company. The directors have to
2, York and North Midland Railway Co, v. Hudson

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follow the articles of association and acts through meetings of the Board However, the person will not be disqualified for first 6 months in the
of Directors. defaulting company after joining.
A private company may by its articles provide for more grounds, in ad-
Disqualification of Directors dition to those referred above, on account of which a person shall not be
Following persons cannot be appointed as directors of acompany (Sec. 164): appointed as director of the company. But in case of public companies and
their subsidiaries provisions on additional disqualifications will be invalid.
(j A person found by a court to be of unsound mind and the finding is
in force. Number of Directorships (Section 165)
(tf) An undischarged insolvent.
(J) No person, after the commencement of this Act, shall hold office as
(iii) A person who has applied to be adjudged as insolvent and his appli- adirector, including any alternate directorship, in more than twenty
cation is pending. companies at the same time. However, directorship in a dormant
(iv) A person who has been convicted by a court, whether in India or company is not included in the limit of 20 companies.
elsewhere, of an offence involving moral turpitude and sentenced to Provided that the maximum number of public companies in which
six months’ imprisonment and a period of five years has not passed a person can be appointed as a director shall not exceed ten. For
from the date of the expiry of the sentence: reckoning the limit of public companies in which a person can be
Provided that if a person has been convicted of any offence and appointed as director, directorship in private companies that are
sentenced in respect thereof to imprisonment for a period of seven either holding or subsidiary company of a public company shall be
years or more, he shall not be eligible to be appointed as a director included.
in any company; (2) Subject tothe provisions of sub-section(1), the members
of acompany
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(v) An order disqualifying him for appointment as a director has been may, by special resolution, specify any lesser number of companies
passed by a court or Tribunal and the order is in force; in which a director of the company may act as directors.
(vi) He has not paid any calls in respect of any shares of the company Who may be appointed as a Director?
held by him, whether alone or jointly with others, and six months
have elapsed from the last day fixed for the payment of the call; ( No body corporate, association or firm shall be appointed director
(vif) He has been convicted of the offence dealing with related party of a company, and only individual shall be so appointed; and
transactions under section 188 at any time during the last preceding (i) Who has been allotted a Director Identity Number (DIN).
five years; or Note: Only individual can be appointed as director of a company. The
(viii) He has not complied
with section 152(3)of the Act relating to Directors Supreme Court clarified in the case of Oriental Metal Pressing Works Pvt.
Identification Number. Lid. v. Bhaskar Kashinath Thakoor (1961) that the office of a director is to
(ix) He has not complied with the provisions of section 165(1) of the Act a certain extent an office akin to trust. Therefore, some individual human
on maximum number of directorships. being should be available for accountability.
(x) A person who is already a director of a public company which: DIRECTOR IDENTIFICATION NUMBER (DIN)
— has not filed the annual accounts and annual returns for any
The concept of a Director Identification Number (DIN) has been intro-
continuous 3 financial years commencing on and after the first
duced by the Companies (Amendment) Act, 2006. It is a part of the MCA
day of April, 1999; or 21 Project launched by the Ministry of Corporate Affairs. As such, all the
— has failed to repay its deposit or interest thereon on due date existing and intending directors have to obtain DIN within the prescribed
or redeem its debentures on due date or pay dividend and such time-frame as notified.
failure continues for one year or more. The DIN is a unique identification number for an existing director or a
A director of such company shall have to vacate the office in all the com- person intending to become the director of a company. In the scenario of
panies except in the company which has committed the default.
3, Cricket Club of India Lid.& others v, Madhav L. Apte & others (1975)
e-filing, DIN is a pre-requisite for filing of certain company related docu- authority. In case a company fails to furnish DIN to the Registrar of
ments. It is mandatory for all directors to acquire a DIN. Companies, such company shall be liable to a penalty as prescribed
To get the DIN, an online application is to be filed. A provisional DIN will by the Act.
be issued after online filing. Thereafter, the printed detail of the fields (6 Obligation to indicate Director Identification Number (Sec. /58).
—
entered has to be generated. A photo has to be attached on the form with Every person or company, while furnishing any return, information
proof of the residence duly attested by Notary/Gazetted Officer/Cost or particulars as are required to be furnished under the Act, shall
Accountant/ Company Secretary /Lawyer. quote the Director Identification Number insuchreturn, information
On resignation of the director from a company, the DIN obtained does not or particulars in case such return, information or particulars relate
have to be cancelled. The DIN will remain with the individual only. Only to the director or contain any reference of the director.
a single DIN is required for an individual irrespective of number of direc- (7 Penalty for contravention (Sec. /59), If any individual or director ora
—
torships held by him. All the directorships of an individual are mapped in company contravenes any of these provisions, every such individual
the database through DIN. or director or the company, as the case may be, who or which, is in
With the introduction of the concept of DIN, the offences committed by default, shall be liable to a penalty which may extend to Rs. 50,000
the directors can be immediately detected. It would also help in addressing and where the contravention is a continuing one, with a further fine
the concerns of companies vanishing after raising funds from the public. which may extend to Rs. 500 for every day after the first during
Investors also get the chance to take more informed decision by knowing which the contravention continues.
the top management of the company.
Appointment of Directors
Provisions of the Companies Act, 2013 relating to Director Identification The appointment of directors is made in the following manner:
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1. Appointment of First Directors

(1) Application for allotment of Director Identification Number (Sec, 53). The first directorsofa company are usually appointed by the promot-
Every individual, intending to be appointed as director of a company;
ers in the manner laid down by the company’s articles, Their names
or director of a company appointed before the commencement of are usually given in the company’s articles. Where the articles do
the Companies (Amendment) Act, 2006, shall make an application not provide for the appointment of first directors, the signatories to
for allotment of Director Identification Number to the Central
the memorandum, who are individuals, and in case of a One Person
Government in the prescribed form, along with the prescribed fee. Company an individual being member shall be deemed to be the first
(2 Allotment of Director Identification Number (Sec. 154). The Central directors of the company subject to the regulations
of the company’s
—
Government shall, within one month from the receipt of the appli- articles [Sec.152(1)]. The first directors can hold office only till the
cation, allot a Director Identification Number to the applicant. first annual general meeting of the company when they are replaced
(3) Prohibition to obtain more than one Director Identification Number by the directors appointed by the company at this meeting.*
(See, £55). No individual, who had already been allotted a Director 2. Appointment of Directors by Members.
Identification Number shall apply, obtain or possess another Director The subsequent directors, in the case of a public company, are appoint-
Identification Number. ed by the members of the company in the general meeting. Section
(4 Obligation of director to intimate Director Identification Number to {52 provides that unless the articles provide for the retirement of all
—
concerned company or companies. (Sec. /56) Every existing director directors at every annual general meeting, at least two-thirds of the
shall, within one monthof the receipt of Director Identification Number total number of directors of a public company shall be persons who
from the Central Government, intimate his Director Identification shall be subject to retirement by rotation and must be appointed by
Number to the company or all companies wherein he is a director. the company in general meeting. The remaining directors in the case
(5 Obligation of company to inform Director Identification Number to of any such company and the directors of a private company may
—
Registrar (Sec. 157). Every company

shall, within 15 days
of the receipt be appointed in accordance with the provisions of the company’s
of intimation under section 156, furnish the Director Identification
4. The members may appoint new directors
to replace the first directors earlier than the annual
Number of all its directors to the Registrar or any other prescribed general meeting.
190 DIRECTORS AND KEY MANAGERIAL PERSONNEL DIRECTORS AND KEY MANAGERIAL PERSONNEL. 191
articles. In the absence of any such provision in the articles or in Appointment of directors to be voted individually (Section 162)
case of default in so appointing directors, these directors shall also Ata general meeting of a company, a motion for the appointment
be appointed by the company in general meeting. (Sec. 152) of two or more persons as directors of the company by a single res-
Retirement of directors by rotation. In case of a public company, out olution shall not be moved unless a proposal to move such a motion
of the two third directors liable to retire by rotation, one-third (or has first been agreed to at the meeting without any vote being cast
the nearest number to one-third) shall retire at every subsequent against it.
annual general meeting of the company. The turn for retirement 3 Appointment of Directors by the Board.
shall be determined by the length of office of each director. Those
=
who have been longest in office shall retire first. As between persons The Board of Directors
may make the following appointments (Section
who become directors on the same day, retirement may be decided 161}:
by lot. (1) Additional or co-opted directors. If authorised by the Articles,
Re-appointment of directors. The vacancies caused by the retirement Board of Directors may appoint any person, other thana person
of directors should be filled upat the same meeting. Retiring directors who fails to get appointed as a director in a general meeting,
are eligible for re-election and may be re-appointed again. A person, as an additional director at any time who shall hold office up
other than the retiring director, can contest election for directorship to the date of the next annual general meeting or the last date
only if he or any other member who intends to propose him has given on which the annual general meeting should have been held,
at least 14 days’ nomination notice before the date of the meeting,
whichever is earlier. [Sec.161(1)]
in writing, to the company along with a deposit of Rs. one lakh or (if) Casual vacancy. A casual vacancy occurring amongst the di-
such higher amount as may be prescribed which shall be refunded rectors (on account of death, resignation or otherwise) may be
filled up by the Board of Directors unless the Articles providea
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to such person or, as the case may be, to the member, if the person
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proposed gets elected asa director or gets more than twenty-five per different procedure. The person so appointed shall hold office
cent of total valid votes cast either on show of hands or on poll on only up to the time his predecessor would have continued.
such resolution. However, the requirement of deposit of Rs. | lakh is [See 161(4)]
not applicable to.an independent director ora director recommended (iii) Alternate directors. The Board of Directors may, if so autho-
by the Board of directors or Nomination & Remuneration Committee. rised by the Articles of Association or by a resolution passed
The company shall inform its members of the candidature of a person by the company in the general meeting appoint an alternate
for the office of director in such manner as may be prescribed. director, to act for a director during his absence for a period
Ifthe vacancy caused by the retirement of adirector by rotationis not of not less than 3 months from the State in which meetings of
filled up at the same general meeting, the meeting shall be deemed to the Board are ordinarily held. Such a director will vacate office
be adjourned to the next week. If at the adjourned meeting also the immediately on the return of the original director to the state.
vacancies are not filled up, the retiring director shall be deemed to Such an alternate director will automatically vacate office on
have been re-appointed automatically except in the following cases the expiry of the term of the original director even if the latter
[Section 152(7)]: has not returned. [Sec.161(2)]
(a) aresolution for his re-appointment was put before the meeting, (iv) Subject to the articles of a company, the Board may appoint
but was lost; or any person as a director nominated by any institution in pur-
suance of the provisions of any law for the time being in force
(6) when such person has declined re-appointment in writing; or orof any agreement or by the Central Government or the State
(ce) when he has been disqualified; or Government by virtue of its shareholding in a Government
(@) a resolution, whether special or ordinary, is required for his company. [See./6//3)/
appointment or re-appointment in virtue of any provisions of 4, Appointment of Directors by the Tribunal
this Act; or Where an application is made to the Tribunal under section 241
(é) section 162 is applicable to such case for relief against oppression and mismanagement of a company’s
wor
affairs, the Tribunal may, if satisfied, order for the appointment of (i) However, a company cannot remove those where not less than
such number of persons as directors, who may be required to report two thirds of the total number of directors has been appointed
to the Tribunal on such matters as the Tribunal may direct. according tothe principle of proportional representation under
The Tribunal may issue the order on a petition made to it by at least section 163.
100 members of the company or the member(s) holding at least 10% (iif) Aspecial notice shall be required of any resolution, toremovea
of the voting rights in the company. The ground on which such a director under this section, or to appoint somebody in place of
petition can be filed is conduct of the affairs of the company in a a director so removed, at the meeting at which he is removed.
manner oppressive to any member of the company or prejudicial to (iv) On receipt of notice ofa resolution to remove a director under
the interests of the company or public interest. this section, the company shall forthwith send a copy thereof
Appointment of Directors by the Central Government to the director concerned, and the director, whether or not he
wn
Where all the directors of a company vacate their offices under any is a member of the company, shall be entitled to be heard on
of the specified disqualifications the promoter or, in his absence, the the resolution at the meeting.
Central Government shall appoint the required number of directors (¥) Where notice has been given of a resolution to remove a di-
who shall hold office till the directors are appointed by the company rector under this section and the director concerned makes
in the general meeting. [Section 167(3)] with respect thereto representation in writing to the company
. Appointment of Directors by Proportional Representation. and requests its notification to members of the company, the
company shall, if the time permits it to do so, send a copy of
Directors in a company may be appointed either by (a) a system of the representation to every member of the company, and if a
straight majority of votes or (6) a system of proportional represen- copy of the representation is not sent due to insufficient time
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ar for the company's default, the directormay require that the
Section 163 of the Companies Act, 2013 gives. an option to the company representation shall be read out at the meeting. However, copy
to adopt Principle of Proportional Representation for Appointment of the representation need not be sent out and the representa-
of Directors. The articles of a company may provide for the appoint- tion need not be read out at the meeting if, on the application
ment of not less than two-thirds of the total number of the directors either of the company or of any other aggrieved person, the
of a company in accordance with the principle of proportional rep- Tribunal is satisfied that the rights conferred by this sub-section
resentation, whether by the single transferable vote or by a system are being abused to secure needless publicity for defamatory
of cumulative voting or otherwise and such appointments may be matter.
made once in every three years. (vi) A vacancy created by the removal of a director may be filled
by the appointment of another director in his place at the
Removal of Directors meeting at which he is removed, provided special notice of the
A director can be removed from his office by: intended appointment has been given. A director so appointed
shall hold office till the date up to which his predecessor would
@ Shareholders under section 169 have held office if he had not been removed.
@ Tribunal under section 402. (vii) If the vacancy is not filled as per above, it may be filled as a
(1) Removal by the Shareholders [Section 169] casual vacancy in accordance with the provisions of this Act,
(i) A company may, by ordinary resolution, remove a director, provided that the director who was removed from office shall
not being a director appointed by the Tribunal under section not be re-appointed as a director by the Board of Directors.
242, before the expiry of the period of his office after giving (2) Removal by the Tribunal
him a reasonable opportunity of being heard. Where an application is made to the Tribunal under section 241
for relief against oppression and mismanagement of a company’s
5. Fardetailsreferto Anil Kumar(201 2) Corporate Goverance: Theory and Practice, international affairs, the Tribunal may, if satisfied, order for the removal of any of
Book House, New Delhi
i
the directors of the company (Section 242). The Tribunal may also (@) he fails to disclose his interest in any contract or arrangement
pass the order for the termination or setting aside of an agreement in which he is directly or indirectly interested, in contravention
which the company might have made with its directors. The effect of of the provisions of section 184;
such order will be removal of such director or directors from his or (e) he becomes disqualified by an order of a court or the Tribunal;
their office. Such a director (including managing director) shall not
be entitled to serve as a manager, managing director or director of (f) he is convicted by a court of any offence, whether involving
any company for a period of 5 years from the date of the Tribunal's moral turpitude or otherwise and sentenced in respect thereof
order terminating or setting aside his contract with the company. to imprisonment for not less than six months;
(g) he is removed in pursuance of the provisions of this Act;
Resignation by a Director (h) he, having been appointed a director by virtue of his holding
(7) A director may resign from his office by giving a notice in writing any office or other employment in the holding, subsidiary or
to the company and the Board shall on receipt of such notice take associate company, ceases to hold such office or other employ-
note of the same and the company shall intimate the Registrar in ment in that company.
prescribed manner, within prescribed time and shall also place the (2) If a person, functions as a director even when he knows that the of-
fact of such resignation in the report of directors laid in the immedi- fice of director held by him has become vacant on account of any of
ately following general meeting by the company. The director shall the disqualifications specified in sub-section, he shall be punishable
also forward a copy of his resignation along with detailed reasons with fine which shall not be less than one lakh rupees but which may
for the resignation to the Registrar within thirty days of resignation. extend to five lakh rupees.
The resignation of a director shall take effect fram the date on which (3) Where all the directors of a company vacate their offices under any
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the notice is received by the company or the date, if any, specified of the disqualifications specified in sub-section (1), the promoter or,
by the director in the notice, whichever is later: in his absence, the Central Government shall appoint the required
Provided that the director who has resigned shall be liable even after number of directors who shall held office till the directors are ap-
his resignation for the offences which occurred during his tenure. pointed by the company in the general meeting.
(3) Where all the directors of a company resign from their offices, or (4) A private company may, by its articles, provide any other ground for
vacate their offices the promoter or, in his absence, the Central the vacation of the office of a director in addition to those specified
Government shall appoint the required number of directors who in sub-section (1).
shall hold office till the directors are appointed by the company in
general meeting. (section 168) Powers of the Directors
Nature and Extent of the Powers of Directors
Vacation of Office by a Director The powers of directors of a company are co-extensive with the powers
The office of the director will fall automatically vacant in the following of the company. As per section 179 of the Companies Act, the Board of
cases (Sec. 167): Directors of a company shall be entitled to exercise all such powers and
(J) The office of a director shall become vacant in case— to do all such acts and things as the company is authorised to exercise
and do. There are however, two limitations upon the powers of the Board:
(a) he incurs any of the disqualifications specified in section 164;
1. The Board cannot exercise those powers which the Act, or
(4) he absents himself from all the meetings of the Board of Memorandum or Articles require to be exercised by the shareholders
Directors held during a period of 12 months with or without in the general meeting; and
seeking leave of absence of the Board;
2. In the exercise of their powers, the directors are subject to the pro-
(c) he acts in contravention of the provisions of section 184 relat- visions of the Act, Memorandum and Articles and other regulations
ing to entering into contracts or arrangements in which he is made by the company in the general meeting.
directly or indirectly interested;
fr
Powers of a company are distributed between the Board of Directors and (/) to grant loans or give guarantee or provide security in respect
the shareholders, Powers vested in the Board of Directors can be exer- of loans;
cised by it alone. The shareholders cannot interfere with the decision of (g) to approve financial statement and the Board's report;
the directors, unless they are acting contrary to the provisions of the Act
or the Articles. However, the inherent residuary and ultimate powers of a (4) to diversify the business of the company;
company lie with the general meeting of the shareholders, and therefore, (f) to approve amalgamation, merger or reconstruction;
the general meeting i¢., the shareholders
can act even ina matter delegated () to take over a company or acquire a controlling or substantial
to the Board in the following exceptional cases: stake in another company;
1, Where the directors’ actions are found to be mala fide. Where the (k) In addition to these powers, the following powers shall also be
actions of directors are mala fide and against the interests of the exercised by the Board of Directors only by means of resolu-
company, ¢.g. clash of directors’ personal interest with the duties tions passed at meetings of the Board:
towards the company.
(i) tomake political contributions
(subject to the prescribed
2. Where the Board becomes incompetent to act. Where the Board of restrictions);
Directors has for some valid reasons become incompetent to act, e.g.
all the directors are interested in a particular transaction. (ii) to appoint or remove Key Managerial Personnel (KMP);
(iti) to take note of appointment(s) or removal(s) of one level
3. Deadlock in the Board. Where directors are unable to act because
below the Key Management Personnel;
of a deadlock in the meeting of the Board of Directors. They are
equally divided and, therefore, cannot come to any decision. (iv) to appoint internal auelitors and secretarial auditor;
{v) to take note of the disclosure of director's interest and
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Statutory Powers shareholding;
Allthe powers that a company is vested with can be exercised by the board (vi) to buy, sell investments
held by the company (other than
of directors of the company, subject to the applicable law. The powers of the trade investments), constituting five per cent or more of
directors can be exercised either ina board meeting by passing a resolution the paid-up share capital and free reserves of the investee
in the meeting itself or by circulation or by way of delegation to various company;
committees constituted by the board or to the appropriate officials of the (vii) to invite or accept or renew public deposits and related
company. The powers of the board of directors under various provisions matters;
of the Indian Companies Act, 2013 may be grouped under three heads:
(viii) to review or change the terms and conditions of public
(1) Powers to be exercised by Resolutions Passed at Board's Meeting deposit;
According to section 179, the following powers of the company can (ix) to approve quarterly, half yearly and annual financial
be exercised only by means of resolutions passed at the meeting of statements or financial results as the case may be.
the Board:
The Board of directors may, by a resolution passed at a meeting,
(a) to make calls on shareholders in respect of money unpaid on delegate the following powers to any committee of directors, the
their shares; managing director, the manager or any other principal officer of the
(4) to authorise buy-back of securities; company or in the case of a branch office of the company, a principal
(c) toissue securities, including debentures, whether in or outside officer of branch office:
India; (a) The power to borrow money.
(d) to borrow money; (b) The power to invest the funds of the company.
(e) to invest the funds of the company; {e) The power to make loans.
198 DIRECTORS AND KEY MANAGERIAL PERSONNEL. DIRECTORS AND KEY MANAGERIAL PERSONNEL. 199
(2) Other Powers Exercisable only at Board Meeting duties are owed to the company meaning generally the shareholders cal-
Besides the powers specified in section 179, there are certain other lectively, both present and future, not the shareholders at a given point in
powers which can be exercised only at the meetings of the Board: time. These are enforceable by the company, although derivative actions
may be brought by individual shareholders as per the provisions of the
(a) The power to fill casual vacancies in the Board. Companies Act, 2013 on class action suit. A breach of these equitable
(6) Sanctioning of a contract in which a director is interested. obligations gives rise to liability to account for improper profits and to pay
(c) Power to appoint the first auditors of the company, and to equitable compensation for improper loss of company assets.
fill any casual vacancy in the office of auditors, unless such Section 166 of the Companies Act, 2013 has codified the duties of directors
vacancy has arisen by resignation of the auditor. as under:
(@) Power to recommend rate of dividend to be declared at the (1) To Act in accordance with the Articles of Association of the Company
AGM (subject to approval of the shareholders), (2) To Act in Good Faith: Directors must act honestly and diligently in
(e) The power to makea declaration of solvency in case of proposal the interests of the company. They must exercise their powers bona
for buy-back of shares, and in case of proposal for voluntary fide ie. in what they consider, is in the interests of company and not
winding up of the company. for any collateral purpose.
(3) Powers to be exercised with the consent of the General Meeting or It is expected from them to behave as honest men of business may
Restrictions on the Powers of the directors be expected to act. They may be held liable for breach of duty if they
The board of directors cannot exercise the following powers except have acted in their own interests or that of some third party without
with the consent of the company in the general meeting by a special considering whetherit was also in the interest of the company though
resolution (See, / 80). they might not have acted with any conscious dishonesty.
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(a) Sale, lease or disposal of the whole or substantially the whole The directors have to look after the interest of the company. Interest
of the undertaking of the company except sale or lease of of the company implies the interests of present and future members
property by a company whose business ordinarily is to sell or of the company. On the footing that the company would be continued
lease properties, as a going concern, they have to balance a long-term view against
the short-term interests of present members.
(4) To remit, or give time for the repayment of any debt due from
a director. Good faith also requires that directors should not make any secret
profit from their dealings with the company nor they should make
(c) Investment otherwise than in trust securities of compensation any profit by corporate opportunities.
received by the company as a result of any merger or amalga-
mation. (3) Duty of reasonable care. A director is bound to observe reasonable
care in the performance of his duties. He is expected to act with that
(@) Borrow money which will make the total borrowings in excess mutch of skill and diligence which an ordinary man would take in his
of the aggregate of the paid-up capital and free reserves of the own case. A director need not exhibit in the performanceof his duties
company except temporary loans obtained by the company
a greater degree of skill than may reasonably be expected from a
from its bankers in the ordinary course of its business.
person of his knowledge and experience.* He cannot be held liable for
(e) Contribution to bona fidecharitable
and other funds, of amount mere errors of judgment. “If directors act within their powers, if they
exceeding 5 per cent of the average net profits of the company act with such care as is to be reasonably expected of them having
for the last three financial years. regard to their knowledge and experience and if they act honestly
for the benefit of the company they represent, they discharge both
Duties of Directors their equitable as well as legal duty to the company.”
Under general law, a director's relationship with the company is regarded
as fiduciary in nature. Consequently, directors owe a duty of loyalty and 6. Re. City Equitable Fire Insurance Co, (1925)
care in performing their responsibilities on behalf of the company. These 7. Lagunus Nitrate Co. +. Lagunus Nitrate Syndicate (1899)
The directors’ duty of care has been explained by Roamer J. in Re. ffadirector of the company contravenes the provisions of this section
City Equitable Fire Insurance Co: such director shall be punishable with fine which shall be from Rs.
(9 A director need not exhibit in the performance of his duties a one lakh to Rs. 5 lakh.
greater degree of skill than may be reasonably expected from
a person of his knowledge and experience, Liabilities of a Director
(ij Adirectorisnot bound to give continuous attention totheaffairs The liabilities of the directors of a company can be grouped under three
of his company. His duties are of an intermittent nature, to be heads:
performed at periodical board meetings and at the meetings # Liability to outsiders
af committees of the board of which he is the member. He is * Liability to company
however, not bound to attend all such meetings, though he
ought to attend whenever, in the circumstances he is reason- # Criminal liability.
ably able to do so. 1. Liability to Outsiders
(iif) In respect of all duties that, having regard to the exigencies of Directors are not personally liable to the outsiders for any acts done
business and the Articles of Association, may properly be left by them on behalf
of the company. They act as agents of the company
to some other official, a director in the absence of grounds of and, therefore, they will be liable only under those circumstances
suspicion, is justified in trusting that official to perform such under which ordinarily an agent can be held liable.
duties honestly. The directors would, be personally liable to third parties in the fol-
(4) A director of a company shall not involve in a situation in which he lowing circumstances:
may have a direct or indirect interest that conflicts, or possibly may
(a) Directors shall be held liable for all the ultra vires transactions
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conflict, with the interest of the company. A director interested in a
contract with the company must disclose the nature of his interest amounting to a breach of an implied warranty of authority
at the Board's meeting. A director stands in a fiduciary capacity with held out by the directors.
the company and he must not place himself in a position in which (6) Directors shall also be liable on all those contracts which they
his personal interest conflicts with his duty. He must not vote as a enter in their own name. They shall also be personally liable
director on any contract or arrangement in which he is directly or on contracts entered into on behalf of the company when they
indirectly interested, unless authorised by the company’s articles. If have expressly or by implication personally undertaken the
he votes in such a case, his vote would not be counted and his pres- responsibility for the same.
ence would not be counted towards the quorum. There is no ban on (c Directors shall be personally liable to the outsiders if they are
company entering into a contract in which a director is interested.
—
found guilty of fraud or other torts. Outsiders who have sub-
The only requirement is that such interest must be disclosed, bona scribed for shares on the basis of false statement can make
fide and fair. the directors liable either under section 62 by an action for
(5) A director of a company shall not achieve or attempt to achieve any damage or by an action for deceit under general law.
undue gain or advantage either to himself or to his relatives, part- 2. Liability to the Company
ners, or associates and if such director is found guilty of making any
undue gain, he shall be liable to pay an amount equal to that gain to The liability of directors towards the company may arise in the fol-
the company. lowing four circumstances:
(6) Adirectorof acompany shall not assign his office and any assignment (a) Liability for “ultra vires" acts. Directors are responsible to the
so made shall be void. Directors should perform the entire duties place company for any loss that it may suffer on account of ultra
upon them by the Act and Articles, personally, They can, however, vires acts é.g. application of funds of company for objects not
delegate their certain functions to the extent to which the Articles sanctioned by the company’s memorandum or payment of
of the company permit or according to the demand of exigencies of dividend out of capital. The acts may not have been committed
business. with any fraudulent intention on their part.
DIRECTORS AND KEY MANAGERIAL PERSONNEL DIRECTORS AND KEY MANAGERIAL PERSONNEL 203
(b) Liability for negligence. Directors shall be liable tothe company the decisions of the board. It will be immaterial whether he attended
for negligence, when they do not use so much skill and care in such meeting of the board or not.'" In case of breach of trust, direc-
the management of the affairs of the company as an ordinary tors are jointly and severally liable.
man would reasonably use in his own case or which may be
expected from person of such experience and knowledge. Meeting of Board of Directors
Directors are, however, not liable for mere errors of judgment
when they have acted within their powers in the bona fide exer- Most of the powers of the directors are exercised in the meetings of the
cise of their discretion or negligence of the subordinates relied board of directors. The meetings are where the Board discusses the affairs
upon by them, in the absence of any ground for suspicion.* of the company and also exercises its authority. Conduct of meetings ina
proper manner is important for the proper functioning of the company.
(ce) Liability for breach of trust. Directors shall be held liable for Following are the provisions of the Companies Act, 2013 regarding conduct
misapplication of the funds of the company or for misappro- of board's meetings:
priation of assets or for making a secret profit out of their
dealings on behalf of the company. A director will also be liable 1, Frequency of Board Meetings: Every company shall hold the first
for breach of trust if he fails to act honestly and in the interests meeting of the Board of Directors within 30 days of the date of its
of the company as a whole. He will be liable to make good any incorporation and thereafter hold a minimum number of 4 meetings
loss sustained by the company as a result of any wrongful act of its Board of Directors every year in such a manner that not more
committed or authorised by him or which he has joined in than 120 days shall intervene between two consecutive meetings of
sanctioning at a board's meeting. the Board. [Section 173(1)]
(d) Liability for misfeasance, Misfeasance implies misconduct on Notice of Board Meetings: A meeting of the Board shall be called by
a
the part of a director concerning the company’s affairs which giving not less than seven days’ notice in writing to every director
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cause loss to the company. In order to take action against a at his address registered with the company and such notice shall be
directoron the ground of misfeasance, two conditions must be sent by hand delivery or by post or by electronic means, A meeting
fulfilled: (4 there must be misconduct or negligence on the part of the Board may be called at shorter notice to transact urgent
of a director and (if) such misconduct or negligence must be business subject to the condition that at least one independent di-
wilful. Mere failure on the part of the director to take certain rector, if any, shall be present at the meeting, provided further that
steps for the benefit of the company, e.g, recovery of a debt, in case of absence of independent directors from such a meeting of
will not amount to misfeasance. the Board, decisions taken at such a meeting shall be circulated to
3. Criminal Liability of the Directors all the directors and shall be final only on ratification thereof by at
least one independent director, if any,
When the directors fail to fulfil the statutory obligations imposed
upon them by law, they may be held criminally liable. There are Every officer of the company whose duty is to give notice under this
various provisions in the Companies Act under which directors shall section and who fails todo
so shall be liable toa penalty
of twenty-five
be criminally liable. The directors can also be held criminally liable thousand rupees. [Section 173(3), 173(4)]
for Fraud, misapplication and embezzlement of the company's funds 3. One Person Company provision: A One Person Company, small com-
under the provisions of the Indian Penal Code. pany and dormant company shall be deemed to have complied with
Liability for the acts of co-directors. A director is not liable for the the provisions of this section if at least one meeting of the Board of
misconduct or wrongful acts committed by his co-directors unless Directors has been conducted in each half of a calendar year and
he has expressly or impliedly authorized the same. A director would the gap between the two meetings is not less than 90 days. However,
be liable for loss or damage to the company resulting from carrying this shall apply to One Person Company in which there is only one
out such decisions if he has taken an active part in giving effect to director on its Board of Directors.
4 Quorum for Board's Meetings: Quorum means the minimum num-
ber of directors who are authorised to act and transact business as
8 Re City Equitable Fire Insurance Co, (1925)
9. Lagunus Nitrate Co. Laguous Nitrate Syndicate (1899) 10. Re. City Equitable Fire Insurance Co. Lid. (1925)
a Board. The quorum for a board meeting is one-third of the total (d) to store for safekeeping and marking the tape recording(s) or
number of directors in office or two directors, whichever is more. In other electronic recording mechanism as part of the records
those cases, where the number of interested directors is two-third of the company at least before the time of completion of audit
or more of the total strength of the Board, the remaining number of of that particular year.
uninterested directors being not less than 2, shall form the quorum te to ensure that no person other than the concerned director
—
for transacting such a business. Directors are not allowed to send are attending or have access to the proceedings of the meeting
their proxies to attend and vote for them in the meetings. through video conferencing mode or other audio visual means;
Meeting of the Board of directors in the absence of quorum, unless and
otherwise provided in the Articles, shall be adjourned until the same (/) toensure that participants attending the meeting through audio
day in the next week, at the same time and place. In case that day is visual means are able to hear and see the other participants
a public holiday it shall be held on the next succeeding day which is clearly during the course of the meeting.
not a public holiday.
(3) (a) The notice of the meeting shall be sent to all the directors in
5. Minutes of Meeting: The minutes of each meeting shall contain a accordance with the provisions of section 173 of the Act.
fair and correct summary of the proceedings thereat. In the case of
a meeting of the Board of Directors or of a committee of the Board, (5) The notice of the meeting shall inform the directors regarding the
the minutes shall also contain: option available to them to participate through video conferencing
mode or other audio visual means, and shall provide all the neces-
(a) the names of the directors present at the meeting; and sary information to enable the directors to participate through video
(5) in the case of each resolution passed at the meeting, the names conferencing mode or other audio visual means.
of the directors, (c) A director intending to participate through video conferencing or
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if any, dissenting from, or not concurring with the resolution. auclio visual means shall communicate
his intention to the Chairperson
or the company secretary of the company.
Meetings of Board through Video Conferencing or other audio visual (4) From the commencement of the meeting and until the conclusion
means of such meeting, no person other than the Chairperson, Directors,
As per the Companies (Meeting of Board and its Power) Rules, 2014, a Company Secretary and any other person whose presence is re-
company shall comply with the following procedure, for convening and quired by the Board shall be allowed access to the place where any
conducting the Board meetings through video conferencing or other audio director is attending the meeting either physically or through video
visual means. conferencing without the permission of the Board.
(1) Every Company shall make necessary arrangements to avoid failure (5) (a) The draft minutes of the meeting shall be circulated among all
of video or audio visual connection. the directors within fifteen days of the meeting either in writing or
in electronic mode as may be decided by the Board.
(2) The Chairperson of the meeting and the company secretary, if any,
shall take due and reasonable care— (5) Every director who attended the meeting, whether personally or
through video conferencing orother audio visual means, shall confirm
(a) tosafeguard the integrity of the meeting by ensuring sufficient or give his comments in writing, about the accuracy of recording
security and identification procedures; of the proceedings of that particular meeting in the draft minutes,
(8) to ensure availability of proper video conferencing or other within seven days or some reasonable time as decided by the Board,
audio visual equipment or facilities for providing transmission after receipt of the draft minutes failing which his approval shall be
of the communications for effective participation of the direc- presumed.
tors;
(c) After completion of the meeting, the minutes shall be entered in
(c) torecord proceedings and prepare the minutes
of the meeting; the minute book as specified under section 118 of the Act and signed
by the Chairperson.
ay
Matters not be dealt in a meeting through Video Conferencing the meeting of the shareholders also. This principle expressed in the case
of Re. Express Engineering Works Lie. (1920)can also be applied to compa-
The following matters shall not be dealt with in any meeting held through
nies where all the members are companies and they have appointed their
video conferencing or other audio visual means.—
representatives as directors in the company.
() the approval of the annual financial statements;
(i the approval of the Board's report; Key Managerial Personnel(KMP)
(ii) the approval of the prospectus; As per section 2(51) “Key managerial personnel", in relation to a company,
(iv) the Audit Committee Meetings for consideration of accounts; and means:
(v) the approval of the matter relating to amalgamation, merger, de- () the Chief Executive Officer or the managing director or the manager;
merger, acquisition and takeover. (i) the company secretary;
However, if there is quorum in board meeting through physical presence (ii) the whole-time director;
of directors, any other director can join board meeting through video (iv) the Chief Financial Officer; and
conferencing (Sec. 173(2)]
(v) such other officer who is in full-time employment one level below
Resolution by Circulation [Section 175] the directors and is designated as KMP;
(vi) such other officer as may be prescribed;
A resolution shall be deemed to have been duly passed by the Board or by
a committee thereof by circulation, if- Board of directors usually appoints managerial personnel such as managing
directors, whole-time director (also known as the executive director), and
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- theresolution has been circulated in draft, together with the necessary

manager (Le. Chief Executive Officer) to manage the affairs of the company
papers, if any, to all the directors, or members of the committee,
under the superintendence and control of the board.
it is sent at their addresses registered with the company in India by
Section 196 does not allow the simultaneous appointment of a managing
hand delivery or by post or by courier, or through such electronic
means as may be prescribed director and a manager in a company, But a company is permitted to ap-
point more than one managing director.
- ithas been approved by a majority of the directors or members, who
are entitled to vote on the resolution, provided that, where not less Appointment of Key Managerial Personnel [Section 203]
than one-third of the total number of directors of the company for
the time being require that any resolution under circulation must Every listed company and every other public company having a paid-up
be decided at a meeting, the chairperson shall put the resolution to share capital of Rs. 10 crores or more shall have the following whole-time
be decided at a meeting of the Board. key managerial personnel:
A resolution by circulation shall be noted at a subsequent meeting of the (i) Managing Director, or Chief Executive Officer or Manager and in
Board or the committee thereof, as the case may be, and made part of the their absence, a whole-time director;
minutes of such meeting. (ii) Company Secretary; and
(ii) Chief Financial Officer
When can the Meeting of the Board be treated as Meeting of the
Provided that an individual shall not be appointed or reappointed as the
Members?
chairperson of the company, in pursuance of the articles of the company,
Where all the members of a company are directors, the meeting of the as well as the managing directoror Chief Executive Officer
of the company
Board may be taken as meeting of the members of the company. The res- at the same time after the date of commencement of this Act unless,
olutions passed at the meeting of the board would be regarded as being (a) the articles of such a company provide otherwise; or
passed at the shareholders meeting when the directors meeting has waived
the requirement of the general meeting and resolved their meeting to be (6) the company does not carry multiple businesses:
wot
Provided further that nothing contained in the above provision shall apply appointment and remuneration payable, however, shall be subject to
to such class of companies engaged in multiple businesses and which has approval by a resolution at the next general meeting of the company and
appointed one or more Chief Executive Officers for each such business as by the Central Government in case such appointment is at variance to the
may be notified by the Central Government. conditions specified in Schedule V of the Act.
Restrictions on number of offices to be held Term of office

A whole-time key managerial personnel shall not hold office in more than As per section 196(2), no company shall appoint or re-appoint any person as
one company except in its subsidiary company at the same time. However, its managing director, whole-time director or manager fora term exceeding
a whole-time key managerial personnel may be a director of any company five years at a time, provided that no re-appointment shall be made earlier
with the permission of the Board. than one year before the expiry of his term.
Provided that a company may appoint or employ a person as its managing
Disqualifications
director, if he is the managing directoror manager of one, and of not more
than one, other company and such appointment or employment is made No company shall appoint or continue the employment of any person as
or approved by a resolution passed at a meeting of the Board with the managing director, whole-time director or manager who:
consent of all the directors present at the meeting and of which meeting, (a) isbelow theage of twenty-one years or has attained the age of seventy
and of the resolution to be moved thereat, specific notice has been given vears. Provided that appointment of a person who has attained the
to all the directors then in India. age of seventy years may be made by passing a special resolution in
which case the explanatory statement annexed to the notice for such
Managing Director motion shall indicate the justification for appointing such person;
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Meaning According to section 2(54) managing director means “a director (5) is an undischarged insolvent or has at any time been adjudged as an
who, by virtue of articles of a company or an agreement with the company insolvent;
or resolution passed by the company in general meeting or by its board (e) has at any time suspended payment to his creditors or makes, or has
of directors, is entrusted with substantial powers of management of the at any time made, a composition with them; or
affairs of a company and includes a director occupying the position of a
managing director, by whatever name called.” (@) hasatany time been convicted bya court of an offence and sentenced
for a period of more than six months.
Amanaging director has essentially to bea director. A managing director will
cease to be so the moment he ceases to be a director. A managing director Powers and duties of Managing Director
of a company has to exercise his powers subject to the superintendence,
A managing director is appointed to manage the affairs of a company. His
control and direction of the Board of directors. powers and duties are usually defined by (a) the agreement with the com-
pany by which he is appointed, or (b) by the Memorandum and Articles of
Appoiniment of a Managing Director the company, or (c) by the resolutions of the shareholders or the directors.
The appointment of a managing director can be made either by: A managing director is entrusted with substantial powers of management.
(a) an agreement with the company; or His powers may relate either to particular division or divisions of the busi-
(5) a resolution passed by the company in the general meeting; or ness. This follows that there may be more than one managing director in
a business.
(ec) a resolution of the Board of Directors; or
A managing director is required to exercise his powers subject to superin-
(@) a clause in the articles or association of the company. tendence, control and direction of the board of directors of the company.
As per section 196(4), a managing director, whole-time director or manag- Since a managing director must be a director he has also the duties, re-
er shall be appointed and the terms and conditions of such appointment sponsibilities and liabilities of an ordinary director. Also, the power to do
and remuneration payable (subject to the provisions of section 197 and administrative acts of a routine nature when so authorised by the Board
Schedule V) be approved by the Board of Directors at its meeting. The such as the power to affix the common seal of the company to any docu-
ment or to draw and endorse any cheque on the account of the company in | Basis | Managing Director | ‘Whole-time Director |
any bank or to draw and endorse any negotiable instrument or to sign any
certificate
of share
or to direct registration
of transfer of any share, shall not Manager Managing director and a A company can have a man-
be deemed to be included within the substantial powers of management. manager cannot beappointed | ager and whole-time director,
in one company at the same both at the same time.
Whole Time Directors time.
Meaning Distinction between a Manager and a Managing Director
Section 2(94) “whole-time director" includes a director in the whole-time
employment of the company. He may be taken as. a director who devotes (a Basis | Manager i Managing Director
his whole or substantially the whole of his working time to work with the Power Amanagerhasmanagement | A managing director has|
company. Thus, whole-time director is an employee director of the compa- over whole orsubstantially | substantial powers of
ny. He does not exercise “substantial power of management, but performs | the whole of the affairs of | management which would
important administrative functions. the company not otherwise be exercisable
Appointment _by him, _|
The provisions of section 196, which are applicable to the appointment of
‘Director A manager may not be a. | The managing director must
| director of the company. _ beadirectorof the company.
a managing director, are also applicable to the appointment of a whole-
time director. Appointment | Amanager may be appoin- | A managing director may
ted under a contract of | be appointed by virtue of an
Manager _ service or otherwise. agreement withthe company
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As per section 2(53) “manager” means an individual who, subject to the or resolution passed by
superintendence, control and direction of the Board of Directors, has the the company in general
management of the whole, or substantially the whole, of the affairs of a meeting or by the board of
company, and includes a director or any other person occupying the po- directors
orthe articles orthe
sition of a manager, by whatever name called, whether under a contract -memorandum of association
of service or not. of the company.
Provisions which are applicable to the managing director regarding ap- Number | There can be only one | A company may have more
pointment, term of office and number of companies which can be managed LManager
ina company _ than one managing director. |
also apply to. a manager. (Sec. /96) Remuneration Maximum remuneration | Where there is more than
|payable to a manager) one managing director, the
Difference between a Managing Director and a Whole-time Director
cannot exceed 5% of the: maximum remuneration
|Basis Managing Director Whole-time Director ] net profits. payable would be 10% of the
Power A managing director is en- A whole-time director does’ _net profits,
trusted with substantial
pow- not have any discretionary
ers of management. power to take decisions re-| IMPORTANT CASES
\ | garding policy matters. _| # Secretary of State for Trade and Shadow Director
Number of | A person can be a managing A person cannot be in the | Industry vs, Deverell
Companies director of more than one whole-time employment of # Ferguson vs. Wilson Legal Position of Director
company. more than one company at # ShubhShantiServices Ltd. vs.Manjula Legal Position of Director
a time, Therefore, a person| Agarwalla
cannot have more than one
_whole-time directorship. |
ar
212 DIRECTORS AND KEY MANAGERIAL PERSONNEL. DIRECTORS AND KEY MANAGERIAL PERSONNEL 213-221
# Dale and Carrington Investment Pvt. Fiduciary Position

of Director 13. Is it necessary to hold board's meeting? What are the provisions of
Ltd. vs. LK. Prathapan the law regarding Board meetings?
# Oriental Metal Pressing Works Pvt.Ltd. Appointment of Director 14, All the powers that a company can exercise are vested with the
vs. Bhaskar Kashinath Thakoor board. Explain.
# Re City Equitable Fire Insurance Co. Duties of Directors 15. Directorscan exercise their powers
only at the meeting
of the board.
REVIEW QUESTIONS What are those powers?
16. The Companies Act, 2013 has codified duties of directors. What
1. Who is a shadow director? How he is different from de facto are those duties?
director? 17. What are the powers and duties of managing director? How a
2. “Directors are described sometimes as agents, sometimes as trustees managing director is different from a whole time director?
and sometimes as managing partners. But each of these expression
is used not as exhaustive of their powers and responsibilities, but
as indicating useful points of view from which they may for the CASE PROBLEMS
moment and for the particular purpose be considered.”
Elucidate this statement with suitable illustrations. 1. Can the following persons be appointed as directors of a public
company:
3. Who can appoint:
(a) a minor,
() an alternate director
(b) bank,
VL
(i) an additional director, and
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(c) a partnership firm,
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(if) a director to fill the casual vacancy?
{d) a trust?
4. Whocan bea director? Can the director
of a company be appointed
Ans. [None. Minor is incompetent to enter into contracts. Only
by the board of directors? Explain.
individuals can be appointed as director.]
5. Explain the circumstances in which a director is deemed to have 2. Ina public company the following situations have arisen—
vacated his office.
()) One of the directors of the company has died and the Board
6. Who is a director? Is there any limit on the number of companies of Directors wants to fill up the casual vacancy.
on which a person can act as a director at a time? State the cir-
cumstances under which a director shall vacate his office, (i) One of the directors of the company proposes to visit China
for four months and the Board of Directors wants to appoint
7. Explain the provisions of the Companies Act relating
to the appoint- an alternate director in his place.
ment of directors by the Board of Directors.
(iti) According to the Articles of Association of the company the
8. Can the directors of a company be removed during their term of maximum number of directors has been fixed at 11. At the
office? relevant time there are only 9 directors. The Board of direc-
9. Whatare the powers that can be exercised
by the Board of Directors tors wants to appoint 2 additional directors.
only by means of resolution passed at a meeting and not by cireu- Advise the company.
lation?
Ans. [(i) The Board can fill in the vacancy by a resolution at its
10. Directors owe a duty of loyalty and care in performing their duties. meeting and not by a resolution by circulation.
Do you agree? Explain.
(ii) The Board can do so if the Articles permit.
11. What is the quorum of a Board's Meetings? (ii) The Board can appointif Articles permit, otherwise the company
12. Can the meeting of the board be regarded as meeting of the mem- in general meeting can do so.]
bers of the company?
wo
SHAREHOLDERS MEETINGS 223
(a) consideration of financial statements and reports of the Board

of Directors and auditors;
(6) declaration of dividends;
(c) appointment of directors in place of those who are retiring;
(d@) appointment and fixing of the remuneration of auditors of the
company.
(2) Statutory requirement. It is a statutory requirement on every com-
pany other than a One Person Company to call and hold an annual
general meeting every year (Section 96).
SHAREHOLDERS MEETINGS The first annual general meeting of a company must be held within
9 months from the closing of the first financial year of the company.
So it is not necessary for the company to hold any annual general
# Annual General Meeting meeting in the year of its incorporation.
* Extraordinary General Meeting Subsequent annual general meetings must be held by the company
# Procedures and Requisites of Valid Meeting each year within 6 months after the close of the financial year but
the interval between any two annual general meetings must not
# Resolutions be more than 15 months. Registrar may, however, for any special
reason, extend the time within which any annual general meeting
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Members of a company have the right to participate in the fundamental (not being the first annual general meeting) shall be held, by a period
corporate decision making and appoint their representatives (termed as not exceeding 3 months. Held, in the case of BR. Kundra v. Motion
directors) to run the company on their behalf. These rights are ensured by Picture Association that the gap between two AGMs cannot be more
the meetings of members of the company. Meetings of the members of a than 18 months (when the Registrar has by an order permitted it).
company, called general meetings are required to be held from time to time. Non-completion of final accounts alone may not be a valid ground
for granting extension. Financial year refers to the period ending on
Kinds of General Meetings the 31st day of March every year.
# Annual General Meeting (AGM) There should be one annual general meeting in every calendar year
and, therefore, there must be as many general meetings as the num-
@ Extraordinary General Meeting (EGM) ber of calendar years for which the company had been carrying on
(It may be noted that the requirement of Statutory Meeting and Statutory business.
Report laid down by section 165 of the Companies Act, 1956 has been “There isaclearstatutory duty oncirectors to call the meeting whether
dropped by the Companies Act, 2013.
or not, the accounts, the consideration of which is only one of the
matters to be dealt with at an annual general meeting, are ready or
Annual General Meeting (AGM) not."' If the annual accounts are not ready for being laid before the
(1) Meaning and Purpose. Annual General Meeting is a regular meeting meeting, proper course is to hold the meeting within the prescribed
of the members of a company which is held annually. This meeting time and then adjourn it to some future date early in the following
provides an opportunity to the members of the company to review year when the accounts will be available (Held in M.D Mundhira v,
working of the company and express their views on the management Assistant ROC), The fact that the company
did not function is also not
of the company. The purpose of calling the meeting is to transact the acceptable as an excuse for not calling the meeting? Similarly, when
ordinary business of the company. The ordinary business consists the management of the company was taken over by the Government
of:
1, Re El Sombrero Ld. (1958)
222 2. Madan Gopal Day v. State of West Bengal (1963)
hh
224 SHAREHOLDERS MEETINGS SHAREHOLDERS MEETINGS 225
in the case of Hindustan Co-op Society Lid, it was not accepted as (5) Notice requirement. Company must give at least 21 days’ written
an excuse for not calling the meeting. notice’ or through electronic mode to call an annual general meet-
Thus, section 96 provides that there shall bean annual general meeting ing of the shareholders. Annual general meeting may be held with a
once at least in every year, Le. one meeting per year. For example, in shorter notice if the consent in writing or through electronic mode
the case of Sree Meenakshi Mills Co. v, Assistant Registrar, Madurat,a is given by not less than 95% of the members entitled to vote at the
meeting was called on 30th December, 1934. It was adjourned to 31st meeting (Sec. /01).
March, 1935 and the next meeting was held on 28th January, 1936. (6 Default in holding the Annual General Meeting. If default is made in
—
Tt was held that the company did not comply with the requirement holding an annual general meeting, the Tribunal may, on the applica-
of section 166 since no meeting was held in the year 1935. tion of any member of the company, call or direct the calling of the
annual general meeting of the company and give such ancillary or
Case Laws consequential directions as the Tribunal thinks expedient in relation
(i) Validity of Annual General Meeting held beyond Statutory to the calling, holding and conducting of the meeting. The directions
Time: An annual general meeting held beyond time cannot be that may be given include that only if one member of the company
held to be void or irregular, if permission from the Registrar is present in person or by proxy that shall be deemed to constitute
has been obtained for the same. This is because the meeting the meeting.
must be held. Decided in the case of Hungerford Investment A general meeting so held shall be deemed to be the annual general
Trust Ltd. v. Turner Morrison & Co. (1972) that once the time meeting of the company.
for holding the meeting has expired that does not mean that
If default is made in holdinga meeting of the company in accordance
the meeting can never be held. with section 96, or in complying with any directions of the Tribunal,
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(i?) Adjourned AGM must be held within the maximum time-limit: company and every officer of the company who is in default, shall
When an AGM has been adjourned, the adjourned meeting be punishable with fine which may extend to Rs, 1,00,000 and in the
must be held within the maximum time period allowed by case of a continuing default, with a further fine which may extend
section 166.Heldin Bejoy Kumar Karnaniv. Assistant Registrar to Rs. 5,000 for every day after the first during which such default
of Companies. continues.
(3 Authorityto convene the Annual General Meeting. The power to con- Case Law
—
vene the Annual General Meeting vests with the Board of Directors.
Individual directors have no such power’ Secretary cannot issue Selvaraj V.v. Mylapore Hindu Permanent Fund Lid. (1968)-An AGM
any notice for the Annual General Meeting without the authority of was called but could not be commenced as directors abandoned it
the Board. before any of agenda could be taken up. Held, the power to call the
meeting by the Central Government/Company Law Board (under
(4) Time and Place of the meeting. Company must call the annual section 167) becomes exercisable.
general meeting either at the registered office of the company or at
some other place within the city in which the registered office of the State of Bihar v. Linkers Private Ltal (1970)- The directors of a
company cannot evade liability for not putting the annual accounts
company is situated [Sec. 96/2)|, However, Annual General Meeting of the company at the AGM by stating that the auditors had not
of unlisted company can be held anywhere in India with consent of sent the same.
all members in advance.
Kastoor Mal Banthia v. State (1951)}-There were only two members
The annual general meeting must be held on any day which is not a ina private company beth of whom were directors also. On account
National holiday during business hours, that is, between 9 a.m. and of serious illness of one director/member, the AGM could not be
6pm, held in time. Held, default is not wilful.
4, implies 21 days’ clear notice te, excluding both the days on which it is served and the date
3. Browne 1: La Trinidad (1887) af the meeting.
— soe
226 SHAREHOLDERS MEETINGS SHAREHOLDERS MEETINGS. 227
Extraordinary General Meeting (EGM) Requisitionists shall call the meetingin the same manner as nearly as
possible in which meetings are called by the Board of Directors, Notice
Meaning of such meeting shall be given in the same manner as for the regular
meetings. If the registered office is not made available to them, they
All general meetings other than the annual general meetings are known as may hold the meeting anywhere else. Requisitionists shall be entitled
extraordinary general meetings. to claim all the expenses of calling the meeting from the company.
The company shall be entitled to indemnify itself and to deduct the
When and By Whom EGM may be called expenses of calling the meeting out of the fees or remuneration of
Extraordinary general meeting may be called under the following circum- those directors who were in default. Resolution, properly passed at
stances: the meeting called by the requisitionists, shall be binding upon the
company.
() By the Board, When the directors have to transact some immediate
and emergent business for which they cannot wait till the next annual Case Laws
general meeting, ie. the board of directors of a company may call Life Insurance Corporation of India v. Escorts Ltd. (1986)- Subject
this meeting whenever it thinks the need of it. to the provisions of the Act, every shareholder, including the insti-
(2) By the Board on the requisition. The board of directors may also call tutional shareholder has the right to requisition an EGM. No share-
an extraordinary general meeting on the requisitionof given number holder can be restrained from calling the meeting. The shareholder |
of members. The given number of members is- is not bound to disclose the reasons for requisitioning the meeting.
(a) In the case of a company having share capital, member or Kuldip Singh Dhillon v. Paragon Utility Financiers Pvt. Lid. (1986)-|
members holding notless than 1/10.of the paid upshare capital Only those shareholders who have the right to vote can requisition
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of the company carrying voting rights regarding the matter of a meeting. Thus, where the Articles of a company provides that the
requisition. members who have not paid calls on shares, are not entitled to vote,
(5) In the case of a company not having share capital, member or those shareholders cannot requisition a meeting.
members holding at least 1/10 of the total voting power of all R. Chettiar v. M. Chettiar (1951)- A meeting was requisitioned to
the members regarding that matter. remove the managing director of the company. The directors did not
Matters, for the consideration of which the meeting is called shall be call the meeting. The requisitionists themselves called the meeting
stated in the requisition and those matters alone shall be considered at the registered office of the company. The managing director of |
at the meeting. Requisition must be duly signed by the requisitionists the company locked the premises of the company on the day of the
and deposited at the registered office of the company. meeting. So the requisitionists called the meeting elsewhere nearing
Board of Directors must proceed to call a meeting for the consid- the registered office of the company. Held,
it was a valid meeting.
eration of the matters notified by the requisitionists within 21 days (4) By the Tribunal. The Tribunal may also under certain circumstances
of the deposit of requisition at the registered office of the company. call, hold and conduct the meeting of a company (Sec. 98+
The meeting must be held by the directors on a day not later than (a) When it is ivtpracticable to call a meeting of the company ina
45 days from the date of the deposit of the requisition. manner in which meetings of the company may be called,* or
(3) By the Requisitionists, On default of the directors to call the meet- (4) When it is not possible to hold or conduct the meeting of the
ing within 45 days of deposit of the requisition, the meeting may be company in the manner prescribed by the Act or the Articles
called by the requisitionists themselves within 3 months of the date of Association of the company.
of deposit of the requisition. Requisitionists shall not be allowed to Tribunal may also give directions modifying or supplementing the
hold the meeting after the expiry of three months from the date of operation of the provisions of the Act or the Articles of Association
deposit of the requisition except a meeting which was duly convened
within three months of the requisition but was adjourned to some 5, Rathnaveluswami Chettiar v, Manickavelu Chettiar (195.1)
other day which falls after the expiry of the said three months. 6. Dayanand Chakraborty v. Himangu Sekhar Mukherjee and others (Company Petition No, 23
of 1977)
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in relation to the calling, holding or conducting of the meeting. It In case the meeting of the Board of directors itself is unlawful eg.
may also direct the company that even one member of the com- where rightful directors are prevented from attending the directors’
pany present in person or by proxy shall be deemed to constitute a meeting, the decision taken by the Board at such meeting to call
meeting.” the general meeting shall also be unlawful! Where, however, the
The Tribunal may order for the calling, holding and conducting of meeting at which the directors decide to call a general meeting is not
such a meeting either (a) of its own motion, or (6) on the application properly constituted (e.g. there is some defect in the appointment or
of any director
of the company, or (c) of any member
of the company qualification of the directors), but the Board acts bona fide, a general
who would be entitled to vote at the meeting, meeting called in pursuance of a resolution passed at such directors’
meeting is not necessarily invalid.”
Comparative Note on General Meetings However, under certain circumstances, the requisitionists or the
Tribunal may call a general meeting
in case of default by the directors.
Basis Annual General Meetings Extraordinary 2. Notice
(AGM) Meeting (EGM)
What Regular Meeting held once in| Meetings other than Notice to whom? Notice of every general meeting should be given
to the following persons:
every year. AGMs.
(i) Every member of the company,
Applicable to | All companies All companies
(if) Every person entitled to a share in consequence of the death
Requirement | Within 6 months of close of the | Any time. or insolvency of a member,
financial year.
(iif) Auditor or auditors of the company
Purpose Ordinary business-election of | Any matter for which
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directors; passing of annual ac- | notice has been given. (iv) Every director of the company [Sec [01(2)].
counts; declaration of dividend; A preference shareholder is entitled to receive notice of only that
and appointment of auditors. general meeting which has to consider a resolution on which he is
Who may call | Board of directors Board
of directors; and entitled to vote ie. resolutions directly affecting their rights or all
Requisitionists resolutions when the dividends are in arrears fora specified number
Default Tribunal may call. Fine on default. | Tribunal may call. Fine of years. [John Shaw and Sons (Salford) Ltd. v. Shaw, 1935).
on default. Deliberate omission to give notice toa single member may invalidate
the meeting, However, an accidental omission to give notice to or
Procedures and Requisites of a Valid General Meeting non-receipt of it by a member will not invalidate the meeting [Sec.
/04(4)| Non-receipt of the notice under
no circumstances invalidates
The following are the requisites for calling and conducting a valid general the holding of the meeting.
meeting:
Case Examples
1. Proper Authority
Musselwhitev, CH. Musselwhite & Sons Lid. (1962)-Omission must |
The authority to call a general meeting is the board of directors of not be designed or deliberate. Failure to send notice to a member
the company. The notice of the meeting should be issued under
under the mistaken belief was held to be deliberate not accidental. |
their authority, granted at a duly constituted meeting of the board
or passing a resolution of the board by circulation. A single director Re. West Canadian Collieries Ltd. (1962)- Accidental failure of the.
has no power to convene a meeting. The secretary of the company company to put a notice to certain members into the post om ac-|
has no authority to call a general meeting unless the Board resolves count of a misinterpretation of the articles of association was held} |
and authorises him to do so. (Held, Re. Haverajt Gold Reduction and not to invalidate the proceedings of the meeting. |
Mining Ca, £900)
8 Harben », Philips (1883)
7. Ramroop Sharma v. C.R.E. Wood & Co. Lid. (1958) 9, Browne v, La Trinidad (1887)
Sao
Length of Notice. A proper notice in writing or through electronic the fact that the same has been sent to the members through post
mode to every member of the company is required by law for the shall be mentioned in the advertisement. In case of joint-holding of
holding of every valid meeting. Notice must be given even though a shares, notice to first named shareholder would be sufficient.
member has waived his right to have notice. It must disclose the pur- When the meeting is adjourned for 30 days or more and the new
pose for which the meeting is called, It must be given at least 21 clear business is to be transacted at the adjourned meeting, a fresh notice
days before the date of the meeting. In calculating 21 days, the date has to be given.
of receipt of notice and the date of the meeting should be excluded
[Sec. /71(1)]. The gap should be of 21 clear days. The notice shall Contents of the Notice, The notice must contain the following par-
be deemed to have been received by a member at the expiry of 48 ticulars:
hours from the time of posting. In case of newspaper advertisement () Name of the meeting, the place, day and hour of the meeting.
of a notice, the period of 21 clear days begins from the day after the The meeting to be valid must be held at the place and time
issue of the newspaper". specified, Annual General Meeting should be held on a work-
Articles may provide for a notice longer than ?1 days, but not shorter ing day during business hours. But the meeting may continue
than 21 days. beyond business hours. Extraordinary general meeting can be
held on any day including a holiday and not necessarily during
Calling a general meeting by a shorter Notice working hours.
(#) Anannual general meeting may be called atanotice of less than (i) Nature of the business to be conducted at the meeting. The
21 days with the consent of not less than 95% of the members Companies puts business into two categories:
entitled to vote at that meeting.
(a) General business (also referred as ordinary business). In
(if) An extraordinary general meeting may be called at a notice of case of annual general meeting, all business relating to:
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less than 21 days with the consent of majority in number of (@ consideration of annual accounts; (i) declaration of
members entitled to vote and who represent not less than 95% dividend; (if) appointment of directors in place of those
of paid up share capital carrying voting rights at the meeting. retiring; and (iv) appointment of, and fixing of remuner-
ation of the auditors, are considered as general business.
In case of company net having share capital with the consent
of members holding not less than 95% of the total voting power (6) Special business,Any other business at an annual general
exercisable at that meeting. meeting and all businesses in case of any other meeting
are regarded as special business. If special business is
Case Example to be transacted at a general meeting, an ‘explanatory
statement’ giving all the material facts of the item of
Re. Parikh Engineering and Body Building Co. Ltd. (1975): Parikh
Engg. sent notice on 20th April, 1973 for the EGM on 8th May, 1973. special business including the particulars of interest, if
any, of every director or other managerial personnel,
The meeting passed a resolution to shift the registered office of must be annexed to the notice.
the company. As the meeting was called with a notice of less than
21 days, post meeting the company sent a notice to all its equity Agenda. Agenda gives guidance and information as tothe business to
shareholders for their consent to waive-off the shorter notice. 266 be discussed and transacted in the meeting. It sets out the chronolog-
shareholders out of total 277 ratified the resolution. They were ical sequence in which the various items of business shall be taken up
holding more than 95% paid-up equity share capital of the company. in the meeting for discussion. The sequence should not be changed
Held, the resolution passed at the meeting is valid. unless agreed to by the members present. Routine items should be
Service of Notice. Company may serve notice on the members either put first and debatable items later. Similar iterns should be placed
closer to each other.
personally or by prepaid post or by advertisement in the newspaper.
It must be properly addressed. Service of notice by advertisement Agendais prepared by the Secretary
in consultation with the Chairman
shall be deemed to be complete the day the advertisement appears or the Managing Director. Agenda must be clear and complete. A
in the newspaper. Explanatory statement need not be advertised, but company may be restrained from transacting that business which
is not mentioned in the agenda.
10. Sneath v. Valley Gold Ltd. (1893)
232 SHAREHOLDERS MEETINGS. SHAREHOLDERS MEETINGS 233
3. Place of the Meeting (a) the meeting shall stand adjourned to the same day in the
Annual General Meeting The annual general meeting is to be held by next week at the same time and place, or to such other
acompany at its registered office or at some other place in the same date and such other time and place as the Board may
city, town or village where the registered office of the company is determine; or
situated. However, the Central Government has the power to grant (5) the meeting, if called by requisitionists
under section 100
exemption to any company from this provision. (Le.extraordinary general meeting) shall stand cancelled:
Aprivate company and unlisted company can hold its annual general Provided that in case of an adjourned meeting or of a change
meeting at any other place if: of day, time or place of meeting under clause (a), the compa-
(@) it has fixed the place of the meeting by the articles; or ny shall give not less than three days’ notice to the members
(if) it has fixed the place of the meeting by a resolution agreed by either individually or by publishing an advertisement in the
all the members. newspapers (one in English and one in vernacular language)
Other General Meetings. There
is no such provision in the Companies which is in circulation at the place where the registered office
Act which requires that the general meetings of the company other of the company is situated.
than the annual general meeting must be held at some particular (3) Ifatthe adjourned meeting also, a quorum isnot present within
place. It, therefore, follows that the other general meetings can be half-an-hour from the time appointed for holding meeting, the
held, subject to any specific provision in the articles at any other members present shall be the quorum.
place. However, the directors must act reasonably in fixing the time
and place of the meeting so that members get full opportunity in Can a single member constitute a valid meeting?
exercising their voting rights. Ordinarily, asingle member present cannot formaquorum,asasingle
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Quorum member cannot constitute a meeting. Thisis because meeting prima

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:
Minimum number of members required to constitute a valid meeting facie means coming together of two or more than two persons. The
and to transact business therein is called ‘quorum’. No meeting can Companies Act also uses the expression “members” which shows that
be valid without quorum. Any resolution passed at a meeting without more than one member is expected to be present at the meetings.
quorum shall be invaliel.
Case Law
Section 103(1) of the Companies Act provides as follows:
Sharp v. Dawes. A meeting of a company was called to make a
(1) Unless the articles of the company provide for a larger num- call. Gut of several shareholders only one turned up. He had the
er—
proxies of other shareholders.He himself took the chair and passed
(a) in case of a public company,— a resolution making the call. He also proposed and passed a vote
({) 5 members personally present if the number of of thanks. It was held that the ‘call’ made was invalid since there
members as on the date of meeting is nol more was no meeting. The term meeting prima facie means the coming
than 1000; together of more than one person.
(i) 15 members personally present if the number of However, under the following circumstances even a single member
members as on the date of meeting is more than present may constitute the quorum and, therefore, a valid meeting:
1000 but up to 5000;
1. When the Tribunal calls or directs the calling of a general
(ii) 30 members personally present if the number of
meeting, it has the authority to direct that one member present
members as on the date of the meeting exceeds
in person or by proxy shall be deemed to constitute a valid
S000; meeting (Secs. 97 and 98).
(8) in the case of a private company, 2 members personally
present, shall be the quorum for a meeting of the com- 2. When a class of members or creditors consists of one person,
pany. that member alone can constitute the meeting of that class and
can pass a resolution by signing it, e.g, when all the shares of
(2) Ifthe quorum is not present within half-an-hour from the time
appointed for holding a meeting of the company— a particular class are held by one person only.
A eT
At what time quorum must be present? The quorum must be present Powers ofa Chairman
at the time when the meeting begins and proceeds to take up busi- 1. The chairman has prima facie authority
to decide all questions
ness. It need not be present throughout or at the time of taking the which arise at a meeting and which require decision at the
vote on any resolution.'' Thus, once a meeting is organised and all time.
the parties have participated, no person or faction, by withdrawing
capriciously and for the sole purpose of breaking the quorum can 2. The entry in the minutes book of the chairman's decision is
render the subsequent proceedings invalid. evidence of the decision of the meeting.
In case, a company is a member of another company, it may, by res- 3. The chairman has a right to decide priority amongst speakers,
olution of its Board of directors, authorise such person as it thinks to demand poll, to exercise casting vote, to expel an unruly
fit to act as its representative at any meeting of the other company. member and he may, with the support of the majority, apply
Such person shall be considered as a member “personally present” closure to a discussion after it has been reasonably debated."
for the purpose of counting the quorum. In case the same person 4, He can adjourn a meeting when it is impossible, by reason
represents more than one company who are members of the com- of disorder or other like causes, to conduct the meeting and
pany, his presence will be counted as two or more members as the complete business.
case may be, for purposes of quorum.” In case two or more persons Casting Vote
are joint-holders of shares in a company, one or more of them will
be counted as one member for the purposes of quorum. Articles of Association may give an additional or second vote to the
chairman of the company, over and above his right to vote as an
Aquorum is presumed unless it is questioned at the meetingor unless ordinary member, In the case of a tie, Le. equality of votes, chairman
the record shows that the quorum in fact was not present. may use the casting vote to decide the matter in one way or the other.
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. Chairman Duties of a Chairman
Ageneral meeting of the companyis
to be presided over by achairman 1. The chairman must take care to see that proper discipline is
who regulates and supervises the proper conduct of the business at maintained
at the meeting; that the proceedings are conducted
the meeting. He decides all incidental questions arising in the course in a proper manner; that proper opportunity is given to the
of the proceedings of the meeting. Chairman should act bona fide members to express their views; that the voting is fair; and
and in the best interest of the company as a whole. Articles usually that the proceedings of the meeting are properly and correctly
provide the mode of appointment of the chairman of a meeting.If the recorded in the minutes book.
articles do not provide otherwise, the members personally present at
the meeting shall elect one of themselves to be the chairman thereof 2. The chairman should act bona fide according to his best ability
ona show of hands [Sec. /04(1)]. [fa poll is demanded on the election and judgment and without any prejudices. He should see that
of the chairman, it must be taken forthwith and the chairman elected the meeting is duly convened and properly held.
on a show of hands can exercise all the powers in this connection 6. Proxy
[Sec. /04{2)]. IF some other person is elected chairman as a result of The term proxy has two meanings:
the poll, he shall be the chairman for the rest of the meeting.
(a) a personal representative of the member at a meeting te, the
Chairman of the original meeting shall be the chairman of the ad- person authorised to act or vote for another at a meeting of
journed meeting also unless validly removed. The chairman of a the company, and
meeting may be appointed by the Company Law Board/Tribunal
in cases where there are differences among the shareholders, anda ()) the instrument by which a person is appointed to act for an-
other at a meeting of the company, since a representative can
peaceful meeting under the chairmanship of a person appointed by
either group is impossible." be appointed only in writing.
Il. Re Hartley Baird Lid. (1954)

12, Re Kelantan Coconut Estates Lid. (1920)
13, Selvaraj v. Mylapore HLP. Fund (1963) i4. Wall v. London Northern Assets Corporation (1898)
Sok
SHAREHOLDERS MEETINGS SHAREHOLDERS MEETINGS 237
The following are the provisions of the Companies Act regarding (6) Every notice of a meeting must appropriately mention that
appointment and rights of proxy: a member is entitled to appoint a proxy and that the proxy
(1) Law entitles every member of a company to appoint a person need not be a member [Sec./05(2)]. A company cannot send
as his proxy to attend and vote at the company meeting instead invitation to members to appoint any one or more persons as
of himself [ Sec. (05/1 )]. However, amember of a company hav- proxies.
ing no share capital does not have this right unless its articles (7) Aproxy is revocable. It can be revoked at any time. Death of the
provide expressly. member appointing a proxy will, in the absence of provisions
(2) Amember of a private company is not entitled to appoint more in the Articles revoke the authority of the proxy. Member may
than one proxy to attend on the same occasion unless
its articles himself attend and vote in the meeting. Vote tendered by the
provide otherwise. But a member of a public company may proxy in such a case will not be accepted because the need
appoint more than one proxy ie, he may appoint one proxy for exercising the proxy had never arisen. Proxy in this case
in respect of certain shares held by him and a different proxy shall stand revoked impliedly. However, the mere presence of
for other shares held by him. Provided that a person appointed a member at the meeting does not imply the revocation of the
as proxy shall act on behalf of such member or members not authority of the proxy. When both the member and the proxy
exceeding 50 and any such number of shares as prescribed. are present at the meeting, the member's absence from voting
on the resolution on which the proxy casts his vote does not
(3) Any person can be appointed as a proxy whether he is a mem- imply the revocation of the authority of the proxy. A proxy
ber of the company or not. In case the proxy is not a member appointed later revokes the proxy appointed earlier.
of the company, he shall have no right to speak at the general
meeting unless the articles otherwise provide. However, a (8 The relationship between the member and the proxy is that of
—
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proxy may put questions in writing and send the same to the principal and agent. A minor member has no capacity to ap-
irman for answer. point a proxy. He can act only through his guardian, However,
a minor can be appointed a proxy. In the case of joint holders
(4) A proxy is ordinarily entitled to vote only ona poll But he may of shares, proxy appointed by the first named joint holder will
vote on voting by show of hands if the articles provide. Besides have precedence over the proxy appointed by the second joint
that, he may demand or join in demanding a poll. However, holder. Proxy appointed by the first joint holder will exercise
he shall have no right to inspect proxy forms or the minutes voting right to the exclusion of the joint holders who may be
of the meeting. present in the meeting.
(5) Proxy must be appointed by an instrument in writing, duly 7. Voting at General Meeting
stamped and signed by the member of the company. A blank
but stamped proxy is valid and may be completed
by the person The decisions at the meetings are taken by way of passing the reso-
authorised to do so. lutions. Every proposed resolution is discussed by the members of
the company. Members have the right to move amendments to the
Proxy must be deposited with the company at least 48 hours proposed resolutions provided the amendments are germane to the
before the commencement
of the meeting. Acompany, however, proposed resolution. After
a proposed resolution has been discussed it
cannot legally require proxies to be deposited with it earlier is put to vote, Every member has a right to vote on such resolutions.
than 48 hours before the time of the meeting. After giving 3 Shareholders may exercise their voting rights in their best interests
days’ notice to the company, members may inspect during with complete freedom. They are allowed to vote even if their interest
business hours the proxies lodged with the company at any is in conflict with the interest of the company. A director may vote
time during the period commencing 24 hours before the time in the shareholders’ meeting even though his interest in the subject
fixed for the commencement of the meeting and ending with matter is opposed to the interest of the company. Only members
the conclusion of the meeting [See. /05/4)]. Proxy lodged for whose names appear in the Register of Members shall have the right
the original meeting remains valid for the adjourned meeting to vote. Share warrant holders, executor of a deceased member,
also.
receiver of an insolvent member cannot exercise any right to vote,
¢
o
238 SHAREHOLDERS MEETINGS. SHAREHOLDERS MEETINGS. 239
unless registered as a member. However, a person who becomes a (5) In the case of a company having share capital, by any member
member between the date of the original meeting and the adjourned ormembers, present in person or by proxy holding not less than
meeting may vote at the adjourned meeting. Members who were not 1/10 of the total voting power in respect of the resolution or
present at the time of voting by show of hands may vote at a poll. having paid up share capital of not less than Rs. 5,00,000.
A company cannot prohibit any member from exercising his voting (ec In the case of any other company, by any member or members
—
right on the ground that he has not held his shares or other interests present in person or by proxy and having not less than 1/10 of
in the company for any specified period before the meeting or on the total voting power.
any other ground (Sec. 106). However, the articles may provide thata The demand for poll may be withdrawn at any time by the
member shall not be entitled to exercise any voting rights, in respect person or persons who made the demand (Sec. /09).
of any shares registered in his name on which he has not paid all
calls or other sums presently payable by him or in regard to which Poll must be held according to the provisions of the Articles
the company has exercised any right of lien (Sec. /06). of Association. A poll on a resolution for the adjournment of
the meeting or for the appointment of the chairman must be
The preference shareholders have right to vote only on such reso- immediately taken. Chairman, in all other cases, must take poll
lutions which directly affect them; and when their dividends are in at any suitable time but not later than 48 hours of the demand
arrears for a specified number of years. for poll (Sec. /09). If a poll is not completed on the same day,
Voting may be either by a show of hands or by a poll. it will be continued on the next day and the chairman will not
Voting by show of hands. In the first instance, at any general meeting, be entitled to close the poll. When more than one resolution is
voting takes place by a show of hands. On a show of hands, each to be passed, poll should be taken on each of the resolutions
member has only one vote. Proxies are not entitled to vote in case of separately.'*
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such a voting unless the articles otherwise provide. The chairman's The chairman of the meeting shall have the power to regulate
declaration on the result of voting by show of hands is conclusive. the manner in which a poll shall be taken. It need not necessar-
Voting by poll. Voting in accordance with the voting rights given to ily be by ballot. It may be by show of hands. But it cannot be
the members by the Articles of Association is called a ‘Poll’. Proxies by secret ballot because secret ballot polling is possible where
are allowed to vote in case of voting by poll. There is a counting each member has one vote to cast. In case of voting by poll,
of votes cast in favour and against the resolution in case of a poll. members have the votes in accordance with the shares held
Ordinarily, it implies exercise of voting rights by members in pro- by them. The chairman shall appoint such number of persons,
portion to their share of the paid up equity capital of the company. as he deems necessary, to scrutinise the poll process and votes
All decisions taken on voting by show of hands will stand cancelled given on a poll and to report thereon to him.
as soon as a demand for voting by poll is made. It is the demand for
poll and not its result which will eradicate the decision by show of Difference between Voting by Show of Hands and Poll
hands.
Show of Hands Pall
A poll can be demanded either before or after the declaration of the
.| Each member has one vote only, | Members have the votes as per the
result of voting on a show of hands. A poll may be demanded by voting rights held by them.
either of the following:
.| Proxies are not allowed to vote. Proxies are allowed to vote.
(a) Chairman, on his own motion. It is the duty of the chairman
to demand poll when he knows that proxies have been lodged .| There is no counting
of votes in| Votes in favour and against are
and that on a poll the decision on a show of hands is likely to favour and against the resolution. | counted.
be reversed," .| Decision of voting by show of | Decision of voting by poll is never
hands is cancelled as soon as poll) cancelled.
is demanded.
15. Second Consolidated Trust Lich v. Cevlon ete. (1943) . Patent Wook Keg Syndicate Lid v. Pearse (1906)
ST
Passing of Resolution by Postal Ballot Procedure

to be followed
for conducting business through Postal Ballot
In view of poor attendance of the members at the general meetings of As per the Companies (Management and Administration) Rules, 2014, the
companies, the Companies Act provides for voting through postal ballot following procedure is to be adopted for conducting business through
including voting by electronic mode. It is limited to specified resolutions postal ballot:
proposed to be passed by a listed company. The Central Government has (1) Notice: The company is required to send a notice to all the share-
framed rules in this regard. holders, along with a draft resolution explaining the reasons therefor
“Postal Ballot" includes voting by post or through any electronic mode and requesting them to send their assent or dissent in writing on a
[Section 2(65)] postal ballot.
Applicability The notice shall be sent either (a) by Registered Post or speed post, or
One Person Company and other companies having members up to 200 are (5) through electronic means like registered e-mail id or (c) through
not required to transact any business through postal ballot. courier service for facilitating the communication of the assent or
dissent of the shareholder to the resolution within the said period of
thirty days.
List of Businesses in which the Resolutions shall be passed through
Postal Ballot The notice of the postal ballot shall also be placed on the website of
the company forthwith after the notice is sent to the members.
(a) alteration of the objects clause of the memorandum;
(2) Advertisement: An advertisement shall be published at least once in
(6) alteration of articles
of association in relation to insertion or removal a vernacular newspaper in the principal vernacular language of the
of provisions which are required to be included in the articles of a district in which the registered office of the company is situated, and
- g NNWIVX WL
company in order to constitute it a private company;
TAXMANN®
having a wide circulation in that district, and at least once in English

{e) change in place of registered office outside the local limits of any language in an English newspaper havinga wide circulation in that
city, town or village; district, about having dispatched the ballot papers and specifying the
(@) change in objects for which a company has raised money from public prescribed details on the business to be transacted by postal ballot,
through prospectus and still has any unutilized amount out of the voting schedule, details of the person for grievances.
money raised; (3) Scrutiniser: The Board of directors shall appoint one scrutinizer,
(e) issue of shares with differential rights as to voting or dividend or who is not in employment of the company and who, in the opinion
otherwise under section 43; of the Board can conduct the postal ballot voting process in a fair
(f) variation in the rights attached to a class of shares or debentures or and transparent manner.
other securities as specified under section 48; The scrutinizer shall be willing to be appointed and be available for
(g) buy-back of shares by a company under section 68; the purpose of ascertaining the requisite majority.
(h) election of a director under section 151 of the Act; (4) Report: The scrutinizer shall submit his report as soon as possible
(i) sale of the whole or substantially the whole of an undertaking of a after the last date of receipt of postal ballots but not later than seven
company as specified under of section 180; days thereof,
() giving loans or extending guarantee or providing security in excess (5) Safe Custody: The postal ballot and all other papers relating to postal
of the limit specified under section 186: ballot including voting by electronic means, shall be under the safe
Besides these, the SEBI regulations require business to be passed by postal custody of the scrutinizer till the chairman considers, approves and
signs the minutes and thereafter, the scrutinizer shall return the
ballot for issuing sweat equity to the promoters; delisting of equity shares;
and substantial acquisition of shares and takeovers. ballot papers and other related papers or register to the company
who shall preserve such ballot papers and other related papers or
Note - As per the Companies (Amendment) Act, 2017, any item of business register safely.
required to be transacted by means of postal ballot can be transacted by
electronic means.
242 SHAREHOLDERS MEETINGS. SHAREHOLDERS MEETINGS 243
(6) Result: The results shall be declared by placing it, along with the repute who, in the opinion of the Board can scrutinize the e-voting
scrutinizer’s report, on the website of the company. process ina fair and transparent manner.The scrutinizer so appoint-
Ifaresolution is assented
to by the requisite majority of the sharehald- ed may take assistance of a person who is not in employment of the
ers by means of postal ballot including voting by electronic means, company and who is well-versed with the e-voting system.
it shall be deemed to have been duly passed at a general meeting (3 Dispatch Notice to the Shareholders: The notices of the meeting shall
—
convened in that behalf. be sent to all the members, auditors of the company, or directors
either-
E-Voting or Voting by the Electronic Means (a) by registered post or speed post; or
“Voting by electronic means’ or“electronic voting system” meansa ‘secured (6) through electronic means like registered e-mail id;
system’ based process of display of electronic ballots, recording of votes (ce) through courier service;
of the members and the number of votes polled in favour or against, such
that the entire voting exercised by way of electronic means gets registered The notice shall also be placed on the website of the company and
and counted in an electronic registry in a centralized server with adequate of the agency. The notice of the meeting shall clearly mention that
‘cyber security’. the business may be transacted through electronic voting system
and the company is providing facility for voting by electronic means.
To enhance the participation of shareholders in the general meetings,
The notice shall clearly indicate the process and manner and time
e-voting has been introduced by the Companies Act, 2013. This has made schedule for voting by electronic means and shall also provide the
possible for members/shareholders to vote without physically attending login ID and create a facility for generating password and for keeping
the general meeting. E-voting does not eliminate the right of the members security and casting of vote in a secure manner.
to physically attend and vote at the general meeting, But a member can
WL
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cast his vote through one mode only. A member after casting his vote (4 ) Advertisement in Newspaper: The company shall cause an advertise-
though e-voting can attend the general meeting but cannot cast vote in ment to be published, not less than 5 days before the date of beginning
that meeting for that matter to secure wider participation of shareholders of the voting period, at least once in a vernacular newspaper in the
in important decisions of the company. principal vernacular language of the district in which the registered
office of the company is situated, and at least once in English lan-
Requirement of E-Voting guage in an English newspaper having a wide circulation in that
district, about having sent the notice of the meeting and specifying
As per section 108 of the Companies Act, 2013 read with rule 20 of the the matters giving details of e-voting as prescribed by the rules.
Companies (Management & Administration) Rules, 2014, following com-
panies are required to provide e-voting facility to their members to vote
(5 ) E-Voting: The e-voting shall remain open for not less than one day
and not more than three days. In all such cases, such voting period
at general meeting:
shall be completed three days prior to the date of the general meet-
- Every Listed Company ing. During the e-voting period, shareholders of the company may
- Every Company having 1000 or more Shareholders. cast their vote electronically, Once the vote on a resolution is cast by
the shareholder, he shall not be allowed to change it subsequently.
Procedure of E-Voting At the end of the voting period, the portal where votes are cast shall
forthwith be blocked.
(L) Appointment of E-Voting Agency: The company which has to provide
e-voling facility to its members will have to take e-voting platform of (6 Scrutiniser's Report: The scrutinizer shall, within a period of not ex-
—
any e-voting service provider/agency with adequate cyber security, ceeding three working days from the date of conclusion of e-voting
period, unblock the votes in the presence of at least two witnesses
(2) Appointment of Scrutiniser: The Board of directors shall appoint not in the employment of the company and make a scrutinizer’s
one scrulinizer, who may be Chartered Accountant in practice, Cost report of the votes cast in favour or against, if any, forthwith to the
Accountant in practice, or Company Secretary in practice or an Chairman,
advocate, but not in employment of the company and is a person of
Sort
(7) Declaration of Results: The results declared along with the scrutiniz- 1. Every company shall make entries of minutes of all the proceedings
er’s report shall be placed on the website of the company and on the of every general meeting within 30 days of the conclusion of every
website of the agency within two days of passing of the resolution such meeting in bound books kept for that purpose with their pages
at the relevant general meeting of members. Subject to receipt of consecutively numbered. Each page of every such book shall be
sufficient votes, the resolution shall be deemed to be passed on the initialled or signed and the last page of the record of proceedings of
date of the relevant general meeting of members. each meeting in such book shall be dated and signed by the chairman
Points to be Noted of the same meeting within the period of 30 days or in the event of
death or inability of the chairman within that period, by a director
() Show of hands not to be allowed in case of e-voting: Voting by show duly authorised by the Board for the purpose.
of hands would not be allowable in cases where rule 20 of Companies
(Management and Administration) Rules, 2014 is applicable. In no case the minutes of proceedings of a meeting shall be attached
te any such book by pasting or otherwise.
(f) Participation in the general meeting after voting by e-means:A person
who has voted through e-voting mechanism shall not be debarred 2. The minutes of each meeting shall contain a fair and correct sum-
from participation in the general meeting physically. But he shall mary of the proceedings.
not be able to vote in the meeting again, and his earlier vote (cast 3. Recording
of the minutes should begin with the name, date, time and
through e-means) shall be treated as final. place of the meeting and the persons who had attended the meeting
(if) Relevance of provisions relating to demand for poll: In case of com- in their respective capacities as members, directors, auditors etc.
panies which are covered under section 108 read with rule 20 of 4. All appointment of officers made at any of the meetings shall be
Companies (Management and Administration) Rules, the provisions included in the minutes of the meeting.
relating to demand for poll would not be relevant. 5. The minutes should not contain such matters which in the opinion
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of the chairman of the meeting—
Advantages of E-Voting to the Company
(a) isorcouldreasonably be regarded asdefamatory
of any person;
# Reduction in cost and paperwork as there will no need to print and (6) is irrelevant or immaterial to the proceedings, or
store physical ballot papers.
(c) is detrimental to the interests of the company.
# The counting of votes and results will be accurate and the results
will be declared in a very short time. The chairman has an absolute discretion in regard to the inclusion
or
non-inclusion of any matter in the minutes on the grounds specified
@ The time provided for Postal ballot may be gradually reduced. above.
Advantages of E-Voting to the Shareholders 6. If a default is made in complying with these provisions in respect of
any meeting, the company shall be liable to a penalty of Rs. 25,000
# The participation in the decision making process will increase as vot- and every officer of the company, who is in default, shall be punish-
ing can be done from home or office and there is no need to attend able with fine which may extend to Rs. 5000.
the meeting physically.
Minutesof meetings kept in accordance with provisions of section 118 shall
@ Voting can be done for different companies at the same time. be the evidence of the proceedings recorded therein. They shall also be a
# There will be increased transparency. proof of this fact, unless contrary is proved. All appointments of directors
or liquidators made at such a meeting shall be deemed to be valid.
Minutes of the Proceedings The minutes book containing the proceedings of general meetings shall be
kept open for inspection for at least 2 hours at the registered office of the
“Minutes” means the written record of the proceedings of a meeting. Minutes
company. Every member shall be entitled to inspect it, free of cost during
is the evidence of the correct record of the decisions of a meeting. Section
normal business hours. He is also entitled to be furnished, within 7 days
118 provides the following rules regarding recording of the minutes:
after he has made a request on that behalf to the company, with the copy
of any minutes on payment of the prescribed fee.
or
RESOLUTIONS Some examples of the cases where a special resolution is necessary are:
A proposal, when passed and accepted by the members, becomes a resolu- () Alteration of memorandum for changing the place of registered
tion. Members holding 5 per cent of the voting rights or any 100 members, office from one State to another or for altering its objects.
holding paid up capital of the company of at least Rs. | lakh may, at their (ii) Changing the name of the company with the previous approval of
own expense, require the company to give notice to all the members of any the Central Government.
resolution which they may be intending to move at the general meeting (ai) Alteration of the Articles of Association.
of the company.
(iv) To reduce the share capital of the company.
Types of Resolutions Any reference to an extraordinary resolution in the Articles
of Association of
a company will be construed as referring to a special resolution. However,
Companies Act provides for two types of resolutions: special resolution and special business are two different things.
1. Ordinary Resolution.
2. Special Resolution. Difference between Ordinary Resolution and Special Resolution
Ordinary Resolution [Sec. 114(1)] a Ordinary Resolution Special Resolution

It is passed: It is passed by a simple majority It is passed by a special majority
ie. votes cast in favour exceeds Le. votes cast in favour exceeds
(i) by a simple majority of votes at a general meeting, three times the votes cast against
votes cast against the resolution.
(i) of which notice required under the Companies Act has been duly the resolution.
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given. Simple majority means that the votes cast cither by show of An explanatory statement is not An explanatory statement, giving
hands or electronically or on a poll in favour of a particular propos- required to be sent along the notice all material facts about the matter,
al, including the casting vote of the chairman, exceed the votes cast of the meeting. is required to be annexed to the
against it. An ordinary resolution is required to pass the annual ac- notice of the meeting.
counts, to declare dividends, to hold elections of directors, to appoint
Items of ‘general business'- passing Fundamental corporate deci-
auditors, to issue shares at a discount, ete.
of annual accounts, dividend dec- sions- altering the objects, name,
laration, appointment of directors, situation clause of the memo-
Special Resolution [Sec. 114(2)] and appointment of auditors-are randum; altering the articles of
(i Itmust be passed by a majority of three-fourths of the votes in person transacted by passing ordinary association; reducing the share
or by proxy. In other words the votes cast in favour of the resolution resolution. capital etc.- are taken by passing
must not be less than three times the number of votes cast against special resolution,
the resolution. Ordinary resolutions are not re- Special resolutions are required
(ij The intention to propose the resolution as a special resolution must quired to be registered with the to be registered with the Registrar
specially be mentioned in the notice issued for calling the meeting. Registrar. within 30 days of passing.
(ii) Thenotice must be accompanied by an explanatory statement setting
out all material facts concerning the subject matter of the special Resolution Requiring Special Notice [Sec. 115]
resolution, An ordinary or special resolution may require special notice to be given
(iv) The resolution must be passed exactly in the same terms as specified for moving it. The requirement of the special notice is laid down by the
in the notice for the meeting. Companies Act which is as follows:
(v) Acopy of the special resolution is required to be filed with the Registrar 1. A notice of the intention to move the resolution is given to the com-
for registering within 30 days of the passing of the resolution. pany not less than 14 clear days before the meeting at which it is to
be moved. Such notice is to be given to the company by members
Coto
holding not less than one per cent of total voting power or holding . Any resolution of the board of directors
ofa company or an agreement
shares on which such aggregate sum not exceeding five lakh rupees, executed by a company relating to the appointment of a managing
as may be prescribed, has been paid-up by the member(s) who are director or variation of its terms;
proposing the resolution. . Resolutions or agreements which have been approved by all the
2. The company shall, immediately after receiving such notice, inform members of a class of shareholders but which would have otherwise
all the members regarding the notice of the proposed resolution. required to be passed by a particular majority and all resolutions or
The company is required to give such notice in the same manner as agreements which bind all the members of a class of shareholders
it gives notice of the meeting or, if that is not practicable, shall give though not agreed to by all those members;
the notice either by an advertisement in a newspaper having an ap- . Resolutions passed by a company conferring power under section
propriate circulation or by any other mode allowed by the Articles. 293 upon its directors:
Notice of not less than seven days before the meeting is required to
be given by the company. (a) to sell or dispose of the whole or any part of the company’s
undertaking; or
3. After the notice requirement, the resolution would be passed by the
members at the general meeting either by a simple or three-fourths (4) to borrow money beyond the limits of the paid up capital and
of the majority as required by the Act for different matters. free reserves of the company; or
According to the Companies Act in the following cases, special notice of . Resolutions requiring the company to be wound up voluntarily.
the resolution must be given: If default is made in getting any of the above resolutions registered,
(a) to replace the old auditor by a new one or to provide that a retiring the company and every officer of the company whois in default shall
auditor shall not be appointed. be liable to a prescribed penalty.
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(5) to appoint a person who is not a retiring director as director of the
company. IMPORTANT CASES
(ce) to remove a director before the expiry of his term. B.R. Kundra vs. Motion Pictures Association AGM
#
(@) to appoint another director in place of the removed director. H.D. Mundhra vs. Assistant ROC Holding of AGM
++
The articles of a company may add additional matters in respect of which Hindustan Co-operative Society Ltd. Holding of AGM
special notice is required. Sree Meenakshi
Mills Co. vs. Assistant Registrar, Holding of AGM
Madurai
Resolutions passed at the adjourned meetings [Sec. 116]
Hungerford Investment Trust Ltd. vs. Turner Holding of AGM
Any resolution passed at an adjourned meeting of a company shall be Morrison & Co.
treated as having been passed on the date on which it was in fact passed,
Bejoy Kumar Karnani vs. Assistant Registrarof AGM
and shall not be deemed to have been passed on any earlier date.
Companies
Resolutions which require Registration with the Registrarof Companies Dinekar Rai D, Desai vs. R.P. Bhasin AGM
[Sec. 117] Nungambakkam Dhanarakshaka Saswatha AGM
Nidhi Ltd. vs, ROC
Following resolutions or agreements must be registered with the Registrar
within 30 days of their passing or making thereof: Selvaraj (V) vs. Mylapore Hindu Permanent AGM
Fund Ltd.
1. Special Resolution;
State of Bihar vs. Linkers Private Ltd. AGM
2. Resolutions which have been agreed to by all the members of a
company but which, in the absence of such an agreement, would Kastoor Mal Banthia vs. State EGM
have to be passed as special resolutions;
Life Insurance Corporation of India vs, Escorts EGM . When can the General Meeting ofa company be called at a shorter
Ltd notice?
Kuldip Singh Dhillon vs. Paragon Utility EGM . Differentiate between voting by show of hands and voting by poll.
+
Financiers Pvt. Ltd.

. What is the significance of ‘annual general meeting’? What are
R. Chettiar vs. M. Chettiar EGM the provisions in the Companies Act regarding (a) holding of such
@
Re. Haycraft Gold Reduction and Mining Co. Notice of Meeting meeting; (4) length, contents, manner, etc., of notice calling such
¢ @ ¢
meeting; (c) business transacted at such meeting? Can the Central

John Shaw and Sons (Salford) Ltd. vs. Shaw Notice of Meeting
*¢
Government call such a meeting in the event of default by a com-

Musselwhite vs. C.H. Musselwhite & Sons Ltd. Notice of Meeting pany?
Re. West Canadian Collieries Ltd. Notice of Meeting . What are the cases where resolutions require special notice?
Bharat Kumar Dilwali vs. Bharat Carbon and Length of Notice . Explain the meaning of proxy? What are the rights and duties of a
Ribbon Manufacturing Co. Ltd. proxy? In what circumstances a proxy is revoked?
Re. Parikh Engineering and Body Building Co. Length of Notice 10. How and by whom an Extraordinary General Meeting can be called?
Lid.
11. Explain ‘ordinary business’ and ‘special business’ which may be
Sharp vs. Dawes Single Member transacted in a general meeting in which such business may be
Quorum transacted.
State of Kerala vs. West Coast Planter’s Agencies Single Member 12. Who can call extraordinary general meeting of a company?
— gNNWVWX EL
Ltd. Quorum
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13. Write a note on ‘Minutes’ of general meeting of a company.

Asia Stone SL vs. B&G Impex Pvt. Ltd. Single Member
14. Write a note on ‘quorum’ of general meeting of a company. Can
Quorum one member constitute quorum?
REVIEW QUESTIONS 15, State provisions regarding quorum at general meeting explaining
how the following be counted for the purpose of quorum:
. Write brief notes on the following: () A representative of the Governor of Gujarat.
(a) Quorum (i) B representing Y Ltd. and Z Ltd.
(b) Proxy (iii) C, D, E as proxies of shareholders.
(c) Casting Vote 16. JKL Limited issues a notice for holding its AGM on 7th November,
2016. The notice was posted on 16th October, 2016.
(a) Poll
(i) Is it a proper notice with respect to period of notice?
. When a poll is demanded should it be by a secret ballot or other-
wise? (7) If not, can shortfall be condoned? How and when?
. (a) What do you understand by the term quorum? 17. (a) “One person cannot form the quorum for a general meeting of
a company Comment.
(4) What is the quorum required for?
() a public company meeting.
18. (@) When and by whom an extraordinary general meeting may be
called and convened?
(ti) a private company meeting.
(4) What are the consequences of default in holding an Annual
(¢) What should the chairman of a meeting do if the quorum is not General Meeting in accordance
with the provisions of the Companies
present? Act?
4 Distinguish
between a special resolution and an ordinary resolution, (c) Distinguish between ordinary resolution and special resolution.
SHAREHOLDERS MEETINGS SHAREHOLDERS MEETINGS 253
19. (a) Who can call extraordinary general meeting of a company? () if the consent of the shareholders for the short notice is re-
Discuss the various provisions on holding of extraordinary general ceived orally;
meeting of a company. (i) if consent in writing is obtained at the meeting itself.
(4) State the legal provisions regarding calling and holding of annual Ans. [In case all members entitled to vote at the meeting agree,
general meeting of a company. shorter notice is valid. The consent may be obtained in writing
(c) Explain the provisions of the Companies Act with regard to before the meeting or by a resolution at the meeting itself.
proxies at general meetings. The company sends a notice to call an annual general meeting on
(a) Distinguish between ordinary resolution and special resolution Ist December, 2012. The notice is posted to the members on 15th
giving examples. October, 2012. On 25th October, 2012, the Central Government de-
(5) What do you understand by Quorum of a meeting? Must a quo- clared Ist December, 2012, asa public holiday under the ‘Negotiable
rum be present throughout the meeting? State the consequences Instruments Act, 1881’. Can the meeting be held as scheduled?
if quorum is not present in a company meeting. Ans. [The declaration by the Government was notified after the
A Proxy was appointed by a member on an instrumentduly executed. issue of the notice convening such meeting. Therefore, the meeting
Will the vote cast by the Proxy be valid in the following cases— can be held as scheduled.]
(a) When the member himself attends and cast his vote at the . 4, a member of a company, gave a proxy to &, in pursuance of
meeting without revoking the authority of the Proxy? and which & attended the meeting of the company, after satisfying all
the requirements of law. However, A himself attended the meeting
(6) When the member died in the meantime?
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and voted on a particular resolution. A's vole was rejected. Discuss
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the validity of A's vote.

CASE PROBLEMS Ans. [The rejection of A’s vote was not valid. Proxy can exercise his
vote only in a case where the shareholder has elected not to cast
In a general meeting of shareholders a special resolution was put his vote in person. Where he decides to exercise his voting right
to vote, 90 voted in favour, 20 voted against and 40 abstained. Has
personally, he eliminates completely the necessity of proxy being
the resolution been validly passed? exercised at all.]
Ans. [Yes. Votes cast in favour are three times of the votes cast . The chairman, at an annual general meeting declares a motion
against it.]
carried after show of hands and says “10 in favour, 15 against it
. The Board of directors of a company do not expect that the final but 60 voting in favour by proxy”. Is he right in his judgment?
audited account of the company would be ready to be circulated Ans. [The chairman is not right in his judgment. Proxies are not
amongst the company’s members in time but if they do not con-
entitled to vote in case of a voting by show of hands unless the ar-
vene the annual general meeting in due time, the retiring directors ticles of the company otherwise provide. The votes cast in favour
would be deemed to have retired on the date on which the annual of the motion are less than votes cast against it, and therefore, the
general meeting ought to have been held. What advice would you motion should be taken as lost.]
give in such a situation?
. Aproxy was appointed by amemberonan instrument duly executed.
Ans. [Should apply for extension of time for holding the meeting Will the vote cast by the proxy be valid in the following situation?
to the Registrar]
When the member himself attended and cast
his vote at the meeting
. The Articles of Association of a company provides for holding its
without revoking the authority of the proxy?
Annual General Meeting at shorter than 21 days notice, provided
the consent of all shareholders is received. Will the holding of the Ans. [The proxy stands revoked.]
Annual General Meeting at a shorter notice be valid in the following . Prosperity Ltd issued a notice of its AGM tobe held on 7th November
cases: 2016. The notice was posted to the members on 16th October, 2016.
—
254 SHAREHOLDERS MEETINGS
Few members of the company allege that the company had not
complied with the provisions of the Companies Act with respect to
the period of notice and as such, the meeting was not validly called.
Decide, giving reasons:
(a) Whether the meeting has been validly called?
(5) Is the notice short than the mandatory requirement?
(ce) Can the short fall be condoned?
Ans. [Fora general meeting at least 21 days clear notice is required.
The day of the meeting and the day on which notice is issued is
to be excluded. If notice is sent by post another 48 hours are to AUDIT
be added. In this case, the meeting has not been validly called as
the notice falls short by 2 days. It can be condoned if all members
entitled to vote at the meeting give their consent.] + Auditor: Appointment and Rotation
. Reliance Industries Ltd. has its registered office at Mumbai. The + Auditors’ Report
company desires to hold an extraordinary general meetingin New @ Auditor's Power
Delhi. Examine the validity of the company's desire with reference
to the relevant provisions of the Companies Act.
Auditor: Appointment and Rotation
Ans. [There is no specific provision in the Companies Act, which
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prohibits the holding of an extraordinary general meeting ata place Qualification for Appointment as Auditor of a Company
other than the registered office or a place outside the town, city According to section 141(1) of the Companies Act, 2013 “a person shall be
or village in which the registered office is situated. Thus, unless eligible for appointment as an auditor of a company only if he is achartered
the articles of association of the company provide otherwise, it is accountant within the meaning of Chartered Accountants Act, 1949 and
legally possible to call an E.G.M of the company in New Delhi. holds a valid Certificate of Practice. A firm shall also considered to appoint-
10. An annual general meeting was called by a company in December ed by its firm name whereof majority of partners practising in India are
2014. This meeting was adjourned to March 2015 and held at that qualified for appointment as auditor of a company. Where a firm including
time. Subsequent annual general meeting was held in February a limited liability partnership is appointed as an auditor of a company, only
2016. Is the company liable for any irregularity? Discuss stating the the pariners who are chartered accountants shall be authorised to act and
provisions of the Companies Act with respect to the time within sign on behalf of the firm” [Section 141(2)].
which annual general meeting should be held.
Ans. [As per the Companies Act, there must be one annual general Disqualification of Auditor
meeting in every calendar year. In this case, the meeting in 2015 is
the continuance of the earlier meeting of the year 2014. Company As per section 141(3) of the Companies Act, 2013, following persons shall
would be liable for not holding the meeting in 2015.] not be eligible as auditor of the company:
() A body corporate other than LLP registered under the LLP Act, 2008
(i) An officer or emplovee of the company.
(ii) A person who is partner or who in the employment, of an officer or
employee of the company.
(iv) A person who or his relative or partner:
255
aon
256 AUDIT AUDIT 257
- isholdingany security /interest inthe company orits subsidiary vacancy shall be deemed to be casual vacancy in the office of the auditor
or of its holding or associate company or subsidiary of such [Section 141(4)].
holding company. It has been further provided that a relative
may hold security or interest in the company of face value not Appointment of Auditors
exceeding Rs. one lakh.
First Auditor
is indebted to the company or its subsidiary, or its holding or
The first auditor of a company, other than a Government company, shall
associate company or subsidiary of such holding company, in
be appointed by the Board of Directors within 30 days from the date of
excess of Rs. 5 lakhs.
registration of the company and in the case of failure of the Board to ap-
has given guarantee or provide any security in connection with point such auditor, it shall inform the members of the company, who shall
the indebtedness of any third person to the company or its within 90 days at an extraordinary general meeting appoint such auditor
subsidiary, or its holding or associate company or a subsidiary and such auditor shall hold office till the conclusion of the first annual
of such holding company for value in excess of Rs. | lakh. general meeting [section 139(6)].
(v) Aperson or a firm who (whether directly or indirectly) has business Subsequent Auditor
relationship with the company, or its subsidiary, or its holding or The Companies Act, 2013 and the Companies (Audit & Auditors) Rules,
associate company or subsidiary of such holding company or asso- 2014 provide as under:
ciate company. The business relationship shall be construed as any
1. Every company shall, at the first annual general meeting, appoint
transactions enter into for a commercial purpose except:
an individual or a firm as an auditor who shall hold office from the
- Commercial transactions
which are in the nature of professional conclusion of that meeting till the conclusion of its sixth annual gen-
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services permitted ta be rendered by an auditor or audit firm eral meeting and thereafter till the conclusion of every sixth meeting
by the professional bodies regulated such members. [section 139(1)].
- Commercial transactions which are in ordinary course of Provided that such appointment shall be subject to ratification by
business of the company at arm's length price as customer. members at every general meeting till the sixth such meeting.
(vi) A person whose relative is a director or is in the employment of the 2, The manner and procedure of selection of auditors by the members
company as a director or key managerial personnel. of the company at such meeting shall be as per the prescribed rules.
(vit) A person: 3. The written consent of the auditor to such appointment and a cer-
- whois in full time employment elsewhere or tificate from him or it that the appointment, if made, shall be in
accordance with the prescribed conditions, shall be obtained from
- a person or a partner holding appointment as its auditor is the auditor before such appointment is made.
at the date of such appointment or reappointment holding
4, The certificate shall also indicate whether the auditor satisfies the
appointment as auditor for more than 20 companies.
eligibility qualifications as laid down by section 141 of the Companies
(vit) A person who has been convicted by a court of an offence involving Act, 2013.
fraud and a period of 10 years has not elapsed from the date of such 5. The company is required to inform the auditor concerned of his
conviction, or its appointment, and also file a notice of such appointment with
(ix) Any person who directly or indirectly renders any service (referred in the Registrar within 15 days of the meeting in which the auditor is
section 144) to the company or its holding company or its subsidiary appointed,
company. Re-appointment
Where a person appointed as auditor of the company incurs any of the Subject to the provisions of the Act, a retiring auditor may be re-appointed
disqualification mentioned in section 141(3) of the Companies Act, 2013 at an annual general meeting, if:
after his appointment, he shall vacate his office as such auditor and such (a) he is not disqualified for re-appointment;
A
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258 AUDIT AUDIT 259
(5) he has not given the company a notice in writing of his unwillingness (i) an audit firm which has completed its term shall not be eligible for
to be re-appointed; and re-appointment as auditor in the same company for 5 years from
(c) a special resolution has not been passed at that meeting appointing the completion of such term:
some other auditor or providing expressly that he shall not be re-ap- Provided further that as on the date of appointment no audit firm having
pointed. a common partner or partners to the other audit firm, whose tenure has
Where at any annual general meeting, no auditor is appointed or re-appoint- expired in a company immediately preceding the financial year, shall be
ed, the existing auditor shall continue to be the auditor of the company. appointed as auditor of the same company for a period of five years:
Recommendations of Audit Committee Provided also that every company, existing on or before the commencement
Where a company is required to constitute an Audit Committee under of this Act which is required to comply with provisions of this sub-section,
section 177, all appointments, including the filling of a casual vacancy of shall comply with the requirements of this sub-section within three years
an auditor under this section shall be made after taking into account the from the date of commencement of this Act:
recommendations of such committee. [Section 139(11)] Subject to the provisions of this Act, members of a company may resolve
Casual Vacancy
to provide that [section 139(3)]:
Any casual vacancy in the office of an auditor shall be filled by the Board (a) in the audit firm appointed by it, the auditing partner and his team
shall be rotated at such intervals as may be resolved by members;
of Directors within 30 days, but if such casual vacancy is as a result of the or
resignation of an auditor, such appointment shall also be approved by the
company at a general meeting convened within 3 months of the recom- (6) the audit shall be conducted by more than one auditor.
mendation of the Board and he shall hold the office till the conclusion of
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the next annual general meeting [Section 139(8)]. Appointment of Auditor in Government Company
Rotation of Auditors In the case of a Government company or any other company owned or
controlled, directly or indirectly, by the Central Government, or by any State
The following classes of companies excluding one person companies and Government or Governments, or partly by the Central Government and
small companies: partly by one or more State Governments, the Comptroller and Auditor-
@ All listed companies; General of India shall, in respect of a financial year, appoint an auditor duly
# All unlisted public companies having paid up share capital of Rs. 10 qualified to be appointed as an auditor of companies under this Act, within
crore or more; a period of 180 days from the commencement of the financial year, who
@ All private limited companies having paid up share capital of Rs. 20 shall hold office till the conclusion of the annual general meeting [section
crore or more;
139(5)].
The first auditor shall be appointed by the Comptroller and Auditor-General
# All companies having public borrowings from financial institutions,
of India within 60 days from the date of registration of the company and in
banks or public deposits of Rs. 50 crores or more
ease the Comptroller and Auditor-General of India does not appoint such
shall not appoint or re-appoint [section 139(2)} auditor within this period, the Board of Directors of the company shall
(@) an individual as auditor for more than one term of 5 consecutive appoint such auditor within the next 30 days; and in the case of failure of
years; and the Board to appoint such auditor within the next 30 days, it shall inform
the members of the company who shall appoint such auditor within the
(5) an audit firm as auditor for more than two terms of 5 consecutive 60 days at an extraordinary general meeting, who shall hold office till the
years: conclusion of the first annual general meeting.
Provided that—
Any casual vacancy in the office
of an auditor shall be filled by the Comptroller
() an individual auditor who has completed his term of 5 years shall and Auditor-General of India within thirty days. In case the Comptroller
not be eligible for re-appointment as auditor in the same company and Auditor-General of India do not fill the vacancy within the said period,
for 5 years from the completion of his term; the Board of Directors shall fill the vacancy within next thirty days.
— So
260 AUDIT AUDIT 261
Removal of Auditor [Section 140(1)] @ ICAL advised that where an auditor willing for reappointment has not
been reappointed shall file with ICAI a copy of representation. The
First Auditor
incoming auditor should, before accepting the appointment, obtain
The first auditors) of a company who have been appointed by Board of a copy of such communication from the company and consider it
Directors can be removed by members in the general meeting without the before accepting the appointment.
approval of the Central Government. It is not necessary that the auditor(s)
shall complete his term of appointment. Removal of Auditor by the Tribunal
In other cases
In case the Tribunal is satishied that auditor has directly or indirectly acted
Any auditor may be removed from office before the expiry of his/her term in a fraudulent manner, it can direct the Company to change the Auditor.
by passing a special resolution. However, prior approval of the Central The Tribunal may pass such order either :
Government shall be sought before removing the auditor in the general # Suo motu
meeting. The auditor concerned shall be given a reasonable opportunity of
being heard. Thus, it is very difficult to remove an auditor before the expiry * Application by other concerned person
of his term since adequate grounds must exist to prove the government that @ Application by CG
the person sought to be removed is unsuitable for continuing as the auditor. = Incase Tribunal is satisfied it shall within 15 days of receipt of
such application pass the order for removal of such auditor.
Appointment of New Auditor in place of Retiring Auditor [Section
« Another auditor in his place will be appointed by Central
140(4) and (5)]
Government.
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TAXMANN®
The Companies Act, 2013 lays down the following procedure for appoint-
ment of new auditor in place of a retiring auditor: Rights/Powers of Auditor
+ A special notice to retiring auditor of such a resolution, The statutory rights are the various rights conferred upon the auditor by
# Notice to members at least 14 clear days before the date of meeting. the Companies Act, 2013. These rights cannot be limited, abridged or cur-
If itis not practicable, then the company can give such a notice either tailed in any way. Any resolution limiting the powers of the auditor or any
by advertisement in a newspaper having an appropriate circulation such provision in the Articles of Association will be void.
or in any other mode prescribed. 1. Right of Access to Books, Accounts and Vouchers of the Company
@ Retiring auditor is given the opportunity to make written represen- at All Times [Sec. /43//)]
tation to the company.
# Every auditor shall have a right of access at all times to books,
# The company shall send a copy of such representation to every accounts and vouchers of the company whether kept at head
member along with the notice. office or elsewhere.
# Ifrepresentation could not be sent then it may be read out at general + ‘Voucher’ includes all documents, correspondence, agreements,
meeting, etc., which support any transaction
or data disclosed in financial
@ Ifthe Tribunal, on application either of company orany other aggrieved statements, directly or indirectly.
person, is satisfied that the auditor is securing needless publicity of a # ‘Books’ include financial, statutory and statistical books. Au-
defamatory manner, then it may exempt the company from sending ditors may also refer to quantitative records relating to pro-
the copy of representation to the members or reading out at general duction, sales, stores, ete.
meeting.
@ ‘At all times’ means an auditor can inspect books, accounts
Retiring auditor has the right to be heard at meeting. and vouchers at any time during the period he acts as auditor
# At general meeting, the resolution to remove the auditor has to be of company. However, all times implies only normal business
passed, hours.
262 AUDIT AUDIT 263
2. Right to Obtain Information and Explanation [Sec. /43//)] the assets of the company against any liabilities incurred by him
# The auditor shall be entitled to get from the officer of the in defending himself against any Civil/Criminal proceeding by the
company such information and explanation as the auditors company if he is held not guilty by law.
thinks necessary for performance of his duties.
@ Incase any information or explanation is not given to him, he Auditors’ Report
should mention this fact in his audit report. Section 143(2) of the Companies Act provides that the auditor shall make
3. Right to Visit Branch Office [Sec. 143/8)] a report to the members of the company on the accounts examined by
@ The auditor is entitled to visit branch offices of the company him and on every financial statement which are required by or under this
if he deems it necessary to do so for the performance of his Act to be laid before the company in general meeting and the report shall
duties as auditor. take into account:
# Theauditorshall have the right of access to the books, accounts — the provisions of this Act,
and vouchers
of the company maintained
at the branch offices. — the accounting and auditing standards,
# Incase of banking company having foreign branches, it would — matters which are required to be included in the audit report under
be sufficient if the auditor is allowed to access the books and the provisions of this Act or any rules made thereunder, and
account of the branchas have been transmitted
to the principal — tothe best of his information
and knowledge, the said accounts, finan-
office of the company in India. cial statements give a true and fair view of the state of the company’s
4. Right to Sign the Audit Report affairs as at the end of its financial year and profit or loss and cash
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# Only the person appointed as auditor of the company or where flow for the year and such other matters as may be prescribed,
a firm is so appointed, only the partner in the firm practicing
in The auditor's report shall also state:
India, may sign the Auditor's Report and/or sign/ authenticate (a) whether he has sought and obtained all the information and expla-
any other document. nations which to the best of his knowledge and belief were necessary
§. Right to Receive Notices and to Attend General Meeting (Sec. /46) for the purpose of his audit and if not, the details thereof and the
# Theauditor has aright toreceive all notice of any general meet- effect of such information on the financial statements;
ing of a company as are sent to the members of the company. (5) whether, in his opinion, proper books of account as required by law
=
@ Theauditorcan also attend any general meeting like amember. have been kept by the company so far as appears from his examina-
tion of those books and proper returns adequate for the purposes of
# However, he can speak only on the matters concerning him as his audit have been received from branches not visited by him;
an auditor.
(¢ whether the report on the accounts of any branch office of the
—
6. Right to Receive Remuneration company audited under sub-section (8) by a person other than the
Auditors has statutory right to receive remuneration which cannot company's auditor has been sent to him under the proviso to that
be limited either by articles or resolution of the members. sub-section and the manner in which
he has dealt with itin preparing
his report;
Other Rights (ad) whether the company's balance sheet and profit and loss account
dealt with in the report are in agreement with the books of account
The auditor of a company is entitled to seek legal and technical and returns;
advice, which is required in the performance of conduct of audit/
discharge of his duties. (e) whether, in his opinion, the financial statements comply with the
accounting standards;
@ The auditor is considered to be the officer of the company for many
purposes. As an officer, he has the right to be indemnified out of
tr
264-272 AUDIT
(/) the observations or comments of the auditors on financial transac-

tions or matters which have any adverse effect on the functioning
of the company:
(g) whether any director is disqualified from being appointed asa director
under sub-section (2) of section 164;
(i) any qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected therewith;
() whether the company has adequate internal financial controls system
in place and the operating effectiveness of such controls;
() such other matters as may be prescribed. DIVIDEND PROVISIONS
Where any of the matters required to be included in the audit report under
this section is answered in the negative or with a qualification, the report
# Legal Provisions
shall state the reasons therefor.
# Investor Education and Protection Fund
Auditor to sign audit reports, etc. @ Interim Dividend
Section 145 of the Companies Act, 2013 provides that the person appointed
as an auditor of the company shall sign the auditor's report or sign
or certify Meaning of Dividend
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any other document of the company. The auditors’ report and the quali- The term ‘dividend’ is derived from the Latin word ‘dividendunt which
fications, observations or comments on financial transactions or matters, means ‘that which is to be divided’. Dividend is that part of the profits of
which have any adverse effect on the functioning of the company men- the company which is distributed amongst its shareholders. It differs from
tioned in the auditor's report shall be read before the company in general interest in the sense that it does not arise out of contractual obligations.
meeting and shall be open to inspection by any member of the company. Dividend implies two things—{ payment out of profits, and (ii) actual re-
lease of some assets. Issue of bonus shares or right shares to the existing
REVIEW QUESTIONS members is not considered as dividend because the former does not involve
release of any assets and the latter has no relation with the profits of the
1. Who can be appointed as auditor of a company? company. Every trading company has an implied inherent power to distrib-
2. How are the auditors of a company appointed? Explain the provi- ute its net earnings or profits to the shareholders in the shape of dividends,
sions of the Companies Act, 2013 on rotation of auditors. Power to declare dividends, therefore, need not expressly be given by the
Memorandum or Articles of Association. Articles may, however, regulate
3. What are the matters to be included in the auditors’ report? the manner in which the dividends are to be paid.
4. Cana properly appointed auditor be removed before the expiry of As per section 2(35) of the Companies Act, dividend includes ‘interim div-
the team? If so, explain the procedure of such removal. iden’,
5. What are the statutory rights of a company auditor?
Legal Provisions regarding Dividend
1. Declaration of dividend to be out of the Profits
As per section 123, dividend by a company for any financial year can
be paid or declared only out of:
273
DIVIDEND PROVISIONS DIVIDEND PROVISIONS 275
(a) Profits of the company of that year arrived at after providing (3) The amount so drawn shall first be utilised to set off the losses
for depreciation in accordance with the provisions of the Act, incurred in the financial year in which dividend is declared
or before any dividend in respect of equity shares is declared.
(b) Profits
of the company for any previous financial year or years (4) The balance of reserves after such withdrawal shall not fall
after providing for depreciation as per the provisions of the below fifteen per cent of its paid up share capital as appearing
Act, or in the latest audited financial statement.
(ce) Out of both, or (3) Nocompany shalldeclare dividend unless carried over previous
(d@) Money provided by the Central or State Governments for the losses and depreciation not provided in previous year or years
payment of dividends in pursuance of the guarantee given by are set off against profit of the company of the current year.
that Government. 5. Payment of Dividend out of Capital Profits
2. Provision for Depreciation Profit arising out of the sale or revaluation of capital assets is termed
as capital profit. Capital profits may be utilised for the purposes of
Before any dividend can be paid out of profits of any financial year, declaration of dividend provided:
a company is required to provide depreciation as per the provisions
of the Schedule I of the Companies Act, 2013. (a) these have been realised in cash,
Unrealised Gains (4) these remain as profits after revaluation of all the assets and
liabilities, and
In computing profits any amount representing unrealized gains, (c) there is nothing in the Articles of Association of the company
notional gains on revaluation of assets and any change in asset or prohibiting their distribution amongst the shareholders in the
liability due to measurement at fair value shall be excluded. shape of cash dividends."
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Transfer of Profits to Reserves Revocation of Declared Dividend
=
A company may, before the declaration of any dividend in any Dividend declared with the approval of the shareholders creates a debt
financial year, transfer such percentage of its profits for that financial
year as it may consider appropriate to the reserves of the company. due to the shareholders. Generally, dividend declared cannot be revoked
except with the approval of the shareholders in the event:
Declaration of Dividend out of Reserves
- of the intervening circumstances after the declaration, such as the
*
Acompany can pay dividend out of its ‘reserve funds’ created out of outbreak of a war, massive fire destroying the properties of the
the undistributed profits of the company for any previous financial company, imposition of hard taxes, or other causes diminishing the
year or years (arrived at after providing for depreciation as required). assets of the company.
As per the Companies (Payment and Declaration of Dividend) Rules, - where a dividend has been declared illegally or violating the require-
2014, in the event of inadequacy or absence of profits in any year, a ments of the law, the board of directors would be justified in revoking
company may declare dividend out of free reserves subject to the the dividend.
fulfilment of the following conditions, namely:—
(1) The rate of dividend declared shall not exceed the average Entitlement of Dividend
of the rates at which dividend was declared by it in the three
years immediately preceding that year: Equity Shareholders
Provided that this rule shall not apply to a company, which A company can pay dividend only to the shareholders of that company:
has not declared any dividend in each of the three preceding () In respect of shares held in electronic form, to those persons whose
financial year. names appear as beneficial owners in the statement(s) furnished by
(2 The total amount to be drawn from such accumulated profits the Depository(ies) as on the close of the market day prior to book
—
shall not exceed one-tenth

of the sum of its paid-up share capital closure or, in the case of Interim Dividend, on the record date; or
and free reserves as appearing in the latest audited financial
statement. 1. Foster v. The New Trinidad Lake Ashphalt Co. Lie. (1901)
—s Ie
276 DIVIDEND PROVISIONS DIVIDEND PROVISIONS. 277
(i) Inrespect of shares held in physical form, tothose shareholders whose Prohibition on Payment of Dividend
names appear on the company’s Register of Members after giving
A company which has failed to repay the deposit or part thereof or any
effect to all valid share transfers in physical form lodged with the
interest thereon within the stipulated time (under sections 73 and 74) shall
company before the date of book closure or, in the case of Interim
Dividend, on the record date; and not, so long as such failure continues, declare any dividend on its equity
shares. [Section 123(6)]
Preference shareholders
Dividend in Abeyance
(a) Preference shares carry a preferential right as to dividend in accor-
dance with the terms of the issue and the Articles, and hence pre- Ifa member authorises the company in writing to pay the dividend to the
ference shareholders are paid dividend before the dividend is paid transferee specified in the instrument of transfer lodged with the company,
to the equity shareholders of the company. the company should act upon such authorisation. However, in the case of
shares which have not been transferred because the ownership thereof
(5) Preference shares may be cumulative or non-cumulative. Dividend
in arrears on cumulative preference shares can be paid in a later is in dispute, or where attachment/prohibitory orders have been passed
year where there are profits to justify such payment. In the case of by a court or statutory authority, dividend should be held in abeyance by
non-cumulative preference shares, if no dividend can be paid in a transferring to the Unpaid Dividend Account.
year, there is no right to receive it in future years. After paying the
preference dividend and any arrears of dividend on cumulative pre- Procedure for Declaration of Dividend
ferenceshares, residual profit may
be utilized for payment
of dividend A company which intends to declare and pay dividend should adopt the
to equity shareholders. However, where participating preference
following procedures. Further, in case the company's shares are listed on the
shares have been issued, the holders thereof also have the right to Stock Exchanges, additional requirements relating to Listing Agreements
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participate in such residual profit.
are to be followed.
Equity Shares with Differential Rights 1, Recommendation by Board of Directors
Where a company issues equity shares with differential rights as to dividend, Dividend can be declared only on the recommendation of the Board
the terms of issue of such shares will govern the rights of each such class of Directors of the Company.
The shareholders donot have any power
of holders as to receipt of dividend. to declare any dividend. The Board of Directors after considering
and approving the financial statements of the company, determines
Payment of Dividend in proportion to amount paid-up on Shares the rate of dividend to be declared and then recommends the same
to the shareholders. For this purpose, a Board Meeting shall be con-
Acompany may, if so authorised by its articles, pay dividends in proportion vened to pass the resolution for purposes of:
to the amount paid up on each share where a larger amount is paid-up on
some shares than on others. (Section 51) - rate of dividend and the amount of dividend to be paid
- book closure date for dividend
Adjustment of Calls in arrears against Dividend Payable - date of annual general meeting
Secretarial Standard-3 ($S-3), issued by the Council of the Institute of - Bank with which the account shall
be opened for the remittance
Company Secretaries of India provides: of dividend.
(a) In the case of listed companies, calls in arrears or any other sum 2. Approval by the Shareholders
due from a member in the capacity of a member may be adjusted
against the dividend payable to him after giving such notice, as may The dividend recommended by the Board of Directorsis declared bya
be required. resolution passed at the Annual General Meeting by the shareholders.
The declaration of dividend should form part of an ordinary business
(5) Inthe case of other companies, unless the Articles provide otherwise,
item to be transacted in the notice of the Annual General Meeting.
any other sums due from a member, in a capacity other than as a
While approving the rate of dividend at the Annual General Meeting,
member, may also be adjusted against the dividend payable to him.
278 DIVIDEND PROVISIONS DIVIDEND PROVISIONS 279
the shareholders have power to declare a lower rate of dividend called “Unpaid Dividend Account". Interest at the rate of 12% p.a. is
than what is recommended by the Board but they have no power payable by the company for delay in making the above transfer.
to increase the amount or the rate of dividend so recommended. 8. Transfer of unpaid or unclaimed dividend to the Investor Education
Dividend when declared becomes debt against the company. and Protection Fund
Usually, dividend is declared at the annual general meeting. But Any amount of dividend which remains unpaid or unclaimed for a
a company which has not declared dividend at an annual general period of 7 years from the date it became due for payment shall be
meeting may do so at a subsequent general meeting. transferred
by the company
to the Investor Education and Protection
A company which has declared dividend at a general meeting is not Fund [Section /24/5)] When making a transfer to the Fund, the
permitted to declare dividend for the second time in that year. company shall furnish to the authority appointed by the Central
. Dividend includes Interim Dividend Government, the details as prescribed in this respect. The said fund
shall be utilised for promotion of investor awareness and protection
As per the Companies Act, 2013, dividend includes interim dividend of the interests of investors.
[Sectior 2(35)]. Interim dividend can be declared by the Board of
Directors if they have authority to do so. Further, the provisions on In case of any default in complying with these provisions, the com-
payment of dividend contained in sections 123, 124 and 127 shall pany and every officer of the company who is in default shall be
apply to interim dividend also. punishable with the fine as prescribed.
. Dividend to be deposited in a Separate Bank Account Penalty for failure to Pay Dividends within 30 Days
The company must deposit the dividend amount (including inte-
rim dividend) within 5 days of its declaration in the separate bank Where a dividend has been declared by a company but has not been paid,
or the warrant in respect thereof has not been posted, within 30 days from
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account opened for this purpose. The interim dividend will have to
be deposited in a bank account within 5 days of the Board Meeting the date of the declaration, to any shareholder entitled to the payment
whereas Final dividend will have to be deposited within 5 days from of the dividend, every director of the company knowingly a party to the
the date of Annual General Meeting in which it was approved by the default, shall be punishable with simple imprisonment for a term which
shareholders. may extend to 2 years and shall also be liable to a fine of Rs. 1000 for every
day during which such default continues, The company shall also be liable
. Dividend to be paid by cheque or warrant to pay simple interest at the rate of 18% per annum during the period for
Section 123(5)of the Companies Act, 2013 provides that the dividend which such default continues (Sec, 127).
payable in cash may be paid either by cheque or warrant or in any However, no offence shall be deemed to have been committed in the fol-
electronic mode to the shareholder entitled to the payment of divi- lowing cases:
dend.
(1) where a dividend is not legally declared or a declaration of dividend
. Time frame for payment of Dividend is legally untenable (Reference Case: Amalgamated Commercial
As per section 127 of the Companies Act, 2013, the dividend is to be Traders Pvt. Led. v. ACK Krishraswarni};
paid or the warrants in respect thereof shall be posted within 30 days (2) where the dividend could not be paid by reason of the operation of
from the date of declaration of dividend. any laws
Transfer of Unpaid Dividend (3) where a shareholder has given directions to the company regarding
ra
As per section 124 of the Act, where a dividend has been declared by the payment of the dividend and those directions cannot be complied
a company but has not been paid (or claimed) within 30 days from with;
the date of declaration, the company shall within 7 days from the (4) where there is a dispute regarding the right to receive the dividend;
expiry of the period of 30 days transfer the total amount of dividend
which remains unpaid or unclaimed toa special account to be opened (5) where the dividend has been lawfully adjusted by the company
by the company in that behalf with any Scheduled Bank which is against any sum due to it from the shareholder; or
Vom
—
(6) where, for any other reason, the failure to pay the dividend or post (a) the refund in respect of unclaimed dividends, matured deposits, ma-
the warrant within the period aforesaid was not due to any default tured debentures, the application money due for refund and interest
on the part of the company. thereon;
(5) promotion of investors’ education, awareness and protection;
Investor Education and Protection Fund
(ce) distribution
of any disgorged amount among eligible and identifiable
The Central Government has established a fund called the Investor applicants for shares or debentures, shareholders, debenture-holders
Education and Protection Fund under section 125, The following amounts or depositors who have suffered losses due to wrong actions by any
are credited to the fund: person, in accordance with the orders made by the Court which had
(a) the amount given by the Central Government by way of grants after ordered disgorgement;
due appropriation made by Parliament by law in this behalf for being (d) reimbursement of legal expenses incurred in pursuing class action
utilised for the purposes of the Fund; suits under sections 37 and 245 by members, debenture-holders or
(4) donations given to the Fund by the Central Government, State depositors as may be sanctioned by the Tribunal; and
Governments, companies or any other institution for the purposes (2) any other purpose incidental thereto.
of the Fund;
(ce) the amount in the Unpaid Dividend Account of companies transferred Interim Dividend
to the Fund under section 124(5); Dividend declared by the board of directors of a company between two
(d@) theamountinthe general revenue account
of the Central Government annual general meetings is called interim dividend. As per section 2(35) of
which had been transferred to that account immediately before the Companies Act dividend includes interim dividend also. The Board of
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the commencement of the Companies (Amendment) Act, 1999, and directors has the power to declare interim dividend.
remaining unpaid or unclaimed on the commencement of this Act; The board may from time to time pay to the members such interim divi-
(e) the amount lying in the Investor Education and Protection Fund dends as appear
to it to be justified by the profits of the company. An interim
under section 205C of the Companies Act, 1956; dividend is only a payment on account of the whole dividend for the year. If
(/) the interest or other income received out of investments made from the working of the whole year results in loss, payment of interim dividend
the Fund; will amount to the payment of dividend out of capital and the directors will
be personally liable to make good to the company the amount of interim
(g) the amount received through disposal of securities allotted in the dividend improperly disbursed.
fictitious names under section 38:
It is prudent to prepare interim financial statements to ascertain the
(h) the application money received by companies for allotment of any amount of profits earned and to see whether the profits for the accounting
securities and due for refund which has remained unclaimed for a period up-to-date sufficiently justify the payment of an interim dividend.
period of seven years from the date it became due for payment; It is essential for a company to provide depreciation for the whole of the
() the amount remaining unpaid on account of matured deposits or year and not proportionately for any fraction of the year before declaring
debentures with companies and interest accrued on that; interim dividend. This is because provision for depreciation is a condition
()) redemption amount of preference shares remaining unpaid or un- precedent for declaration or payment of any dividend. While final dividend
claimed for 7 or more years; may be paid out of free reserves, no interim dividend should be paid by
transfers out of any reserves. The Board should take into account the spe-
(Xk) any other amount as be prescribed. cified percentage required to be transferred to reserves before declaration
of interim dividend.
Utilisation of Fund
As per section 123(3) of the Companies Act, 2013, the Board of Directors of
The Fund can be utilised for promotion of investors, awareness and pro- a company may declare interim dividend during any financial year out of
tection of the interests of investors in accordance with the prescribed rules. the surplus in the profit and loss account and out of profits of the financial
As per section 125(3)of the Companies Act, the Fund shall be utilized for: year in which such interim dividend is sought to be declared:
ak
Provided that in case the company has incurred loss during the current REVIEW QUESTIONS
financial year up to the end of the quarter immediately preceding the date
of declaration of interim dividend, such interim dividend shall not be de- 1. Explain the meaning of dividend. What are the rules regarding
clared at a rate higher than the average dividends declared by the company payment of dividends?
during the immediately preceding three financial years. 2. What are the provisions of the law regarding payment
of dividends
The amount of interim dividend is required to be deposited in a separate on partly paid-up shares? Can a company adjust calls in arrears
bank account within five days from the date of declaration of such dividend against the dividend payable?
[section 123(4)]. The amount of interim dividend so deposited) shall be used 3 (a) Dividend can be declared only at the annual general meeting.
for payment of interim dividend. The provisions of the Act applicable to Discuss.
dividend are also applicable to interim dividend. (6) Can a dividend once declared be revoked? If so explain the
circumstances under which it can be done.
Procedure to declare Interim Dividend
4 State the restrictions imposed by the Companies Act, 2013 regarding
(i) Articles of Association must authorise the directors to declare interim payment of dividend to the shareholders. What steps are required
dividend. to be taken by the company regarding unpaid and unclaimed
(i Meeting of Board of Directors is to be called to declare interim dividends?
dividend and decide the record date. . What is the situation when dividend is kept in abeyance?
(if) Board of Directors in their meeting has to pass a resolution declaring 6. Explain the provisions of the law regarding:
the interim dividend.
(a) Payment of dividend out of capital profits.
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(iv) Open a separate bank account and credit the amount of dividend
(5) Payment of dividend out of Reserve Funds of the company.
within 5 days from the date of declaration of dividend.
7 Examine the validity of declaration of dividends at the Extraordinary
(v) Make the payment or issue dividend warrant within 30 days from
the date of declaration.
General Meeting of the company.
(vi) Transfer the unpaid or unclaimed dividend to the ‘Unpaid Dividend Examine the following and comment:
Account’ within 7 days of the expiry of period of 30 days from the (a2) Payment of interim dividend without providing for depreci-
declaration, ation.
Revocation of Interim dividend - Interim dividend is to be paid within 30 (5) Payment of interim dividend out of free reserves of the
days of declaration. Since the provisions applicable to dividend apply to company.
interim dividend also, the interim dividend becomes debt due once it is 9 State the procedure for declaring interim dividend.
«
declared. Thus, interim dividend can be revoked under the same circum-
10. Explain the provisions of the Companies Act relating to the estab-
stances where dividend can be revoked.
lishment of Investor Education and Protection Fund.
IMPORTANT CASES
11. Write a note on Interim Dividend. Can it be revoked?
12 (a) ‘Dividend, once declared cannot be revoked,’ State the law re-
*
@ Amalgamated Commercial Traders Pvt, Dividend Payment garding declaration and payment of dividend.
Ltd. v. ACK Krishnaswami (4) The shareholders of acompany unanimously passed aresolution
+ Foster v. The New Trinidad Lake Dividend Payment out of at the Annual General Meeting for payment of dividend at the rate
Ashphalt Co. Ltel. Capital Profits higher than that recommended by the Board of Directors. Discuss
the validity of the resolution.
284 DIVIDEND PROVISIONS. DIVIDEND PROVISIONS 285
i 13. Nodividend can be paid by acompany except out of profits. Explain. 5. The shareholders at an annual general meeting of a public limited
14. “Dividend once declared cannot be revoked.” Explain. company unanimously resolved for payment of dividend though the
Board of Directors did not recommend payment of any dividend.
15. State the circumstances when a company will not be deemed to State the legal position.
have committed any offence even if it does not pay dividend to its|
shareholders within 30 days of its declaration. Ans. [Subject to the provisionsof articles of a company declaration
of dividend is allowed only if the directors recommend.]
16. (a) A company cannot pay dividend out of its capital. Comment.
(5) Can the decision for payment of dividend be revoked?
CASE PROBLEMS
. Theshareholdersin a duly convened annual general meeting passed

a resolution for payment of dividend at a rate higher than what
was recommended by the Board. Discuss whether the resolution
is valid.
Ans. [Resolution is not valid.]
2 The directors of a company declare interim dividend in contraven-
tion of law. Can they call back the money from the shareholders?
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Ans. [Yes]
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3 = Board
of directors ofa company proposed a dividend at Rs. 5 per
equity share. At the annual general meeting some shareholders
suggested that the dividend should be declared at the rate of Rs. 6
per equity shares while some other shareholders suggested that the
dividend should be declared at the rate of Rs. 4 per equity shares,
Explain how the chairman of the meeting should deal with these
suggestions.
Ans. [Chairman should explain that the meeting cannot declare
dividend in excess of the rate recommended by the Board. It can
be either Rs. 4 or Rs.5 per share to be decided by the members.]
4 An equity dividend of 12% was declared at the annual gener-
*
al meeting of Z Ltd. The directors convened an extraordinary

general meeting of the company
to consider and approve
a further
3% equity dividend for the same year, on the plea that the earlier
profits were not correctly computed, Some of the shareholders of
the company raised objection to this additional dividend. Examine
the legality of the director's proposal.
Ans. [The directors’ proposal to convene extraordinary general
meeting for further dividend of 3% on equity shares is not legal
and the objection raised by the dissenting shareholders are valid.]
wom
WINDING UP OF COMPANIES 287
Registrar from the Register of Companies and he shall also get this fact
published in the Official Gazette. The dissolution, thus puts an end to the
existence of the company.
Modes of dissolution
Dissolution of acompany
may be brought about inany of the following ways:
1. Through transfer of a company’s undertaking to another under a
scheme of reconstruction or amalgamation. In such
a case the trans-
feror company will be dissolved by an order of the Tribunal without
WINDING UP OF COMPANIES being wound up.
2. Through the winding up of the company, wherein assets of the com-
pany are realized and applied towards the payment of its liabilities.
# Meaning of Winding up and Dissolution The surplus, if any is distributed to the members of the company, in
accordance with their rights.
# Compulsory Winding up
Insolvency and Bankruptcy Code, 2016 Difference between dissolution and winding up
Meaning of winding up | Winding up _ Dissolution

| Winding up is one of the method
| Dissolution is the end result of
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“Winding up is a means by which the dissolution of a company is brought
about and its assets realised and applied in payment of its debts, and after by whichdissolutionofacompany | winding up.
satisfaction of the debts, the balance, if any, remaining is paid back to the is brought about.
members in proportion to the contribution made by them to the capital of 2 Legal entity of the company | Dissolution brings about an end
the company."' “The liquidation or winding up of a company is the process continues at the commencement | to the legal entity of the company.
whereby its life is ended and its property is administered for the benefit _of the winding up. | |
of its creditors and members. An Administrator, called a liquidator, is ap- 3 A company may be allowed | Company ceases to exist on its
pointed and he takes control of the company, collects its assets, pays its to continue its business so far | dissolution.
debts and finally distributes any surplus among the members
in accordance necessary for the beneficial
with their rights."? winding up of the company.
As per section 2(94A) of the Companies Act, 2013, “winding up" means wind-
ing up under this Act or liquidation under the Insolvency and Bankruptey Modes of winding up
Code, 2016,
Acompany may be wound up in any of the following two ways:
Thus, winding up ultimately leads to the dissolution of the company. In
between winding up and dissolution the legal entity of the company remains 1. Compulsory winding up. (Sec. 272)
and it can be sued in a Tribunal of law. 2. Liquidation under Insolvency and Bankruptey Code, 2016,
Meaning of dissolution Compulsory Winding Up

A company is said to be dissolved when it ceases to exist as a corporate Winding up a company by an order of the Tribunal is known as compul-
entity. On dissolution, the company's mame shall be struck off by the sory winding up.
1, ARamalva A Guide te whe Companies Act, 17th Be. 2010
2, L.C.B, Gower Gower’ Principles of Modern Company Caw 4th Ed, p. 719,
286
288 WINDING UP OF COMPANIES WINDING UP OF COMPANIES 289
Grounds of Winding up may order forthe winding up of the company. The Tribunal will
As per section 271, Tribunal may order for the winding up of a company issue such an order only when it is impossible for the business
on a petition submitted to it on any of the following grounds: of the company to be carried on for the benefit of the company
as a whole owing to the way in which voting power is held and
1, Passing of special resolution for the winding-up. When a company used.
has by passing a special resolution resolved to be wound up by
the Tribunal, winding up order may be made by the Tribunal. The (ii) Deadlock in management - Where there is a complete dead-
resolution may be passed for any cause whatever. Tribunal may not lock in the management of the company, the company may
order for the winding up if it finds it to be opposed to public interest be ordered to be wound up. But mere incompatibility of good
relations between the rival factions of the directorate ie, the
or the interest of the company as a whole.
majority group and minority group will not be sufficient for
If the company has acted against the interests of the sovereignty and ordering winding up.
bw
+
integrity of India, the security of the State, friendly relations with

foreign States, public order, decency or morality. Re. Yenidje Tobacco Ltd. W and R were the only two
3 If on an application made by the Registrar or any other person au-
shareholders as well as the directors of a private company.
Subsequently some serious differences developed and they
+
thorised by the Central Government by notification under this Act,

the Tribunal is of the opinion that the affairs of the company have became hostile to each other. They stopped even talking to
been conducted in a fraudulent manner or the company was formed each other. It was held that there was complete deadlock in
for fraudulent and unlawful purpose or the persons concerned in the the management of the company and, therefore, it would be
formation or management of its affairs have been guilty of fraud, just and equitable to order for its winding up.
misfeasance or misconduct in connection therewith and that it is (iii) Loss of substratum - Where the objects for which a company
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proper that the company be wound up. was constituted have either failed or become substantially
4. If the company has made a default in filing with the Registrar its impossible to be carried out, Le, ‘substratum of the company’
financial statements or annual returns for immediately preceding is lost. However, a temporary difficulty which does not knock
five consecutive financial years. out the company objects and purposes may not be permitted
to become a ground for liquidation. Loss of substratum is a
5. Just and equitable - The Tribunal may order for the winding up of question of fact depending on the circumstances of the case.
a company if it thinks that there are just and equitable grounds for
doing so. The Tribunal has very large discretionary power in this Re. Steam Navigation Co. A steamship was formed mainly
case. The term ‘just and equitable’ grounds may include any of the with the object of acquiring the business of a firm engaged
grounds for the winding up of the company. This power has been in plying steamers. The business was acquired, but later on
given to the Tribunal to safeguard the interests of the minority and due to serious differences between the two, seven out of
the weaker group of members. Tribunal, before passing such an or- nine steamers acquired were returned. A shareholder filed
der, will take into account the interest of the shareholders, creditors, a petition to the Tribunal for the compulsory winding up of
employees and also the general public. Tribunal may also refuse to the company on the ground of loss of substratum. The peti-
grant an order for the compulsory winding up of the company if it is tion was rejected since the company could purchase more
of the opinion that some other remedy is available to the petitioner steamers and carry out its original objects.
to redress his grievances and that the demand for the winding up
The substratum of a company is said to disappear when the
of the company is unreasonable. A few of the examples of ‘just and
objects have substantially failed or it is impossible to carry on
equitable’ grounds on the basis of which the Tribunal may order for
the winding up of the company are given: business except at a loss or existing liabilities are far in excess
of existing and possible assets. An illustration is:
(i) Oppression of minority - In cases where those who control the
company abuse their power to such an extent that it seriously
prejudices the interests of minority shareholders, the Tribunal
Veoh
Re. German Date Coffee Co.A company was incorporated ta: 2. Petition by the Contributories - A contributory® shall be entitled to
manufacture coffee from dates under a patent to be granted present a petition for the winding up of the company, notwithstand-
by the Government of Germany. The German patent was not ing that he may be the holder of fully paid-up shares or that the
granted and the company embarked upon other patents. The company may have no assets at all, or may have no surplus assets
company was ordered to be wound up on just and equitable left for distribution among the holders after the satisfaction of its
grounds as the company was held to lost its substratum and liabilities. It is no more required of a contributory making petition
it was impossible to carry out the objects for which it was to have tangible interest in the assets of the company.
formed. But a contributory cannot make a petition for the winding up of
(iv) Losses - When the business of a company cannot be carried on the company unless at least some of the shares held by him were
except ata loss, the company may be wound up by an order of originally allotted to him or have been held by him and registered in
the Tribunal on just and equitable grounds. But mere appre- his name for at least 6 months during the 18 months before the com-
hension on the part of some shareholders that the company mencement of the winding up or have devolved upon him through
will not be able to earn profits cannot be just and equitable the death of a former holder. Thus, in case of a legal representative
ground for the winding up order. of adecreased shareholder, the requirement of holding of shares for
a specified time is not applicable. [See. 27343)]
(v Fraudulent object - If the business or the objects of the com-
3. Petition by the Registrar - [Sec. 272(4)] Registrar may with the
—
pany are fraudulent or illegal’, or have become illegal with the

changes in the law, the Tribunal may order the company to be previous sanction of the Central Government make petition to the
wound up on just and equitable grounds. It will not be a valid Tribunal for the winding up the company only in the following cases:
defence in such a case that the profits earned will be used for (a) Ifthe company has made a default in filing with the Registrar
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philanthropic purposes‘. However, the mere fact of having been its financial statements or annual returns for immediately
a fraud in the promotion or fraudulent misrepresentation in preceding five consecutive financial years;
the prospectus will not be sufficient ground for a winding up (6) Ifthe company has acted against the interests
of the sovereignty
order, for the majority of shareholders may waive the Fraud®, and integrity
of India the security of the State friendly relations
(vi) Bubble Company - When a company is a bubble company ie. with foreign States, public order, decency or morality;
it does not carry on any business in reality or does not own (ce) Ifon an application made by the Registrar or any other person
any property. authorised by the Central Government by notification under
this Act, the Tribunal is of the opinion that the affairs of the
Who may file Petition to the Tribunal company have been conducted in a fraudulent manner or the
A petition for compulsory winding up of a company may be filed in the company was formed for fraudulent and unlawful purpose or
Tribunal by any of the following persons. (See. 272) the persons concerned in the formation or management of its
affairs have been guilty of fraud, misfeasance or misconduct
1. Petition by the Company - A company can make a petition to the in connection therewith and that it is proper that the company
Tribunal for its winding up when the members of the company have be wound up.
resolved by passing a special resolution to wind up the affairs of the
company. Managing director or the directors cannot file such a peti-
4 Petition by the Central Government or a State Government on the
.
tion on their own account unless they doit on behalf of the company ground that company has acted against the interests of the sovereign-
and with the proper authority of the members in the general meeting. ty and integrity of India, the security of the State, friendly relations
[See. 272(5)] with foreign States, public order, decency or morality.
5. Any person authorised by the Central Government in that behalf.
3. Offfteia! Liguialator, Milan Chit Frere Pot. Lie. v. Joginder Singh Kolili & others (1978)
4, Universal Mutval Aad cic v, Chapa Naidu 6, On the commencement of the winding up of a company, its members /shareholders are
5. Oriental Navigation Co. v. Bhanaran Aganvall (1922) termed as contributories.
word
292 WINDING UP OF COMPANIES. WINDING UP OF COMPANIES 293
Consequences of the winding up order Types of Creditors under IBC

In case the Tribunal issues a winding up order against the company, the |. “Financial creditor” means any person to whom afinancial debtis owed
following consequences will follow: and includes a person to whom such debt has been legally assigned
or transferred to. “Financial debt” means a debt along with interest,
1. The Tribunal shall appoint an Official Liquidator or a liquidator if any, which is disbursed and includes (a) money borrowed against
from the panel maintained by the Central Government as Company the payment of interest; (5) any amount raised by acceptance under
Liquidator, [Section 275(1)] any acceptance credit facility; (c) any amount raised on the issue of
2. The order for winding up shall operate in favour of all the creditors bonds, notes, debentures, loan stock or any similar instrument; (qd)
and contributories of the company as if it has been made out on the the amount of any liability in respect of any lease or hire purchase
joint petition of creditors and contributories. [Section 278] contract; (e) receivables sold or discounted; (/) any amount raised
3. The winding up order shall be deemed to be notice of discharge to under any other transaction, including any forward sale or purchase
the officers and employees
of the company except when the business agreement, having the commercial effect of a borrowing; (g) any
of the company is continued. [Section 277(3)] derivative transaction; (/) any counter-indemnity obligation in re-
spect of a guarantee, indemnity, bond, documentary letter of credit
4. The powers of the board of directors will terminate and they will
or any other instrument issued by a bank or financial institution;
now vest in the Official Liquidator, who shall by virtue of his office () the amount of any liability in respect of any of the guarantee or
become the liquidator
of the company. indemnity for any of the items referred to in sub-clauses (a) to (ft);
5. No suit or other legal proceedings shall be commenced, or if pend- () the amount raised from allottees under a real estate project te. a
ing at the date of the winding up order, shall be proceeded with or buyer of under-construction residential or commercial project.
against the company, except by leave of the Tribunal and subject to 2. “Operational creditor” means a person to whom an operational
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such terms as the Tribunal may impose. [Section 279(1)]

debt is owed and includes any person to whom such debt has been
legally assigned or transferred. “Operational debt" means a claim in
Insolvency Resolution and Liquidation of company under the respect of the provision of goods or services including employment
Insolvency and Bankruptcy Code, 2016 or a debt in respect of the repayment of dues arising under any law
The Insolvency and Bankruptey Code, 2016 relates to re-organisation and for the time being in force and payable to the Central Government,
insolvency resolution of companies, partnership firms and individuals ina any State Government or any local authority.
time bound manner, With notification of the Code in November 2016, the 1. The Corporate Insolvency Resolution Process
provisions of section 271(2) of the Companies Act, 2013 on winding up due ( Initiation of the Process: Where a company commits a default in
to inability to pay debts and voluntary winding up (sections 304 to 323 of payment of debt of Rs. | lakh or more, a creditor (financial creditor
the Companies Act, 2013) have been deleted and are not applicable. or operational creditor) or the company itself may initiate corporate
The Insolvency and Bankruptcy Code, 2016 (IBC) applies to matters relat- insolvency resolution process in respect of such company as under:
ing to the insolvency and liquidation of a company where the minimum - Afinancial creditor’ either by itself or jointly with other financial
amount of the default is Rs. | lakh (may be increased up to Rs.1 cr. by the creditors may file an application before the National Company
Government, by notification)". Law Tribunal for initiating corporate insolvency resolution
The Code lays down two stages: process.
Insolvency Resolution Process- It is the stage during which financial credi- - An operational creditor® may, on the occurrence of a default,
tors assess whether the debtor's business is viable to continue and the serve a notice of demand to the company with a copy of the
options for its re-organisation and re-structuring; and inveice demanding payment of the amount involved in the
Liquidation - In case the insolvency resolution process fails, the liquidation default.
process shall commence in which the assets of the company are realized The company may, within a period of ten days of the receipt of
to pay to the creditors, the demand notice or copy of the invoice bring to the notice of the
operational creditor (a) existence of a dispute, if any, and record of
1. Increased to Rs. 1 cr. in view of Covid-19,
the pendency of the suit or arbitration proceedings filed before the
receipt of such notice or invoice in relation to such dispute; or (5) reference to the Board (Insolvency andl Bankruptcy Board) for the
the payment of unpaid operational debt by sending an attested copy recommendation of an insolvency professional who may act as an
of the record of electronic transfer of the unpaid amount from the interim resolution professional. The term of the interim resolution
bank account of the company; or an attested copy of record that the professional shall not exceed 30 days from date of his appointment.
operational creditor has encashed a cheque issued by the company.
(vi) Management of affairs of the company by Interim Resolution
After the expiry of the period of ten days from the date of delivery of Professional: From the date of appointment of the interim resolution
the noticeor invoice demanding payment, if the operational creditor professional:
does not receive payment from the company or notice of the dispute, - the management
of the affairs of the company shall vest in the
the operational creditor may file an application before Tribunal for interim resolution professional;
initiating a corporate insolvency resolution process.
the powers of the board of directors of the company shall
(i) Order for Initiation of Insolvency Process: The Tribunal shall, within stand suspended and be exercised by the interim resolution
14 days of the receipt of the application of the creditor (financial or professional;
operational creditor) ascertain the existence of a default from the
records or on the basis of other evidence furnished by the creditor. the officers and managers of the company shall report to the
Where the Tribunal is satisfied that a default has occurred and the interim resolution professional and provide access to such
application is complete, the Tribunal shall pass the order for initiation documents and records of the corporate debtor as may be
of corporate insolvency process. required by the interim resolution professional;
(ii) Time Limit for Completion of Insolvency Resolution Process: The the financial institutions maintaining accounts of the company
corporate insolvency resolution process shall mandatory be completed shall act on the instructions of the interim resolution profes-
within a period of 330 days from the date of admission of the appli- sional in relation to such accounts and furnish all information
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cation to initiate such process 330 days would not include the period relating to the company available with them to the interim
of lockdown imposed by Central Govt. in the wake of Covid-19, resolution professional.
(iv) Moratorium on Claims: Upon admission of application by the (vit) Committee of Creditors: The interim resolution professional shall
Tribunal, creditors’ claims will be frozen for 180 days, during which after collation of all claims received against the company and de-
time Tribunal will hear proposals for revival and decide on the future termination of the financial position of the company, constitute a
course of action. The Tribunal shall by an order declare moratorium committee of creditors. The committee of creditors shall comprise
for prohibiting (a) the institution of suits or continuation of pending all financial creditors of the company:
suits or proceedings against the company including execution of any Provided that a related party to whom the company owes a finan-
judgment, decree or order in any court of law, Tribunal, arbitration cial debt shall not have any right of representation, participation or
panel or other authority; (5) transferring, encumbering, alienating voting in a meeting of the committee of creditors. All decisions of
or disposing of by the company any of its assets or any legal right or the committee of creditors shall be taken by a vote of not less than
beneficial interest therein; and (c) any action to foreclose, recover or 51% of voting share of the financial crecitors. However, for certain
enforce any security interest created by the company, until approval key decisions of the Committee of Creditors voting threshold is 66%.
of resolution plan or until initiation of liquidation process. Operational creditors may be part of creditors’ committee (without
( Appointment of Interim Insolvency Professional (IP): The Tribunal voting right) if their aggregate dues are not less than 10% of the debt.
Key functions of the Committee of Creditors:
—
shall appoint an interim resolution professional within 14 days from

the insolvency commencement date: (a2) Where the application for () Appointment of the Resolution Professional (RP)
corporate insolvency resolution process is made by a creditor (fi- (i) Approval of the Resolution Plan.
nancial or operational creditor) or the company, as the case may be,
the resolution professional, as proposed respectively in the applica- (iif) Increasing the time-limit for insolvency resolution plan.
tion; (6) Where the application for corporate insolvency resolution (vii Appointment of Resolution Professional: The first meeting of the
process is made by an operational creditor and no proposal for an creditors’ committee shall be held within 7 days of its constitution
interim resolution professional is made, the Tribunal shall make a and decide by 66% of votes either to replace or confirm interim insol-
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vency professional as Resolution Professional. Thereupon, Resolution . Appoint accountants, legal or other professionals.
bh
Professional is appointed by the Tribunal upon confirmation by the . Maintain an updated list of claims.
& in
Board. The creditors’ committee, with a majority of 66% votes, can
on
change Resolution Professional any time. . Convince and altered all meetings of the Committee of Creditors.
(iz) Resolution Professional to conduct Corporate Insolvency Resolution . Prepare the ‘Information memorandum’.
Process: The resolution professional shall conduct the entire corpo- . Present all resolution plans at the meetings of the Committee of
rate insolvency resolution process and manage the operations of the Creditors.
company during the corporate insolvency resolution process period. 9. Such other actions as may be specified by the IBB.
The resolution professional shall exercise powers and perform duties
as are vested or conferred on the interim resolution professional, 2. Liquidation
The resolution professional shall prepare an information memorandum in (i) Initiation of Liquidation: The Tribunal shall pass the liquidation order
such form and manner containing such relevant information as may be spe- in the following cases:
cified by the Board for formulating a resolution plan. A resolution applicant - failure to submit the resolution plan to the Tribunal within the
may submit a resolution plan to the resolution professional prepared on the prescribed period, or
basis of the information memorandum. The resolution professional shall rejection of resolution plan for non-compliance with the
examine each resolution plan received by him. The resolution professional requirements of the Code, or
shall present to the committee of creditors for its approval such resolution
plans which confirm the conditions which are laid down by the Code. The decision of creditors’ committee based on vote of majority, or
committee of creditors may approve a resolution plan by a vote of not less contravention of resolution plan by the company.
than 66% of voting share of the financial creditors, The approved resolution
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During liquidation, no suit or other proceedings shall be instituted by

plan shall be submitted by the resolution professional to the Tribunal.If the or against the company except with permission of the Tribunal. The
Tribunal is satisfied with the resolution plan as approved by the committee order for liquidation shall be deemed to be a notice of discharge to
of creditors, it shall by order approve the resolution plan which shall be the officers, employees and workmen of the corporate debtor, except
binding on the company and its employees, members, creditors, guarantors when the business of the corporate debtor is continued during the
and other stakeholders involved in the resolution plan. liquidation process by the liquidator,
Resolution Professional (RP)
(ti) Appointment of Liquidator: The Resolution Professional shall act as
Resolution Professional (RP) means an insolvency professional appointed liquidator unless replaced by the Tribunal. On the appointment of a
to conduct the corporate insolvency resolution process and includes an liquidator, all powers of the board of directors and key managerial
interim resolution professional. personnel of the company shall cease to have effect and shall be
The Committee of Creditors in the first meeting by a majority vote of not vested in the liquidator. The personnel of the company are required
less than 66% of the voting share of financial creditors appoint the resolution to extend all assistance and cooperation to the liquidator as may be
professional and communicate the same to the NCLT who will made the required by him in managing the affairs of the company.
appointment of RP after confirmation by the Insolvency and Bankruptcy (iit) Powers and Duties of the Liquidator: Subject to the directions of the
Board. Tribunal, the liquidator shall have the following powers and duties:
Duties of Resolution Professional (a) to verify claims of all the creditors;
The Resolution Professional conducts the entire corporate insolvency res-
olution process and manage the affairs of the company during that period. (5) to take into his custody or control all the assets, property,
effects and claims of the company;
The other duties of RP are:
1. To preserve and protect the assets of the company. (c) to evaluate the assets and property of the company in the
manner as may be specified by the Board and prepare a report;
2. Represent and act on behalf of the company with third parties.
(d) to take such measures to protect and preserve the assets and
3. Raise interim finances subject to the approval of the committee of properties of the company as he considers necessary;
creditors.
(e) to carry on the business of the company for its beneficial liq- 2. Passing of Special Resolution: Within four weeks of the declaration,
uidation as he considers necessary; the company is required to pass:
(f) to sell the immovable and movable property and actionable (f) aspecial resolution of the membersof the companyina general
claims of the company; meeting requiring the company to be liquidated voluntarily and
(zg) to invite and settle claims of creditors and claimants and appointing an insolvency professional to act as the liquidator;
distribute proceeds in accordance with the provisions of this or
Code; (if) a resolution of the members of the company in a general
(h) totake all such actions, steps, or to sign, execute and verify any meeting requiring the company to be liquidated voluntarily
paper, deed, receipt document, application, petition, affidavit, as a result of expiry of the period of its duration, if any, fixed
bond or instrument as may be necessary for liquidation, distri- by its articles or on the occurrence of any event in respect of
bution of assets and in discharge of his duties and obligations which the articles provide that the company shall be dissolved,
and Functions as liquidator; and as the case may be and appointing an insolvency professional
to act as the liquidator
() to perform such other functions as may be specified by the
3. Resolution of the Creditors: Where the company owes any debt to
any person, creditors representing two thirds in value of the debt of
The liquidator shall form an estate of all assets of company called the company shall approve the resolution passed by the company
the liquidation estate. within 7 days of such resolution.
(4) Dissolution of company: Where the assets of the company have 4, Notice to the Registrar and the Board: The company is required to
been completely liquidated, the liquidator shall make an application notify the Registrar of Companies and the Board about the resolu-
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to the Tribunal for the dissolution of such company. The Tribunal tion to liquidate the company within 7 days of such resolution or the
shall on application filed by the liquidator order that the company subsequent approval by the creditors, as the case may be.
shall be dissolved from the date of that order and the company shall
be dissolved accordingly. 5. Commencement of Voluntary Liquidation: The voluntary liquidation
proceedings in respect of a company shall be deemed to have com-
Voluntary Liquidation of Company menced from the date of passing of the resolution. Provisions of the
A company which intends to liquidate voluntarily and has not committed voluntary liquidation shall apply.
any default and can pay off its debts fully from proceeds of liquidation of its 6. Dissolution: Where the affairs of the corporate person have been
assets may initiate voluntary liquidation proceedings under the provisions completely wound up, and its assets completely liquidated, the liq-
af Chapter V of the Insolvency and Bankruptcy Code, 2016. The voluntary uidator shall make an application to the Tribunal for the dissolution
liquidation requires the following conditions to be met: of such company. The Tribunal shall on an application filed by the
1, Declaration from the Directors: A declaration from majority of the liquidator pass an order that the company shall be dissolved from
directors of the company verified by an affidavit stating that - ( they the date of that order.
have made a full inquiry into the affairs of the company and they
have formed an opinion that either the company has no debt or that IMPORTANT CASES
it will be able to pay its debts in full from the proceeds of assets to
be sold in the voluntary liquidation; and (i) the company is not being @ Trade Links Corporation v. Nalanda Inability to pay debts
liquidated to defraud any person. Tobacco Co. Pvt, Lt.
The declaration must be accompanied with the following documents: @ Praneet Enviroquips Pvt. Ltd.v. Vishal Inability to pay debts
() audited financial statements and record of business operations of Papertech (India) Ltd.
the company for the previous two years or for the period since its
incorporation, whichever is later; (ii) a report of the valuation of the # Re. Yenidje Tobacco Lid. Just and Equitable Grounds
assets of the company, if any prepared by a registered valuer. # Re. Steam Navigation Co. Loss of Substratum
@ Re. Gernian Date Coffee Co, Loss of Substratum
Sarr r¥i
WINDING UP OF COMPANIES
REVIEW QUESTIONS
1, What do you mean by winding up ofa company? How winding up

is different from dissolution of a company?
2. When would it be just and equitable for Tribunal to wind up a
company?
3. State the circumstances under which a company may be compul-
sorily wound-up by the Tribunal.
4. State the Corporate Insolvency resolution process as laid down by
the Insolvency and Bankrupicy Code, 2016. THE DEPOSITORY SYSTEM
5. What is Committee of Creditors under the Insolvency and
Bankruptcy Code, 2016?
6. How the insolvency process is initiated under the Insolvency and + Depository System - Features, Functioning and Benefits
Bankruptcy Code, 2016? + Provisions of the Depository Act, 1996
7. How the Interim Insolvency Professional is appointed?
8. Whatare the powers and duties of the liquidator
under the Insolvency Limitations of Holding Securities in Physical Form
Bankruptcy Code, 2016?
Holding of securities in physical form (ie. by way of share certificate or
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9, Outline the steps in voluntary liquidation. debenture certificate) involves a risk of theft and mutilation of certificates.
Safe custody of certificate may also be problematic. Transfer of securities
CASE PROBLEMS in physical form is required to be accomplished by physical movement of
certificates to, and registration with, the company concerned. The process
often involves long delays and a significant portion of transactions end up
1. There are only two members of a company. They are also the di- as ‘bad delivery’ due to faulty completion of paperwork. In many cases the
rectors of the company. Both of them are not on speaking terms. process of transfer would take much longer than the two months stipulated
Can the company be wound-up on this ground? Give reasons. in the Companies Act. All this add to costs and delays in settlement, restrict
Ans. | Yes, the company can be wound-up on the ground of just and liquidity and make investor grievance redressal time consuming and, at
equitable by the Tribunal.] times, intractable. Thus, the limitations of having shares in physical form are:
2. Acompany’s trade has been suspended temporarily owing to trade 1. High cost involved by way of postal charges, stamp duty, cost on
depression but it has bona fide intention to continue its operations paper work etc.
when conditions improve, A prayer was made to the Tribunal for 2. Delay in settlements
the winding up of the company. Decide.
3. Risk of bad delivery
Ans. [The Tribunal should not accept the petition of winding up.
4. Risk of theft and forgery
Power has to be exercised judicially.]
Depository System
Depository system is a system wherein the securities of investors are held
in the electronic form with the depository at the request of the investors.
In this system transfer of securities takes place by means of book entries
301
— sn
302 THE DEPOSITORY SYSTEM THE DEPOSITORY SYSTEM 303
on the ledger
of the depository. The system is also referred as the ‘scripless Owner and Beneficial Owner. For the securities demateria-
trading system’ as the system dispenses with the securities and its move- lized, depository is the Registered Owner in the books of the
ment in the physical form. issuer (Le. company); the investor of securities
who has availed
the services of the depository is the Beneficial Owner,
A deposi-
Depository System resembles with the Banking System in the following tory is deemed to be registered owner (of the securities) for the
ways: purposes of effecting transferof ownership of the securities on
behalf of the beneficial owner. However, the depository does
| Depository Systent_ | Bank not have any voting rights or any other rights in respect of the
securities which are under depository’s custody. The beneficial
| Safekeepingof money _] owner is entitled to all the rights and benefits and subjected to
2. Holds securities in accounts | Holds funds in accounts
all the liabilities in respect of his securities held by a depository.
3. Transfer securities between accounts | Transfer funds between
(iv) Issuer: The Company who has issued the securities which are
accounts
dematerialized.
4. “Transfers without handling physical | Transfers without handling
4, Free Transferability of Shares. Transfer of securities held in demate-
_securities _ cash rialized form takes place freely through electronic book-entry system.
The system dispenses with the transfer deed and other procedural
Features of the Depository System requirements with respect to transfer of securities.
The depository system provides for the establishment of depositories to 5. No Stamp Duty. No stamp duty for transfer of securities in the
curb the irregularities in the capital market and protect the interests of electronic form is payable. In case of transfer of physical shares,
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the investors. The system facilitates an orderly conduct of the financial
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stamp duty of 0.5 per cent is payable on the market value of shares
markets through the free transferability of securities with speed, accuracy transferred.
and transparency. Its features are:
No Risk. All risks associated with physical certificates such as delays,
na
1. Securities in Dematerialized Form. Depository system provides for
.
loss in transit, theft, bad deliveries, etc. are eliminated in the depos-
maintenance of ownership record of the securities of the investor itory system.
in a book entry form. The system immobilizes physical securities so
that there is no physical certificate in existence. The securities are Functioning of Depository System
dematerialized to be held only as electronic records maintained with
the depository. The depository system functions as under:
Fungibility. In the depository system, the securities dematerialized 1. The system envisages setting up of one or more depositories to hold
y
are not identified by distinctive numbers or certificate numbers as securities of investors in the electronic form.
in the physical environment. Thus, all securities in the same class are 2. Thedepository functions through
its agents, who are called Depository
identical and interchangeable. For example, all equity shares in the Participants (DP).
class of fully paid up shares are interchangeable. 3. The investor, who wants to avail the services of the Depository, has
3. Parties Involved. In a depository system, the parties involved are: to open a beneficiary account with the Depository through a DP. The
(1) Depository: The depository renders service connected with account known as the “Demat” account can be opened with more
the recording of ownership of securities in its record. than one DP also.
(if) Depository Participant (DP): A depository functions through 4 After opening the demat account, the investor is required to dema-
depository participants who are the agent of the depository terialize the securities held by him in the physical form. To dema-
through whom the investors avail of the depository service. terialize the securities, the investor has to fill the Dematerialisation
Request Form (DRF) and submit the same to the DP along with the
(iii) Beneficial Owner: In the depository system, the ownership of security certificate. The DP through the Depository will intimate the
securities dematerialized, is bifurcated between Registered
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company /issuer and surrender the security certificate. The process | Investor submits the DRF (Demat Request Form) and physical certificates to the DP |
known as ‘dematerialisation’ takes about 30 days.
5. The issuer/company on receipt of the intimation shall cancel the DP enters the demat request in its system to be sent to the Depository. |
security certificate and substitute the name of the Depository as the
registered owner of the security.
| _DP dispatches the physical certificates along with the DRF to the Company (R & T Agent) |
6. The Depository on being intimated by the company/issuer, enters
the name of the investor in its record as the beneficial owner of the
| Depository records the request in the system and forwards to the RK & T Agent. |
security.
7. Whenever any rights, bonus or dividend is announced by a company
forits particular security, the Depository would furnish all the details | R&T Agent after verification confirm to DP the dematerialization of the concemed securities |
of the investors having electronic holdings of that security on the E
record date. The disbursement of the rights, dividends etc. are, thus [Depository credits the dematerialized securities tothe beneficiary (Demat) account ofttheinvestor)
done by the company based on the information provided.
8. In case of sale of the security under this mode, the investor/trans- Depository intimates the DP electronically. |
feror (the client) has to intimate the DP through issuing a Delivery
Instruction Slip (DIS) duly signed and containing the details of the The DP issues a statement of account to the client, |
security transaction. In case of purchase, the client will send the
intimation to the DP giving details of the security purchased. The
Depository on receiving the information through the DP will register Rematerialisation
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the transfer of securities in the name of the transferee in its record. Rematerialisation of securities is converting the securities from electronic
9. DP will also make book entries in the account of the investor to form with the depository into the physical form, For rematerialisation, the
record sale/ purchase of securities. investorhas tosubmit a Rematerialisation Request Form (RRF) through the
10. DP is required to send statement of accounts to the clients at regular concerned DP in the same manner as in Dematerialisation. The Depository
intervals, and update the account after each transaction. Participant will forward the request to the Depository after verifying that
the client has the necessary securities in balance. The Depository in turn
11. The client/investor has to pay charges to the Depository and the DP will intimate the Registrar and Transfer (R&T) Agents of the Company who
for availing the services. will print and dispatch the share certificates for the number of shares so
rematerialised and the beneficiary account will be debited by the Depository
Dematerialisation and credited with the Company. It is not necessary that one gets the shares
Dematerialisation is the process of converting physical scrips into comput- of the same folic number. The Registrars and Transfer Agents will print
erised ledger accounts maintained by the depository. In this process the new certificates with a new range of certificate numbers.
physical security certificate of an investor is surrendered to the company The process of rematerialisation is completed within a period of 30 days.
through the depository and an equivalent number of securities are cred-
ited in electronic form at the request of the investor. Dematerialisation of Difference between Dematerialisation and Rematerialisation
securities is optional and an investor has the choice to hold securities in
physical form. Basis of Dematerialisation Rematerialisation
The following steps may be followed for getting physical securities con- Difference
verted into the Demat form: Definition Ttisa processof conversion | It is a process of conversion of
of physical securities into | securities from electronic form
electronic form. into the physical form.
— 1k
Basis of Dematerialisation Rematerialisation Transfer of Securities under the Depository System (through market
Difference i.e. Stock Exchange)
Conversion In this, physical securities | In this, electronic records are Step 1: Seller gives delivery instructions to his DP to move securities from
certificates are converted | converted into physical certifi- his account to his broker's account.
into electronic records. cates.
Step 2: Securities are transferred from broker's account to Clearing House
Sequence First, securities are dema- | Securities already dematerial- of the Stock Exchange on the basis of the delivery instruction.
terialized, so it is primary | ized are rematerialized, so it is Step 3: On the pay-out day, securities are moved from Clearing House to
and principal function of | secondary and supporting fune-
the depository. tion of depository. buying broker's account.
Use of form | This process requires “De- | This process requires Step 4: Buying broker gives instructions and securities move to the buyer's
materialisation Request | “Rematerialisation Request account.
Form" form* (RRF)
At present there are two depositories in India. Depository
(i) National Securities Depository Ltd. (NSDL): NSDL was formed and
registered in 1995 under the Companies Act, 1956. NSDL was pro-
moted by Industrial Development Bank of India (IDBI), Unit trust of
India (UTI) and National Stock Exchange (NSE). DPI Clearing DP. IL
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(i) Central Depository Services (India) Ltd. (CDSL): Central Depository
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Services (India) Limited commenced operations in 1999. CDSL was
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promoted by the Bombay Stock Exchange in association with Bank
of Baroda, Bank of India, State Bank of India and HDFC Bank.
Transfer of Securities under the Depository System (off-market)

Step 1: Transferor/Seller gives delivery instructions to his DP to move
securities from his account to the buyer's account. Seller Buyer
Step 2: Transferee/
Buyer automatically receives the credit
of the securities
through his DP into his account on the basis of the receipts instructions.
Benefits of the Depository System
Step 3: Funds move from buyer to seller outside the Depository system.
Il. Benefits to the Investors
—
1. Bad deliveries are almost eliminated.
2. The risks associated with physical certificates such as loss,
theft, mutilation of certificate etc. are eliminated.
3. It eliminates handling of huge volumes of paper work involved
DPI D.P.I in filing the transfer deeds and lodging
the transfer documents
and share certificates with the company.
4, There is immediate transfer and registration of the securities
(at the end of every settlement cycle, which is 4 working days
ie. T+3) and there is no delay on account of processing time.
Seller Buyer
ha
5. It leads to faster settlement cycle and faster realisation of sale securities in non-physical form (known as dematerialized form) and to
proceeds so the fund of the investoris not tied upunnecessarily. effect transfer of securities by way of book entries in accounts maintained
6. The system facilitates a faster disbursement of security by the depository.
holding benefits like rights shares, bonus shares etc. The depository system envisages a deposit of securities by various investors
7. The stamp duty on transfer of securities, which is 0.25% of the with the depository. Once
the securities are lodged with the depository, their
consideration on transfer of shares in physical form, is not transfer would be through book entry transfers in accounts maintained by
applicable. the depository. Thus the main function of a depository is to dematerialize
the securities and enable their transaction in book entry form.
8. Thereisareduction inrates of interest on loans granted against
pledge of dematerialised securities by various banks.
Provisions of the Depository Act
9, There is reduction in brokerage for trading in dematerialised
securities. Meaning of Depository
10. There is reduction in transaction costs in dematerialised secu- A depository is an organisation which holds securities (like shares, deben-
rities as compared to physical securities. tures, bonds, Government Securities, units, etc.) of investors in electronic
11. Availability of periodical status report to investors on their form. Besides holding securities, depository also provides services related
holding and transactions is disseminated by the depository. to transactions in securities. It acts as a trustee of the owner since the secu-
rities are entrusted with it in trust. As per the Depositories Act, depository
IL. Benefits to the Company means a company formed and registered under the Companies Act, 1956
1. The depository system provides up-to-date knowledge of and which has been granted a certificate of registration by the Securities
and Exchange Board of India Act, 1992 [section 2(1}(e)]. As per the SEBI
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shareholder's names and addresses to the company.
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2. There is savings in costs of new issues from reduction in print- Regulations, a depository has to obtain a Certificate for commencement
ing and distribution costs. of business on fulfilment of the prescribed conditions.
3. It may also lead to increased efficiency of registrar and The minimum net worth stipulated by SEBI for a depository is Rs. LOO
transfer agent functions and better facilities for communication crore. Every depository must have adequate mechanisms for reviewing,
with shareholders, conveying benefits of corporate actions and monitoring and evaluating the depository's controls, systems, procedures
information notices. and safeguards. It should conduct an annual inspection of these procedures
and forward a copy of the inspection report to SEBL The depository is
4. The system enables a company to attract international also required to ensure that the integrity of the automatic data processing
investors without having to incur the expenditure of issuance systems is maintained at all times and take all precautions necessary to
in overseas markets. ensure that the records are not lost, destroyed or tampered with.
A depository carries out the transactions of securities by means of book
The Depositories Act, 1996
entry, without any physical movement of securities. The depository based
The Depositories Act, 1996 provides for regulation of depositories in secu- settlement system is also called ‘scrip-less trading’. The depository acts as a
rities and for matters connected thereto. The Act has made consequential de facto owner (called registered owner) of the securities lodged with it for
amendments in the Companies Act, 1956; the Securities and Exchange the limited purpose of transfer of ownership. It Functions as a custodian of
Board of India Act, 1992; the Indian Stamp Act, 1899; the Income-tax Act, securities of its clients. The name of the depository appears in the records
1961; and the Benami Transactions (Prohibition) Act, 1988. of the issuer as the ‘Registered Owner’.
The Depositories Act, 1996 provides a legal framework for establishment
of depositories to facilitate holding of securities including shares in the Securities Eligible for Dematerialisation
demat form (electronic form) and to effect transfer of securities through (a) Shares, scrips, stocks, bonds, debentures, debenture stock or other
book entry. The Act establishes the depository system in India by providing marketable securities of a like nature in or of any incorporated
for setting up of one or more depositories to enable the investors to hold company or other body corporate;
(5) Units of mutual funds, rights under collective investment schemes depository service, shall surrender the certificate of security, for which he
and venture capital funds, commercial paper, certificates of deposit, seeks to avail services of the depository, to the issuer in such a manner
securitised debt, money market instruments, Government Securities specified by the regulations. Thereupon,the issuer shall cancel the certificate
and unlisted securities are eligible for being held in dematerialized af security and the investors name in the register of companies concerned
form in a depository. will be replaced by the name of the depository as the registered owner of
securities. Consequent to the cancellation of the certificate, the depository
Meaning of Participant shall on receipt of the intimation from the issuer, enter in its records the
name of the beneficial owner of the securities.
The participant means a person through whom the investor (called ben-
ehcial owner) of the securities avails the depository service. Participant With respect tonew securities, section 8 of the Act provides that every person
is the custodial agencies like banks, financial institutions as well as large subscribing to securities offered by the issuer shall have the option either
corporate brokerage firms section 2(1)}(g) of the Act defines participant as to receive the security certificate or hold securities with the depository. In
a person registered under section 12 of the Securities and Exchange Board the latter case, the issuer shall inform such a depository of the details of
of India Act, 1992. As per section 4(1) of the Act, participant is an agent of the allotment of the security, and on the receipt of such information the
the depository and relationship and dealings between the depository and depository shall enter inits records the name of the allottee as the beneficial
the participant are governed by an agreement in the prescribed form. owner of that security.
A participant must be registered with the SEBL The following persons can The depository shall be the registered owner of the shares and entered as
apply to the SEBI for registration: amember by the company in its register of members. According to section
10 of the Act, a depository shall be deemed to be the registered owner (of
(i) A public financial institution;
the shares) for the purposes of effecting transfer of ownership of the shares
(i) A schedule Bank; on behalf of the beneficial owner. However, the depository shall not have
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(ai) A foreign bank operating in India with the approval of the RBI; any voting rights or any other rights in respect of the shares which are
under depository’s custody. The beneficial owner shall be entitled to all
(iv) A state financial corporation;
the rights and benefits including voting rights and be subjected to all the
(v) An institution engaged in providing financial services promoted by liabilities in respect of his shares held by a depository. This principle shall
any of the institutions mentioned in sub-clause (/), (7, (if), (iv) jointly equally apply with regard to any other securities.
or severally;
(vi) A custodian of securities registered with the SEBL Rights and obligations of Depositories, Participants, Issuers and
(vii) A clearing corporation or of a stock exchange; Beneficial owners
(viii) A stock broker registered with the SEBI provided that the stock 1. Agreement between depository and participant. A depository shall
broker has a minimum net worth of Rs, 50 lakhs; enter into an agreement with one or more participants as its agent
in the prescribed form (Sec. 4).
(i) A non-banking finance company, having a net worth of not less than
Rs. 50 lakhs; 2. Services of depository. Any person, through a participant, may enter
into an agreement, in the specified form with any depository for
(x) A registrar to an issue or share transfer agent registered with the
availing its services (Sec. 5).
SEBI provided that it has a minimum net worth of Rs. 10 crore.
3. Surrender of certificate of security. (a) Any person who has entered
Registered Owner and Beneficial Owner into an agreement with the depositary will have to surrender the
certificate of security, for which he seeks to avail the services of a
As per the Depositories Act, ‘Registered owner’ means a depository whose depository, to the issuer; (4) The issuer, on receipt of certificate of
name is entered as such in the register
of the issuer, and ‘Beneficial owner’ security shall cancel the certificate of security and substitute in its
means a person whose name is recorded as such with a depository. records the name of the depository as a registered owner in respect
Section 6 of the Act provides that any person, whe has entered into an of that security and inform the depository accordingly; and (c) the
agreement with the depository through the participant for availing of the
—
depository, thereafter will enter the name of that personin its records, inform the depository accordingly who will make appropriate entries
as the beneficial owner (See. 6). in its records and shall inform the issuer (Sec. /4),
. Registration of transfer of securities with depository. Every depository 12. Depositories to indemnify loss in certain cases. The depository shall
shall, on receipt of intimation from a participant, register the trans- have to indemnify any loss caused to the beneficial owner due to its
fer of security in the name of the transferee. Further, if a beneficial negligence or of the participant. Where the loss due to the negligence
owner or a transferee of any security seeks to have custody of such of the participant is indemnified by the depository, the depository
security, the depository shall inform the issuer accordingly (Sec. 7), shall have the right to recover the same from such participant.
5 Options to receive security certificate or hold securities with depos- 13. Systems and procedures. Every depository shall have systems and
itory. Every person subscribing to securities offered by an issuer procedures which will enable it to co-ordinate with the issuer or its
shall have the option either to receive the security certificates or agent, and the participants, to reconcile the records of ownership of
hold securities with a depository (Sec. 8). securities with the issuer or its agent, as the case may be, and with
. Securities in depositories to be in fungible form. All securities held by participants, on a daily basis. (Regulation 30 of SEB
a depository shall be dematerialised and shall be in a fungible form 14. Internal monitoring, review and evaluation of systems and controls.
(Sec. 9). Every depository shall have adequate mechanisms for the purposes
. Rights of depositories and beneficial owner. A depository shall be of reviewing, monitoring and evaluating the depository's controls,
deemed to be the registered owner for the purposes of effecting systems, procedures and safeguards.
transfer of ownership of security on behalf of a beneficial owner. 15. External monitoring, review and evaluation of systems and controls.
The depository as a registered owner shall not have any voting rights Every depository shall cause an inspection of its controls, systems,
WL
or any other rights in respect of securities held by it. The beneficial procedures and safeguards to be carried out annually and forward
TAXMANN®
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owner shall be entitled to all the rights and benefits and be subjected a copy of the report to the SEBL
to all the liabilities in respect of his securities held by a depository
(Sec. 10). Enquiry and Inspection
. Register of beneficial owner. Every depository shall maintain a reg- Power of the SEBI to call for information and enquiry [Sec. 18].
ister and an index of beneficial owners in the manner provided in
Section 150, Section 151 and Section 152 of the Companies Act, 1956
(1) The SEBI (Board), on being satisfied that it is necessary in the pub-
(See. [7). lic interest or in the interest of investors so to do, may, by order in
writing:
. Pledge or hypothecation of securities held in a depository. A benefi- (a) calluponany issuer, depository, participant or beneficial owner
cial owner may with the previous approval of the depository, create
to Furnish in writing such information relating to the securities
a pledge or hypothecation in respect of a security owned by him held in a depository as it may require; or
through a depository. Every beneficial owner shall give intimation of
such pledge or hypothecation to the depository and such depository (4) authorise any person to make an enquiry or inspection in re-
shall thereupon make entries in its records accordingly (Sec. /2). lation to the affairs of the issuer, beneficial owner, depository
or participant, who shall submit a report of such enquiry or
10. Furnishing of information
and records by depository and issuer. Every
depository is required to furnish to the issuer information about inspection to it within such period as may be specified in the
order.
the transfer of securities in the name of beneficial owners at such
intervals and in such manner as may be specified by the bye-laws. (2) Every director, manager, partner, secretary, officer or employee
Every issuer also has to make available to the depository copies of of the depository or issuer or the participant or beneficial owner
the relevant records in respect of securities held by such depository shall on demand produce before the person making the enquiry or
(See. 13). inspection all information or such records and other documents in
11 Option to opt out in respect of any security. If a beneficial owner
his custody having a bearing on the subject matter of such enquiry
or inspection.
seeks to opt out of a depository in respect of any security, he shall
Power of the SEBI io give directions in certain cases [Sec. 19]. After the Board under section 19, within the time specified by it, he shall
making an enquiry or inspection, the Board may issue such directions to be liable to a penalty of Rs. 1 lakh for each day during which such
any depository or participant or any person associated with the securities failure continues or Rs. 1 crore, whichever is less.
market; or to any issuer, as may be appropriate in the interest of investors 6. Penalty
for contravention of the Act (Sec. 20). Whosoever contravenes
or the securities market. orattempts to contravene or abets the contravention of the provisions
of this Act or any regulations or bye-laws made thereunder shall be
Penalty punishable with imprisonment for a term which may extend to 5
Sections 19, 20 and 21 of the Depositories Act prescribe penalty for con- years, or with fine which may extend to Rs. 25 crore, or with both.
travention of provisions of the Act: 7. Offences by companies. (Sec, 2/). Where an offence under this Act
1. Penalty for failure to furnish information, return, ete, (Sec. / 9A). Any has been committed by a company, every person who at the time the
person, who is required under this Act or any rules or regulations offence was committed was incharge of, and was responsible to, the
or bye-laws of the Act to furnish any information, document, books, company for the conduct of the business of the company, as well as
returns or report to the Board, fails to Furnish the same within the the company, shall be deemed to be guilty of the offence and shall
time specified therefor or to maintain books of account or records be liable to be proceeded against and punished accordingly.
shall be liable to a penalty of Rs. 1 lakh for each day during which Further, where an offence under this Act has been committed by accompany
such failure continues or Rs. | crore, whichever is less. and it is proved that the offence has been committed with the consent or
2. Penalty for failure to enter into an agreement (Sec. 9B). If a depos- connivance of, or is attributable to any neglect on the part of any director,
itory or participant or any issuer or its agent or any person, who is manager, secretary or other officer of the company, such director, manager,
registered as an intermediary with the SEBI and is required under secretary or other officer shall also be deemed to be guilty of the offence
= g WNW INL
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this Act or any rules or regulations made thereunder, to enter into and shall be liable to be proceeded against and punished accordingly.
an agreement, fails to enter into such agreement, such depository
or participant or issuer or its agent or intermediary shall be liable REVIEW QUESTIONS
to a penalty of Rs. 1 lakh for each day during which such failure
continues or Rs. 1 crore, whichever is less for every such failure. 1. What are the limitations of holding securities in physical form?
How these limitations are addressed in the depository system?
3. Penalty for failure to redress investors’ grievances (Sec. /9C). IF any
depository or participant or any issuer or its agent after having been 2. What is a depository system? How does it function?
called upon by the Board in writing, to redress the grievances of the 3. What do you mean by (in the context of depository system):
investors, fails to redress such grievances within the time specified
(a) Participant
by the Board, such depository or participant or issuer or its agents
or intermediary shall be liable to a penalty of Rs. 1 lakh for each day (4) Registered owner
during which such failure continues or Rs. 1 crore, whichever is less. (c) Beneficial owner
4, Penalty for delay in dematerialisation or issue of certificate of securities 4. Discuss the rights and obligations of depositories and participants
(Sec. 79D). If any issuer or its agent or any person, who is registered as laid down by the Depositories Act, 1996,
as an intermediary, fails to dematerialise or issue the certificate of 5. What is the procedure of dematerialisation of securities under the
securities on opting out of a depository by the investors, within the depository system? Can the dematerialised securities re-materi-
time specified under this Act or regulations or bye-laws, such issuer ised?
or its agent or intermediary shall be liable to a penalty of Rs. 1 lakh
for each day during which such failure continues or Bs. 1 crore, 6. What is a depository? Describe the working of a depository.
whichever is less. 7. What are the advantages of the Depository System over the old
5. Penalty for failure to comply with directions issued by the SEBI system of physical movement and trading of share certificates?
(Sec. 19F), If any person fails to comply with the directions issued by
316 THE DEPOSITORY SYSTEM
8. Write
a note on Demat System. How is the transfer of shares ef.
fected in the dematerialized form?
9.ites ate tise richts and obligationsof ‘depository’ and ‘participanied
under the Depositories Act, 1996?
B.COM (HONS.) MAY-JUNE 2016
10. What is Depository? What are the benefits of Depository System?
1 1. Explain the salient features of Depository Act, 1996.
CORPORATE LAWS
12, Distinguish between dematerialisation and re-materialisation of|
shares.
1. (a) What is lifting of corporate veil? Explain the statutory provisions
under which the corporate veil of the Company may be lifted. (5)
(6) Explain the procedure of on-line registration of the company. (5)
(c) Awas employed as an office manager in a company. He had arrears
of his three month’s salary and he filed a suit against the managing
director of the company for the recovery of arrears of his salary.
Will he succeed in getting his arrears? Give reasons. )
OR
(a) “A promoter is neither a trustee nor an agent of the company he
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promotes but he stands in a fiduciary position towards the company
and the original allottees of shares”. Comment on the statement. (5)
(6) What are preliminary contracts? Discuss the legal effects of prelim-
inary contracts. ()
(c) X holds all the shares except one in a textile company and is also its
substantial creditor. He gets the company's goods insured in his own
name. Unfortunately the goods are destroyedby fire and X claims the
compensation of loss from the insurance company, Is the Insurance
company liable to compensate the loss and pay to X. State reasons
for your answer, (5)
2.(a) Define a private company and distinguish it from a producer com-
pany. (5)
(6) “The power to alter the Articles conferred by the Companies Act is
very wide, yet it is subject to a large number of limitations’.
Explain, (5)
(c) Write a short note on One Person Company. (5)
OR
(a) Explain the provisions of the Companies Act, 2013 regarding alte-
ration of name clause. (5)
a7
¢
c
318 B.COM (HONS.) MAY-JUNE 2016 CORPORATE LAWS B.COM (HONS.) MAY-JUNE 2016 CORPORATE LAWS 319
(5) Explain the doctrine of Indoor Management. State the exceptions, if OR

any, to the doctrine of Indoor Management. (4) (a) Describe the term ‘Depository’ and ‘Participants’ as piven under the
(c) Write a short note on Independent Director. (5) Depositories Act, 1996. (3)
3. (a) What do you mean bya misleading prospectus? What are the remedies (6) What is meant by Rotation of Auditors. What are the provisions of
available to the shareholders against the company for mis-statement the Companies Act, 2013 with respect to it? (5)
in the prospectus? (5) (c) Discuss the grounds and consequences of voluntary winding up of
(5) What is forfeiture of shares? Distinguish between forfeiture and a company. ()
surrender of shares. (5)
(c) Write a note on Employees’ Stock Option Scheme. (5)
OR
(a) Describe the statutory provisions regarding quorum at the general
meeting of a company. Can one member constitute quorum? — (5)
(6) Describe the provisions of the Companies Act, 2013 regarding private
placement of securities. (3)
(c) Write a note on issue of Sweat equity shares. (5)
4. (a) Who can be a director? Explain the provisions of the Companies Act
relating to the appointment of directors by the Board of Directors.
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(5)
(6) What is an extraordinary
general meeting? By whom can an extraor-
dinary general meeting be called? (5)
(c) What is the procedure to be followed to conduct a Board
of Directors
meeting through video conferencing or other audio visual means?
(3)
oR
(a) Describe the general powers vested in the Board. Under what excep-
tional situations, the shareholder in general meeting is competent to
act even on the matters delegated to the Board? (5)
(5) Explain the provisions regarding ‘Proxy’ under the Companies Act,
2013. (5)
(ce) Discuss the provisions of the Companies Act regarding removal of
directors. (5)
5. (a) Explain the advantages of Depository System over the old system of
physical movement and trading of share certificates. (5)
(6) Write a note on compulsory winding up of a company? (5)
(c) What is unpaid and unclaimed dividend? Explain the statutory pro-
visions regarding unpaid and unclaimed dividend. (5)
¢
o
B.COM. (HONS.) (CBCS) - MAY 2017 321
5) Define a Government cony pany », State special

pe Pl provisions of the Com-
panies Act relating to Government Companies.
B.COM. (HONS.) (CBCS) - MAY 2017 SEMESTER-II (c) Write a note on Shelf prospectus.
Or
(a) Define Producer Company and explain the objects for which Producer
Company is formed.
(6) ‘Apromoterremains liable for pre-incorporation contracts’. Critically
examine the statement.
Duration: 3 Hours Maximum Marks: 75 (c) Explain different kinds of resolutions passed at the general meeting
1. (a) “The fundamental attributes of corporate personality is that company of the shareholders, citing appropriate examples of each.
is a legal entity distinct from its members". Explain the statement 3. (a) A company has its registered office at Mumbai in the state of Maha-
citing relevant case laws. rashtra. For better administrative convince, the company wants to
(5) Discuss the statutory provisions regarding reduction of share capital. shifts it’s to Pune in the state of Maharashtra. What formalities the
company has to comply with for shifting its registered office?
(c) With a view to issue shares to the general public, a shelf prospectus
containing some false information was issued by the company. Mr. (5) Differentiate between the right shares and bonus shares.
Xa high net worth investor received a copy of the prospectus but (ce) Cana retiring director be reappointed? Explain the provisions of the
did not apply for any shares. The allotment of shares was completed Companies Act in this regard.
by the company. A few months later Mr. X bought 100 shares of this
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Or
company from the open market at a higher price. Subsequently, the
price of the shares fell and Mr. sold these shares at a heavy loss. Mr. (@) What do you mean by ‘buy of securities’? Explain the provisions of
X filed a case against the company clamming damages for the loss the Companies Act, 2013 regarding ‘buy of securities’.
suffered on the ground that the prospectus issued by the company (5) What do you mean by transmission of shares and distinguish between
contained a false statement. Referring to the provisions of the the transfer and transmission of shares.
Companies Act, examine whether Mr. X's claims is justified. (e) Write a note on Corporate Social Responsibility Committee.
Or 4.(a) State the provisions of the Companies Act, 2013 with respect to
(a) What do you mean by lifting of the corporate veil? Explain the cir- qualifications and disqualifications of Directors.
cumstances when the corporate veil of a company may be lifted (5) State the legal provisions regarding calling and helding of an Annual
under the order of the court, General Meeting. What are the consequences of default in holding
(6) Describe the essential steps to be taken for the incorporation of a of such a meeting?
company. (ec) Write a note on Audit Committee.
(c) The articles of a company stated that Mr. A will be the financial ad- Or
visor of the company. The company in its general meeting passed a
resolution to appoint Mr. B in place of Mr. A as the financial advisor (a) Distinguish between a whole time director and a managing director.
of the company by altering
the Articles of Association of the company. (5) What do you mean by Insider Training? State the legal provisions
Explain with reasons whether the company can do so. regarding Insider Training under the Companies Act, 2013.
2. (a) Define aprivate company and state the provisions under the Companies (ce) Write a note on Postal Ballot.
Act, 2013 for the conversion of a private company into a public 5. (@) What is meant by inability to pay debts? Can a company be wound
company. up on this ground?
320
322 B.COM. (HONS.) (CBCS) - MAY 2017
(5) What is the process of Dematerialization of physical shares under

the Depository System? Can these be rematerialised?
(e) Define the term books of account and discuss the provisions for the
maintenance of books under the Companies Act, 2013. B.COM. (HONS.) (CBCS) - MAY 2016 SEMESTER-II
Duration: 3 Hours Maximum Marks: 75

1. (a) “A company in law is a different person altogether from the mem-
bers.” Comment, citing the relevant case laws. 5
(6) Write a note on a ‘small company’. 5
(c) “The Companies Act is not against the profits made by a promoter,
but its non-disclosure.” Examine the statement with regard to duties
and obligations of promoter of a company. 5
OR
(a) “The property
of acompany is the property of its members,”
Comment
TAXMANN®
a NNVINXWL
on the statement with the help of suitable case laws. a
(6) Explain the concept of ‘Producer Company’. State the objectives for
which a producer company may be formed. 5
(c) Describe the essential steps to be taken for on-line registration of a
company.
2. (a) “Acompany cannot justify a breach of contract byaltering its Articles
of Association.” Explain. 5
(6) ‘A’ applied for certain shares of a company on the basis of a pro-
spectus containing the names of six directors of the company. Two
directors from these six retired before the shares were allotted. Can
‘A’ exercise the right of rescission against the company ? Also explain
the cases where he will lose this right. 5
(c) State the importance of ‘Memorandum of Association’ of the compa-
ny. Explain the procedure relating to the alteration of object clause
of Memorandum of Association. 5
OR
(a) A company was in financial difficulties and the majority share-
holders representing 95% of the shares were willing to provide the
required capital if remaining shareholders amounting to 5% would
sell their shares to the majority shareholders, However, the minority
323
—i
324 B.COM. (HONS.) (CBCS)- MAY 2018 B.COM. (HONS.) (CBCS) - MAY 2018 325
shareholders refused to sell their shares to majority shareholders, 5. (a) What is the process of dematerialisation of physical shares under
but the company altered its Articles so as to authorize the majority the Depository system ? Can these be rematerialised ? 5
shareholders to purchase the shares of minority shareholders com- (5) What is ‘Audit Committee’ of Board of Directors ? Explain the func-
pulsorily upon certain terms. Are the minority shareholders bound tions of this committee. 5
by this alteration ? Explain. 3
(e) Explain ‘Advisory Committee’ which is constituted in case of
(5) Write a note on ‘Deemed Prospectus’. 5 Compulsory Winding up. 5
(ce) A company wants to shift its registered office from Chennai to OR
Coimbatore both in the state of Tamil Nadu for administrative con-
venience. What provisions the company has to comply with under (a) Is it mandatory for every company to rotate its Auditors ? What
the Companies Act, 2013 for shifting its registered office. 5. are the provisions of the Companies Act with regard to Rotation of
Auditors ? 5
3. (a) What do you understand by the forfeiture of shares ? Explain the
requirements of a valid forfeiture of shares by a company. 5 (b) Explain winding up of a company on ‘just and equitable’ grounds 5
(6) What are the conditions to be fulfilled by a company that proposes (@) What do you understand by seriptless trading system as per the
to issue ‘sweat equity shares’ under the Companies Act, 2013? 5 Depository Act, 1996 ? Explain its benefits. 5
(ec) Why does the Companies Act allow a company to buy back its
shares ? Which sources of funds can be used by the company for
this purpose ?
OR
TAXMANN®
aNNVWX¥L
(@) Who is member of a company ? Explain various modes of acquiring
membership of a company. 5
(5) What are the bonus shares? State the conditions that must be com-
plied with before a company makes a bonus issue. 5
(c) What are the sources of money credited to the ‘Investor Education
and Protection Fund’? 5
4. (a) Write a note on ‘voting by electronic means’. 5.
(5) Discuss the provisions of the Companies Act, 2013 regarding the
Directors Identification number. 5
(c) Under what circumstances a director is deemed to have vacated the
office of directorship ? 5
OR
(a) Write a note on Woman Director. 5
(5) Who is a proxy ? Is it essential for a proxy to be a member of the
company? If a proxy is appointed by a shareholder but in the meeting
shareholder also casts his vote, whose vote will be considered valid
and why? 5
(c) State the provisions of the Companies Act, 2013 with respect to
qualification and disqualification of Directors. 5.
$~
B.COM. (HONS.) (CBCS) - MAY 2019 $27
(5) “An outsideris presumed to know the constitution and the statutory
public documents of a company, but not what may or may not have
taken place within the doors that are closed to him.” Explain with
B.COM. (HONS.) (CBCS) - MAY 2019 SEMESTER-II reference to the doctrine of Indoor Management. 5
(c) Discuss the importance of a Red Herring prospectus in the light of
issue of securities by the company through book building process.
5
3. (a) Differentiate between right issue and bonus issue. 5
(5) “Directors owe a duty of loyalty and care in performing
their duties."
Duration: 3 Hours Maximum Marks: 75
Do you agree? Explain. 5
1. (a) “A fundamental attribute of corporate personality is that a company
(e) What is the role of CSR Committee? Is it compulsory for a Company
is a legal entity distinct from its members.” Discuss the above state-
to constitute a CSR Committee? 5
ment citing the relevant case laws. 5
Or
(6) “Preliminary contracts are a nullity.” Comment on the statement
bringing out clearly the position of promoters with regard to these (a) Discuss the provisions of the Companies Act, 2013 wegeecing holding
contracts, 5 of board's meeting through audio-visual means.
(ec) Write a short note on ‘Licensed Company’. 5 (5) State difference between transfer and transmission of shares. 5
Or (ce) Write a note on ‘Women Director’. 5
gM NV IK EL
TAXMANN™
(a) What is a foreign company? Is it necessary for it to comply with the 4. (a) ‘Dividend
once declared cannot be revoked’
Are there any exceptions
provisions of the Companies Act? If so, to what extent? 5 to it? Explain. 5
(b) Explain the concept of corporate personality and discuss
the circum- (6) What is an Audit Committee? Discuss its powers and functions. 5
stances where the Court lifts the corporate veil to see what really lies {c) ‘A faulty notice of a meeting can be Fatal to the validity of a meeting.
behind, 5 Explain. 5
(ce) Write a note on “Illegal association of persons”. 5 Or
2.(a) On the cover page of the prospectus of a company a statement was (a) Distinguish between ordinary resolution and special resolution by
printed in bold letters stating that the managing agent, promoters giving suitable examples of each. 5
and directors with their friends and relatives have promised to sub- (5) ABC Limited hasits registeredoffice at Mumbai. The company desires
scribe shares worth Rupees ten lakhs. However, they collectively to hald its AGM at New Delhi. Examine the validity of the company’s
subscribed shares worth Rupees six lakhs only. Can the prospectus desire with reference to the relevant provisions of the Companies
of the company be considered as misleading? 5 Act. 5
(5) What do you mean by “buyback of securities"? Explain the legal
(c) Discuss the provisions of the Companies Act, 2013 regarding the
provisions relating to buyback of securities by a company under the removal of a Director. 5
Companies Act, 2013.
5. (a) What are the provisions of the Companies Act, 2013 regarding the
(ce) Discuss
the binding effect of Memorandum of Association and Articles
appointment of an Auditor? 5
of Association of a company on the shareholders, outsiders and the
company itself. 5 (6) State the circumstances under which a company may be wound up
compulsorily by the NCLT. 5
Or
(c) Write a note on ‘Dematerialisation of securities’. 5
(a) Write a note on ‘Producer Company’. 5
326
(
c
|
B.COM. (HONS.) (CBCS) - MAY 2019
Or
(a) Write a note on ‘National Company
Law Tribunal’,
Who cn lea pesto nthe NELT for winding up of company?
(© What is Depository? Explain the benefits of Depository System.

TAXMANN®
About the Book
The objective of this book is to familiarise the students with the understanding
of provisions of the Companies Act, 2013 and the Depositories Act, 1996, Cases
and issues relating to Corporate Laws are discussed in this book in easy and
comprehensive language.
Distinctive features
® University Grants Commission (UGC) recommended Text book for under-graduate
students of B-Com(H) and allied courses under the Choice Based Credit System
(CBCS) Programme.
* Incorporating all latest amendments and rules concerning Corporate Laws
including Insolvency and Bankruptcy Code 2016as applicable to companies.
@ Case laws and examples are given to enable comprehension of complicated legal
provisions.
@ Review questions.and case problems are given atthe end ofeach chapter.
About the Author

Anil Kumar, Ph.D, is Associate Professor and Coordinator, National Centre of
Corporate Governance, Shri Ram College of Commerce (SRCC), University of Delhi. An
alumnus of SRCC, he did his Post Graduation in Commerce from Delhi School of
Economics, Delhi University. His area of specialisation is Corporate Laws and
Corporate Governance, He has been awarded Ph.D degree by the University of Delhi
for his research on corporate governance. Dr. Kumar has contributed number of
research articles in national and international journals; presented his research work
at international conferences in India.and abroad; and has conducted several executive
development and training programmes for corporate executives and directors. He has
over thirty years’ experience of teaching both under-graduate and post-graduate
students.
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Anil Kumar

1-6 PREFACE TO TENTH EDITION

book building, shares including dividend, general meetings,

profit; Illegal association; Formation of company, promoters, their legal

1. Lord Justice Lindley,

Company Law Appellate Tribunal (NCLAT) are quasi-judicial bodies

4 COMPANY : MEANING AND FEATURES COMPANY : MEANING AND FEATURES 5

6 COMPANY : MEANING AND FEATURES COMPANY : MEANING AND FEATURES 7

members, a creditor of such a company has remedy only against the

COMPANY : MEANING AND FEATURES. COMPANY : MEANING AND FEATURES 9

12 COMPANY : MEANING AND FEATURES COMPANY : MEANING AND FEATURES 13

capital comprised of transferable shares and limited liability. Partnership

14 COMPANY : MEANING AND FEATURES COMPANY

SL| Basis of Company Partnership Firm LIFTING THE CORPORATE VEIL

12. United State +. Milmaubee Retrigerator Transit co.

of the shareholders could be regarded as the expertise of the com-

. Investigation in the affairs of a company. If an inspector

COMPANY : MEANING AND FEATURES COMPANY : MEANING AND FEATURES 23.

is alegal entity different from its members. Elucidate the statement

ADMINISTRATION OF COMPANY LAW 25

3. The Appellate Authority for Industrial and Financial Reconstruction.

26 ADMINISTRATION OF COMPANY LAW ADMINISTRATION OF COMPANY LAW 27

record or document from any office; . Change in Financial Year

(e) issuing commissions for the examination of witnesses or

30 ADMINISTRATION OF COMPANY LAW ADMINISTRATION OF COMPANY LAW 31

Offences triable by Special Courts REVIEW QUESTIONS

serve people. The liability of the members

KINDS OF COMPANIES Registered Company

40 KINDS OF COMPANIES KINDS OF COMPANIES 41

42 KINDS OF COMPANIES KINDS OF COMPANIES 43

A private company which: is subsidiary of a public company is regarded

Concept and Meaning Primary Produce

by-products of such product;

52 KINDS OF COMPANIES KINDS OF COMPANIES 53

Benefits of Producer Companies Illegal Association

54 KINDS OF COMPANIES KINDS OF COMPANIES 55

1. Whatisa private company? Whatare the privileges and exemptions |

58 FORMATION OF COMPANY FORMATION OF COMPANY 59

60 FORMATION OF COMPANY FORMATION OF COMPANY 61

Liability of the Promoter Adoption of Preliminary Contract

66 FORMATION OF COMPANY FORMATION OF COMPANY 67

68 FORMATION OF COMPANY FORMATION OF COMPANY 69

70 FORMATION OF COMPANY FORMATION OF COMPANY 71

@ Kelner v. Baxter Liability of Promoters he promotes.” Explain.

Memorandum of Association is the main document of a company which

74 MEMORANDUM OF ASSOCIATION MEMORANDUM OF ASSOCIATION 75

76 MEMORANDUM OF ASSOCIATION MEMORANDUM OF ASSOCIATION 77

78 MEMORANDUM OF ASSOCIATION MEMORANDUM OF ASSOCIATION 79

diction of one Registrar of Companies to the jurisdiction of another

Variation in the rights of the shareholders Rationale of the Doctrine

did not consent to such variation or vote in favour of the special

# Ewing vs. Buttercup Margarine Name of company

1. What purpose does the memorandum of association serve?

Articles of a company are subordinate to the provisions of the

Rayfield was a shareholderin acompany. He was required toinform Alteration of Articles

96 ARTICLES OF ASSOCIATION ARTICLES OF ASSOCIATION oT

98 ARTICLES OF ASSOCIATION ARTICLES OF ASSOCIATION 99

7 (@) ‘While the power to alter Articles of Association is wide, the

Life Assurance Co, contract.’ Explain.

Ltd. vs, Vardhaman Publishers Ltd of association.