DICTUM

LAW CLASSES

NOTES
ON COMPANY’S Law
Unit I : Incorporation of Company and Constitutional Instruments

Q1. Explain the meaning of ‘company’.

A company is a corporate body and a legal person having status and personality
distinct and separate from the members constituting it.
In the legal sense, a company is an association of both natural and artificial persons
(and is incorporated under the existing law of a country). In terms of the Companies
Act, 2013 (Act No. 18 of 2013) a “company” means a company incorporated under
this Act or under any previous company law [Section 2(20)].
Lord Justice Lindley has defined a company as “an association of many persons who
contribute money or money’s worth to common stock and employ it in some trade or
business and who share the profit and loss arising therefrom. The common stock so
contributed is denoted in money and is the capital of the company.
An incorporated company owes its existence either to a special Act of Parliament or
to company law. Public corporations like Life Insurance Corporation of India, SBI
etc., have been brought into existence by special Acts of Parliament, whereas
companies like Tata Steel Ltd., Reliance Industries Limited have been formed under
the Company law i.e. Companies Act, 1956 which is being replaced by the
Companies Act, 2013.

Q2. What are the various characteristics of a Company?

(i) Corporate personality or Separate Legal Entity

A company incorporated under the Act is vested with a corporate personality so it

redundant bears its own name, acts under a name, has a seal of its own and its assets
are separate and distinct from those of its members. It is a different ‘person’ from the
members who compose it. Therefore, it is capable of owning property, incurring
debts, borrowing money, having a bank account, employing people, entering into
contracts and suing or being sued in the same manner as an individual.
(ii) Limited Liability

The privilege of limited liability for business debts is one of the principal advantages
of doing business under the corporate form of organization. The company, being a
separate person, is the owner of its assets and bound by its liabilities. The liability of
a member as a shareholder extends to the contribution to the capital of the company
up to the nominal value of the shares held and not paid by him. Members, even as a
whole, are neither the owners of the company’s undertakings nor liable for its debts.

1
(iii) Perpetual Succession
An incorporated company never dies, except when it is wound up as per law. A
company, being a separate legal person is unaffected by death or departure of any
member and it remains the same entity, despite the total change in the membership. A
company’s life is determined by the terms of its Memorandum of Association. The
membership of an incorporated company may change either because one shareholder
has sold/transferred his shares to another or his shares devolve on his legal
representatives on his death or he ceases to be a member under some other provisions
of the Companies Act.
(iv) Separate Property
A company is a legal person and entirely distinct from its members, is capable of
owning, enjoying and disposing of property in its own name. The company is the real
person in which all its property is vested, and by which it is controlled, managed and
disposed of.
(v) Transferability of Shares
The capital of a company is divided into parts, called shares. The shares are said to be
a movable property and, subject to certain conditions, freely transferable, so that no
shareholder is permanently or necessarily wedded to a company. When the joint-
stock companies were established, the object was that their shares should be capable
of being easily transferred.
(vi) Common Seal
Upon incorporation, a company becomes a legal entity with perpetual succession and
a common seal. Since the company has no physical existence, it must act through its
agents and all contracts entered by its agents must be under the seal of the company.
The Common Seal acts as the official signature of a company. The name of the
company must be engraved on its common seal.
(vii) Separate Management

As already noted, the members may derive profits without being burdened with the
management of the company. They do not have effective and intimate control over its
working, and they elect their representatives as Directors on the Board of Directors of
the company to conduct corporate functions through managerial personnel employed
by them. In other words, the company is administered and managed by its managerial
personnel.

2
(viii) Contractual Rights
A company, being a legal entity different from its members, can enter into contracts
for the conduct of the business in its own name. A shareholder cannot enforce a
contract made by his company; he is neither a party to the contract nor be entitled to
the benefit derived from of it, as a company is not a trustee for its shareholders.

Q3. What are the Various Kinds of

Companies? See PPT.

Q4. Explain What is a Corporate Personality with various cases?

Corporate Personality is the creation of law. Legal personality of corporation is
recognized both in English and Indian law. A corporation is an artificial person
enjoying in law capacity to have rights and duties and holding property. A corporation
is distinguished by reference to different kinds of things which the law selects for
personification. The individuals forming the corpus of corporation are called its
members. The juristic personality of corporations pre-supposes the existence of three
conditions:
(1) There must be a group or body of human beings associated for a certain purpose.
(2) There must be organs through which the corporation functions, and
(2) The corporation is attributed will by legal fiction.
A corporation is distinct from its individual members. It has the legal personality of
its own and it can sue and can be sued in its own name. It does not come to end with
the death of its individual members and therefore, has a perpetual existence. However,
unlike natural persons, a corporation can act only through its agents. Law provides
procedure for winding up of a corporate body.
Kondoli Tea Co. Ltd., Re ILR [1886]. In this case certain persons transferred a tea
estate to a company and claimed exemption from ad valorem duty on the ground that
they themselves were the shareholders in the company and, therefore, it was nothing
but a transfer from them in one to themselves under another name. Rejecting this, the
Calcutta High Court observed - “The company was a separate person, a separate body
altogether from the shareholders and the transfer was as much a conveyance, a
transfer of the property, as if the shareholders had been totally different persons.”
Solomon v. Solomon & Co. Ltd. [1895-99] All. ER 33 (HL), Solomon was a
prosperous leather merchant. He converted his business into a Limited Company—

3
 Solomon & Co. Ltd. The company so formed consisted of Solomon, his wife and five of his
children as members. The company in less than one year ran into difficulties and liquidation
proceedings commenced. The assets of the company were not even sufficient to discharge the
debentures (held entirely by Solomon himself). And nothing was left for the unsecured
creditors. The House of Lords unanimously held that the company had been validly
constituted, since the Act only required seven members holding at least one share each. It said
nothing about their being independent, or that there should be anything like a balance of power
in the constitution of the company. Hence, the business belonged to the company and not to
Solomon. Solomon was its agent. The company was not the agent of Solomon.
Lee v. Lee’s Air Farming Ltd. [1960] 3 All. ER 420 (PC), ‘L’ formed a company with a share
capital of three thousand pounds, of which 2999 pounds were held by ‘L’. He was also the sole
governing director. In his capacity as the controlling shareholder, ‘L’ exercised full and
unrestricted control over the affairs of the company. ‘L’ was a qualified pilot also and was
appointed as the chief pilot of the company under the articles and drew a salary for the same.
While piloting the company’s plane he was killed in an accident. As the workers of the
company were insured, workers were entitled for compensation on death or injury. The
question was while holding the position of sole governing director, could ‘L’ also be an
employee/worker of the company. Held that the mere fact that someone was the director of the
company was no impediment to his entering into a contract to serve the company. If the
company was a legal entity, there was no reason to change the validity of any contractual
obligations which were created between the company and the deceased. The contract could not
be avoided merely because ‘L’ was the agent of the company in its negotiations. Accordingly,
‘L’ was an employee of the company and, therefore, entitled to compensation claim.

Q5. What is the Principle of Corporate Personality?

Corporate Personality is the creation of law. Corporate personality is the fact stated by the law that
a company is recognized as a legal entity distinct from its member. A company with
such personality is an independent legal existence separate from its shareholder, directors, officers
and creditors. A corporation is an artificial person enjoying in law capacity to have rights and duties
and holding property.
A corporation is distinguished by reference to different kinds of things which the law selects for
personification. The individuals forming the corpus of corporation are called its members. The
juristic personality of corporations pre-supposes the existence of three conditions:
(1) There must be a group or body of human beings associated for a certain purpose.
4
(2) There must be organs through which the corporation functions, and
(3) The corporation is attributed will by legal fiction. A corporation is distinct from its
individual members.
Whenever any company is formed or it is incorporated, it has its separate legal personality &
independent status apart from its members. It has the legal personality of its own and it can sue and
can be sued in its own name. It does not come to end with the death of its individual members and
therefore, has a perpetual existence. However, unlike natural persons, a corporation can act only
through its agents. Law provides procedure for winding up of a corporate body. In certain cases, the
corpus of the legal person shall be some fund or estate which reserved certain special uses.
For instance, a trust – estate or the estate of an insolvent, a charitable fund etc..; are
included within the term ‘legal personality’.
Means after incorporation members & company both are separate from each other and becomes two
separate legal entity. And this separation concept is known as corporate personality.
Actual usuage of this can be understood by this three important case laws:

1. Oakes v. Turquand
2. Salomon v. Salomon & co ltd.
3. Lee v. lee’s Air Farming Ltd.

For the first time, this concept was recognized in the year 1867 in the case of Oakes v. Turquand
and Harding. But it was approved and firmly established in the leading case of Salomon vs.
Salomon in which it was held that a company has its own personality which is different from the
personalities of the individuals.

CASE STUDY 1: Salomon v A Salomon & Co Ltd [1897] AC 22

FACTS:

1. Mr. Aron Salomon was a businessman who specialized in manufacturing leather boots. After
a few years, he incorporated a limited company known as Salomon and Co. Ltd.
2. In order to meet the requirement to incorporate a company, he needed at least seven
members/ shareholders so he decided to make his family members his business partners by
giving one share to each of them.
3. He sold his business to the limited company for $39000 out of which $10000 was a debt to
him. He was then the company’s principal shareholder and principal creditor.
4. After one year, the company went into liquidation. The assets realized were $6000 while the
liability was debentures held by Salomon $10000 and unsecured creditor $7000.
5
 5. An unsecured creditor challenged the right of Salomon to have preference as debenture
holder over unsecured creditors.

ISSUE:

Was the formation of Salomon’s company a fraud intended to defraud the creditors?

HELD:

The court said that on incorporation, the company became an independent legal person and not an
agent of Salomon. Salomon, as a debenture holder of the company was ought to get priority in
payment over the unsecured creditor.

IMPORTANCE OF THIS JUDGEMENT:

The decision in this case established the concept of separate legal personality of a company which
allowed shareholders to carry on trading with minimal exposure to the risk of personal insolvency in
the event of a collapse. There are 2 principles laid down in the Salomon’s case:

1. Artificial Person: Company is an artificial person created by law. Artificial in the sense, it
has no body/soul like a natural person. Created by law means formation of a company
requires fulfilment of so many legal formalities.
2. Limited Liability: The liability of the members is limited to the extent of the face value of
the shares, where the company is limited by shares. Then, the shareholder is liable to the
extent of the unpaid capital on his shares and his personal assets will not be affected in the
event of winding up of the company.

CASE STUDY 2: Lee v. Lee’s Air Farming Ltd. (1961) AC 12

FACTS:

1. This case is concerning about the veil of incorporation and separate legal personality. In this
case out of the 3000 shares in Lee’s Air Farming Ltd., L held 2999 shares. He made himself
the Managing Director and was also the chief pilot on a salary.

2. While working for the company he was killed in an air crash. Since his death was in the
course of employment, his widow claimed for compensation. She claimed £2,430
compensation for herself and her four infant children and she also claimed a sum for

6
 funeral expenses.

3. The respondent company denied that deceased was a “worker” of the company and alleged
that at the time of the accident the deceased was the controlling shareholder and governing
director of the respondent company.

ISSUE:

Was there a separate legal entity? Whether Mrs. Lee can claim compensation?

HELD:

The Lee Air Farming case confirmed the Salomon principal. The Privy Council allowed Mrs Lee’s
claim and said that Lee might have been the controller of the company in fact but in law, they were
separate distinct persons and the concept of separate legal entity was explained. Mr. Lee could
therefore enter into a contract with the company, and could be considered to be an employee. His
wife was therefore entitled to an award in respect of workmen’s compensation.

Judicial Committee of the Privy Council also said that a company is a separate legal entity, so that a
director could still be under a contract of employment with the company he solely owned.

Q6. Explain the meaning of “Lifting of Corporate Veil” in relation to a company incorporated
under Companies Act, 2013.

The separate personality of a company is a statutory privilege and it must be used for legitimate
business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the corporate personality. The
Court will break through the corporate shell and apply the principle/doctrine of what is called as
lifting of or piercing the corporate veil. The Court will look behind the corporate entity and take
action as though no entity separate from the members existed and make the members or the
controlling persons liable for debts and obligations of the company.
However, the shareholders cannot ask for the lifting of the veil for their purposes.

When directors, or whosoever be in charge of the company, start committing frauds, or illegal
activities, or even activities outside purview of the objective/articles of the company, principle of
lifting the corporate veil is initiated. It is disregarding the corporate personality of a company, in
order to look behind the scenes, to determine who the real culprit of the committed offence is.
7
Thus, wherever this personality of the company is employed for the purpose of committing illegality
or for defrauding others, Courts have authority to ignore the corporate character and look at the
reality behind the corporate veil in order to ensure justice is served. This approach of judiciary in
cracking open the corporate shell is somewhat cautious and circumspect.

Case Laws:

a) Gilford Motor Co v/s Horne

Where the corporate veil has been used for commission of fraud or improper conduct, Courts have
lifted the veil and looked at the realities of the situation. A former employee of a company made a
covenant not to solicit its customers. He formed a company which undertook solicitation. The
company was restrained by the Court.

b) Connors Bros. v/s. Connors

In the given case, a company whose affairs were de facto with the persons, residents of Germany
was at war with England. The corporate veil of the company was lifted & the alien company was not
allowed to proceed with the action as it was against public policy.

c) Sir Dinshaw Maneckjee Petit

In the above mentioned case, the assesse formed four private companies and agreed to hold a block
of investment as an agent for it. The dividend & interest income received on such investment was
further given to Sir Dinshaw as a pre handed loan. This way his income was divided in four parts
which in turn reduced his tax liability lifting the corporate veil, it was seen that these companies did
not do any business and were just the means to evade tax.

d) The workmen Employed in Associated Rubber Industries Limited, Bhavnagar v/s. The
Associated Rubber Industries Ltd. Bhavnagar
In this case, the principal company was liable to pay bonus to its employee as a percent of its Gross
Profits under the Bonus Act or any other applicable law. In order to reduce its liability the Principal
company formed a new company which had no business or income of its own except receiving
dividends from the shares transferred to it by the principal company. The SC held that the new
Company was formed to reduce the gross profits & thereby reduce the amount to be paid by way of
bonus to workmen.

8
Q7. What are the Statutory recognition to the doctrine of Lifting of Corporate Veil?

The Companies Act, 2013 has been integrated with various provisions which tend to point out the
person who’s liable for any such improper/illegal activity. These persons are more often referred as
“officer who is in default” under Section 2(60) of the Act, which includes people such as directors
or key-managerial positions. Few instances of such frameworks are as following: -

A. Misstatement in Prospectus: -
Under Section 26 (9), Section 34 and Section 35 of the Act, it is made punishable to furnish untrue
or false statements in prospectus of the company. Through issuing prospectus, companies offer
securities for sale. Prospectus issued under Section 26 contains key notes of the company such as
details of shares and debentures, names of directors, main objects and present business of the
company. If any person attempts to furnish false or untrue statements in prospectus, he is subject to
penalty or imprisonment or both prescribed under the aforesaid sections, depending upon the case.
Each of these sections create a distinct aspect, that which type of incorrect information furnishing
would make such person liable for what amount or serving term.

B. Failure to return application money: -

Under Section 39 (3) of the Act, against allotment of securities, if the stated minimum amount has
not been subscribed and the sum payable on application is not received within a period of thirty days
from the date of issue of the prospectus, then such officers in default are to be fined with an amount
of one thousand rupees for each day during which such default continues or one lakh rupees,
whichever is less.

C. Mis description of Company’s name: -

The name of the company is most important. Usage of approved name entitles the company to enter
into contracts and make them legally binding. This name should be prior approved under Section 4
and printed under Section 12 of the Act. Thus, if any representative of the company collects bills or
sign on behalf of the company, and enter in incorrect particulars of the company, then such persons
are to be held personally liable. Similar things happened in the case Hendon vs. Adelman where
signatory directors were held personally liable for stating company’s name on a signed cheque as “L
R Agencies Ltd” while the original name was “L & R Agencies Ltd.”
D. For investigation of ownership of company: -
Under Section 216 of the Act, the Central Government is authorized to appoint inspectors to
investigate and report on matters relating to the company, and its membership for the purpose of

9
determining the true persons who are financially interested in the success or failure of the company;
or who are able to control or to materially influence the policies of the company.

E. Fraudulent conduct: -
Under Section 339 of the Act, wherever in case of winding up of the company, it is found that
company’s name was being used for carrying out a fraudulent activity, the Court is empowered to
hold any such person be liable for such unlawful activities, be it director, manager, or any other
officer of the company. In the case Delhi Development Authority vs. Skipper Construction
Company (P) it was stated that “where, therefore, the corporate character is employed for the
purpose of committing illegality or for defrauding others, the court would ignore the corporate
character and will look at the reality behind the corporate veil so as to enable it to pass appropriate
orders to do justice between the parties concerned.

F. Inducing persons to invest money in company: -

Under Section 36 of the Act, any person who makes false, deceptive, misleading or untrue
statements or promises to any other person or conceals relevant data from other person with a view
to induce him to enter into either of following:-
i. An agreement of acquiring, disposing, subscribing or underwriting securities.
ii. An agreement to secure profits to any of the parties from the yield of securities or by
reference to fluctuations in the value of securities.
iii. An agreement to obtain credit facilities from any bank or financial institution.
In such circumstances, the corporate personality can be ignored with a view to identify the real
culprit and make him personally liable under Section 447 of the Act accordingly.

G. Furnishing false statements: -

Under Section 448 of the Act, if in any return, report, certificate, financial statement, prospectus,
statement or other document required, any person makes false or untrue statements, or conceals any
relevant or material fact, then he is liable under Section 447 of the Act. If any document is sent from
company to any place else, content of the documents are sent on the letter-head of the company,
Now when this letter is received by any other person, he is supposed to be under assumption that he
has received the letter from the company. This “any other person” here is persons appointed under
the Act, such as Registrar of Companies (ROC). If he is furnished
any false or untrue statement, that is also an offence. Thus, in order to determine the real guilty
person, who allowed such documents being released in the name of the company is to be found by
way of lifting the corporate veil.

10
H. Repeated defaults: -
Under Section 449 of the Act, if a company or an officer of a company commits an offence
punishable either with fine or with imprisonment and this offence is being committed again within
period of 3 years, such company and officer are to pay twice the penalty of that offence in addition
to any imprisonment provided for that offence.

Q8. What are the Judicial Pronouncements to the doctrine of Lifting of Corporate Veil?

Though the Legislature has attempted to insert numerous provisions in the Act to make sure guilty
person is pointed out as veil is pierced, there are instances where Judiciary has played it’s part better
and kept a check that no guilty person, due to a mere technicality, walks free. Following are few
such scenarios where Court may without any doubt lift the corporate veil: -

A. Tax Evasion: -
It’s duty of every earning person to pay respective taxes. Company is no different than a person in
eyes of law. If anyone attempts to unlawfully avoid this duty, he is said to be committing an offence.
When strict rules are laid down for human being, why leave company? One clear illustration was is
Dinshaw Maneckjee Petit re. where the founding person of 4 new private companies, Sir Dinshaw,
was enjoying huge dividend and interest income, and in order to evade his tax, he thus found 4 sham
companies. His income was credited in accounts of these companies and these amounts were repaid
to Sir Dinshaw but in form of a pretended loan. These loans entitled him to have certain tax benefits.
It was rather held that purpose of founding these new companies was simple as means of avoiding
super-tax.

B. Prevention of fraud/ improper conduct: -

It is obvious that no company can commit fraud on its own. There has to be a human agency
involved to commit such acts. Thus, one may make efforts to prevent upcoming frauds. Similar
thing was observed in the case Gilford Motor Co Ltd vs. Horne where, Horne was appointed as
Managing Director of the company, provided he accepts the condition that he will not attempt to
entice or solicit customers of the company while he is holding the post or even afterwards. However,
shortly thereafter, he opened a company, in his wife’s name, which carried out a competing business
to that of the first company, with himself being in management. When the matter was brought into
the Court, it was held that the newfound company was mere cloak or
sham, for purpose of enabling Sir Dinshaw to commit breach of his covenant against solicitation.

11
C. Determination of enemy character: -
The purpose behind formation of company is self-profit. A company will not attempt to do good
towards society consciously. However, it may opt to cause damage instead. Similar things were
observed in the case Dailmer Co Ltd vs. Continental Tyres & Rubber Co Ltd. The facts were such
that a Germany based company was incorporated in England to sell tyres manufactures in Germany.
The German company had however held the bulk of shares in this English company. As World War
I broke out, the English company commenced an action to recover trade debt. The question was
brought before House of Lords which decided the case against the claimant, stating
that, company is not a real person but a legal entity, it cannot be a friend or an enemy. However, it
may assume an enemy character when persons in de facto control of its affairs are residents of the
enemy territory. Thus, the claim was dismissed.
It was rather held in the case Sivfracht vs. Van Udens Scheepvart that, if in such scenarios where a
company is suspected to be of enemy character or is proved to be of enemy character, then such
granted monetary funds would be used as machinery to destroy the concerned State itself. That
would be monstrous and against public policy of that concerned State.

D. Liability for ultra-vires acts: -

Every company is bound to perform in compliance of its memorandum of association, articles of
association, and the Companies Act, 2013. Any action done outside purview of either is said to be
“ultra-vires” or improper or beyond the legitimate scope. Such operations of the company can be
subjected to penalty.
The doctrine of ultra-vires acts against companies was evolved in the case Ashbury Railway
Carriage & Iron Company Ltd v. Hector Riche where a company entered into a contract for
financing construction of railway lines, and this operation was not mentioned in the memorandum.
The House of Lords held this action as ultra-vires and contract, null and void.

E. Public Interest/Public Policy

Where the conduct of the company is in conflict with public interest or public policies, Courts are
empowered to lift the veil and personally hold such persons liable who are guilty of the act. To
protect public policy is a just ground for lifting the corporate personality. One such scenario is Jyoti
Limited vs. Kanwaljit Kaur Bhasin & Anr., where it was held that corporate veil maybe ignored if
representatives of the company commit contempt of the Court so punishment can be inflicted upon.

12
F. Agency companies: -
Where it is expedient to identify the principal and agent concerning an improper action performed
by the agent, the corporate veil maybe neglected. Such as in the case of Bharat Steel Tubes Ltd vs
IFCI where it was held that it doesn’t matter, and it isn’t necessary that Government should be
holding more than 51% of the paid-up capital to be the principal. In fact, in the case New Tiruper
Area Development Corporation Ltd vs. State of Tamil Nadu where Government was holding mere
17.4% of the investment funds, it was found that Area Development Corporation was actually a
public authority through the Government. It was created under a public-private participation to
build, operate and transfer water supply and sewage treatment systems.

G. Negligent activities: -
Every company law distinguishes between holding and subsidiary companies. Holding companies
under Indian company law are the companies which have right in composition of Board of
Directors, or which have more than 50% of the total share capital of the subsidiary company. For
example, Tata Sons is the holding company while Tata Motors, TCS, Tata Steel are its subsidiary
companies.
In cases where subsidiary companies have been found with tainted operations, Courts have power to
make holding companies liable for actions of their subsidiary companies as well for breach of duty
or negligence on their part. Such as in the case of Chandler vs Cape Plc where an employee brought
an action against holding company ‘Cape Plc’ for not taking proper health and safety measures,
even though employee was employed in its subsidiary company.
Employee was appointed in the year 1959 in the subsidiary company while he had discovered the
fact that he is suffering from asbestosis in year 2007. When he was aware of his condition it was that
the subsidiary company was no longer in existence, thus, he brought action against the holding
company, which was still in existence. This matter was held to be maintainable. Rather, holding
company was held guilty and made liable as it owed duty of care towards employees. It was for the
first time where a holding company, despite the fact that it’s a legal entity separate from that
of its subsidiary, is however liable for actions of its subsidiary.

H. Sham Companies: -
The Courts are also empowered to lift the corporate veil if they are of the opinion that such
companies are sham or hoax. Such companies are mere cloaks and their personalities can be ignored
in order to identify the real culprit. This principle can be seen in the prior discussed case of Gilford
Motor Co Ltd vs. Horne where it was held that the new found company was mere cloak or sham, for

13
purpose of enabling Sir Dinshaw to commit breach of his covenant against solicitation.
I. Companies intentionally avoiding legal obligations: -
Wherever it is found that an incorporated company is deliberately trying to avoid legal obligations,
or wherever it is found that this incorporation of a company is being used to avoid force of law, the
Courts have authority to disregard this legal personality of the company and proceed as if no
company existed. The liabilities can be straight away imposed on persons concerned.

Q9. Who Are The Promoters of a Company?

A Promoter is a person who is engaged in promoting the formation and incorporation of the
Company. He conceives the idea of setting up the business and took the steps for the formation of
the Company. However, the persons who assist in the incorporation of the company are the
Professionals and not the promoters.
The most important work of a promoter is in the formation of a company. The whole process of the
formation of a company may be divided into four stages (i) Promotion, (ii) Registration, (iii)
Floatation and (iv) Commencement of business.
Promotion is a term of wide import denoting the preliminary steps taken for the purpose of
registration and floatation of the company. A promoter may be an individual, syndicate, association,
partner or company.

As per Section 2(69) of the Companies Act, 2013, promoter means any of the following
persons:

 A person named as a promoter in the prospectus or identified by the company in its annual
return in Section 92.

 A person who controls the company affairs, indirectly or directly, whether as a director,
shareholder or otherwise.

 A person in accordance with whose directions, advice or instructions the Board of Directors of
a company are accustomed to act.

In simple words, promoters perform the preliminary steps, like floating the securities in the market,
making the prospectus of the company, etc., for establishing the company’s business. However, if a
person is doing these things professionally, they will not be considered a promoter. A person who
acts in a professional capacity is not a promoter. Thus, a solicitor, who prepares on behalf of the
promoters the primary documents of the proposed company, is not a promoter. Similarly, an
accountant or a valuer who helps the promotion in his professional capacity is not a promoter. But
any such person may become a promoter if he helps the formation of the company by doing an act
14
outside the scope of his professional capacity. A person cannot; however, become a promoter
merely because he signs the memorandum as a subscriber for one or more shares.
In the case of Bosher v. Richmond Land Co., the term Promoter has been defined as: “A Promoter is
a person who brings about the incorporation and organization of a corporation. He brings together
the persons who become interested in the enterprise, aids in procuring subscription, and sets in
motion the machinery which leads to the formation itself.”

In conclusion, it may be said that word “promoter” is used in common parlance to denote any
individual, syndicate, association, partnership or a company which takes all the necessary steps to
create and mould a company and set it going.

Q10. What are the duties of Promoter?

The promoters occupy an important position and have wide powers relating to the formation of a
company. It is, however, interesting to note that so far as the legal position is concerned, he is
neither an agent nor a trustee of the proposed company. But it does not mean that the promoter does
not have any legal relationship with the proposed company. The promoters stand in a fiduciary
relation to the company they promote and to those persons, whom they induce to become
shareholders in it.
Following are the major Duties of the promoter:

A. Duty to disclose secret profits

A promoter is not forbidden to make profit but to make secret profits. He may make a profit out of
promotion with the consent of the company, in the same way as an agent may retain a profit
obtained through his agency with his principle’s consent. A promoter is allowed to make a profit out
of a promotion but with the consent of the company.

B. Duty of disclosure of interest

In addition to his duty for declaration of secret profits, a promoter must disclose to the company
any interest he has in a transaction entered into by it. This is so even where a promoter sells property
of his own to the company but does not have to account for the profit he makes from the
sale because he bought the property before the promotion began. Disclosure must be made in the
same way as though the promoter was seeking the company’s consent to his retaining a profit for
which he is accountable.

15
C. Promoter’s duties under the Indian Contract Act
Promoter’s duties to the company under the Indian Contract Act have not been dealt with by the
courts in any detail. They cannot depend on contract, because at the time the promotion begins,
the company is not incorporated, and so cannot contract with its promoters. It seems, therefore, that
the promoter’s duties must be the same as those or a person, who acts on behalf of another without a
contract of employment, namely, to shun from deception and to exercise reasonable skill and care.
Thus, where a promoter negligently allows the company to purchase property, including his own,
for more than its worth, he is liable to the company for the loss it suffers. Similarly, a promoter who
is responsible for making misrepresentations in a prospectus may be held guilty of fraud under
section 17, of the Indian Contract Act and consequently liable for damages under section 19 of the
Act.

Q11. What are the Liabilities on Promoter

A promoter is subjected to liabilities under the various provisions of the Companies Act.

 Section 26 of the Companies Act, 2013 lay down matters to be stated in a prospectus. A
promoter may be held liable for non-compliance of the provisions of the section.
 Under section 34 and 35, a promoter may be held liable for any untrue statement in the
prospectus to a person who subscribes for shares or debentures in the faith of such prospectus.
However, the liability of the promoter in such a case shall be limited to the original allottee of
shares and would not extend to the subsequent allotters.
 According to section 300, a promoter may be liable to examination like any other director or
officer of the company if the court so directs on a liquidator’s report alleging fraud in the
promotion or formation of the company.
 A company may proceed against a promoter on action for deceit or breach of duty under section
340, where the promoter has misapplied or retained any property of the company or is guilty of
misfeasance or breach of trust in relation to the company.

The Madras High Court in Prabir Kumar Misra v. Ramani Ramaswamy [2010] 104 SCL 174, has
held that to fix liability on a promoter, it is not necessary that he should be either a signatory to the
Memorandum/Articles of Association or a shareholder or a director of the company. Promoter’s
civil liability to the company and also to third parties remain in respect of his conduct and contract
entered into by him during pre-incorporation stage as agent or trustee of the company.

Q12. What is the legal position of Promoter?

16
A Promoter is neither an agent nor a trustee of the Company. He acts in a fiduciary position towards
the Company. He takes steps for the formation of the Company and incurs the preliminary expenses
for the Incorporation of the Company like Registration expenses, Stamp duty payment, professional
fees, etc. They have a fiduciary duty towards the company and are liable for any profits made by
them personally in company deals.

Q13. Explain Memorandum of Association.

Memorandum of Association is a legal document which describes the purpose for which the
company is formed. It defines the powers of the company and the conditions under which it
operates. It is a document that contains all the rules and regulations that govern a company’s
relations with the outside world.
It is mandatory for every company to have a Memorandum of Association which defines the scope
of its operations. Once prepared, the company cannot operate beyond the scope of the document. If
the company goes beyond the scope, then the action will be considered ultra vires and hence will be
void.
It is a foundation on which the company is made. The entire structure of the company is detailed in
the Memorandum of Association.
The memorandum is a public document. Thus, if a person wants to enter into any contracts with the
company, all he has to do is pay the required fees to the Registrar of Companies and obtain the
Memorandum of Association. Through the Memorandum of Association, he will get all the details
of the company. It is the duty of the person who indulges in any transactions with the company to
know about its memorandum.
Definition of Memorandum of Association
Section 2(56) of the Companies Act, 2013 defines Memorandum of Association. It states that a
“memorandum” means two things:
 Memorandum of Association as originally framed. - Memorandum as originally framed refers
to the memorandum as it was during the incorporation of the company.
 Memorandum as altered from time to time.- This means that all the alterations that are made in
the memorandum from time to time will also be a part of Memorandum of Association.

In addition to this, according to Section 399 of the Companies Act, 2013, any person can inspect
any document filed with the Registrar in pursuance of the provisions of the Act. Hence, any person
who wants to deal with the company can know about the company through the Memorandum of
Association.

17
Q14. Describe the contents of Memorandum of Association.
Section 4 of the Companies Act, 2013 states the contents of the memorandum. It details all the
essential information that the memorandum should contain.

1. Name Clause

 The first clause states the name of the company. Any name can be chosen for the company.
But there are certain conditions that need to be complied with.
 Section 4(1)(a) states:
 If a company is a public company, then the word ‘Limited’ should be there in the
name.
Example, “Robotics”, a public company, its registered name will be “Robotics Limited”.
 If a company is a private company, then ‘Private Limited’ should be there in the name.
 “Secure “a private company, its registered name will be “Secure Private Limited”.
 This condition is not applicable to Section 8 companies.
 What kind of names are not allowed?
 The name stated in the memorandum shall not be,
 Identical to the name of another company.
 Too nearly resembling the name of an existing company.
 According to Rule 8 of the Company (Incorporation) Rules,2014.
 If a company adds ‘Limited’, ‘Private Limited’, ‘LLP’, ‘Company’,
‘Corporation’, ‘Corp’,
 ‘inc’ and any other kind of designation to its name to differentiate it from the
name of the other company, the name would still not be accepted.
 In addition to this, an undesirable name will also not be allowed to be chosen.
Undesirable names are those names which in the opinion of the Central Government
are:
 Prohibited under the Provisions of Section 3 of Emblems and Names
(Prevention and Improper Use) Act, 1950.
 Names which resemble each other, which are chosen to deceive.
 The name includes a registered trademark.
 The name includes any word or words which are offensive to a section of
people.

18
  Name which is identical to or too nearly resembles the name of an existing
Limited Liability Partnership.
 Furthermore, statutory names such as the UN, Red Cross, World Bank,
Amnesty International etc. are also not allowed to be chosen.
 Names which in any way indicate that the company is working for the
government are also not allowed.

2. Registered Office Clause

 The Registered Office of a company determines its nationality and jurisdiction of courts. It is a
place of residence and is used for the purpose of all communications with the company. Section
12 of the Companies Act, 2013 talks about Registered Office of the company.
 Before incorporation of the company, it is sufficient to mention only the name of the state
where the company is located. But after incorporation, the company has to specify the exact
location of the registered office. The company has to then get the location verified as well,
within 30 days of incorporation.
 It is mandatory for every company to fix its name and address of its registered office on the
outside of every office in which the business of the company takes place. If the company is a
one-person company, then “One-person Company” should be written in brackets below the
affixed name of the company.
 Change in place of Registered Office should be notified to the Registrar within the prescribed
time period.

3. Object Clause

 Section 4(c) of the Act details the object clause. The Object Clause is the most important clause
of Memorandum of Association. It states the purpose for which the company is formed.
 The object clause contains both, the main objects and matters which are necessary for achieving
the stated objects also known as incidental or ancillary objects. The stated objects must be well
defined and lawful according to Section 6(b) of the Companies Act, 2013.
 By limiting the scope of powers of the company. The object clause provides protection to:
1. Shareholders – The object clause clearly states what operations will the company
perform. This helps the shareholders know their investment in the company will be
used for what purpose.
2. Creditors – It ensures the creditors that capital is not at risk and the company is

19
 working within the limits as stated in the clause.
3. Public Interest – The object clause limits the number of matters the company can deal
with thus, prohibiting diversification of activities of the company.

4. Liability Clause

The Liability Clause provides legal protection to the shareholders by protecting them from being
held personally liable for the loss of the company.
There are two kinds of limited liabilities:
 Limited by Shares – Section 2(22) of the Companies Act, 2013 defines a company limited
by shares. In a company limited by shares, the shareholders only have to pay the price of
the shares they have subscribed to. If for some reason they have not paid the full amount for
the shares and the company winds up, then their liability will only be limited to the unpaid
amount.

 Limited by Guarantee – It is defined in Section 2(21) of the Companies Act, 2013.A

company limited by guarantee has members instead of shareholders. These members
undertake to contribute to the assets of the company at the time of winding up. The
members give guarantee of a fixed amount that they will be liable for. Non-profit
Organizations and other charities usually have a structure of companies limited by
guarantee.

5. Capital Clause

It states the total amount of share capital in the company and how it is divided into shares. The
way the amount of capital is divided into what kind of shares. The shares can be equity shares or
preference shares.
Illustration: The share capital of the company is 80,00,000 rupees, divided into 3000 shares of 4000
rupees each.

6. Subscription Clause

The Subscription Clause states who are signing the memorandum. Each subscriber must state the
number of shares he is subscribing to. The subscribers have to sign the memorandum in the
presence of two witnesses. Each subscriber must subscribe to at least one share.

20
7. Association Clause
In this clause, the subscribers to the memorandum make a declaration that they want to associate
themselves to the company and form an association.

Q 15. What are the procedures for alteration of clauses of Memorandum of Association?
The alteration of various clauses of the memorandum have different procedures:

1. Alteration to the Name Clause:

To alter the name of the company, a special resolution is required. After the resolution is passed,
the copy is sent to the registrar. For changing the name, the application needs to be filed in Form
INC- 24 with the prescribed fees. After the name is changed, a new certificate of incorporation is
issued.

2. Alteration to the Registered Office Clause:

The application for changing the place for Registered Office of the company shall be filed with the
Central Government in Form INC- 23 with the prescribed fees. If the company is changing its
Registered Office from one to another, then the approval of the Central Government is required.
The Central Government is required to dispose off the matter within 60 days and should ensure that
the change of place has the consent of all the stakeholders of the company.

3. Alteration to the Object Clause:

To alter the object clause, a special resolution is required to be passed. The changes must be
confirmed by the authority. The document which confirms the changes by authority with a printed
copy of the altered memorandum should be filed with the Registrar. If the company is a public
company, then the alteration should be published in the newspaper where the Registered Office of
the company is located. The changes to the object clause must also mentioned on the company’s
website.

4. Alteration to the Liability Clause:

The Liability clause of the memorandum cannot be altered except with the written consent of all the
members of the company. By altering the liability clause, the liability of the directors of the
company can be made unlimited. In any case, the liability of the shareholders cannot be made
unlimited. Changes in the liability clause can be made by passing a special a special resolution and

21
sending a copy of the resolution to the Registrar of Companies.

5. Alteration to the Capital Clause: The capital clause of a company can be altered by an ordinary
resolution. The company can, 1. Increase its authorised share capital. 2. Convert the shares into
stock. 3. Consolidate and divide all of its shares. 4. Cancel the shares which have not been
subscribed to. 5. Diminish the share capital of the shares cancelled.

The altered Memorandum of Association should be submitted to the Registrar within 30 days of
passing the resolution.

Q.16 Explain Articles of Association and what are the contents of AoA.
The Companies Act, 2013 defines ‘articles’ as the “articles of association of a company originally
framed, or as altered from time to time in pursuance of any previous company laws or of the
present.” The Articles of Association of a company are that which prescribe the rules, regulations
and the bye-laws for the internal management of the company, the conduct of its business, and is a
document of paramount significance in the life of a company. The Articles of a company have often
been compared to a rule book of the company’s working, that regulates the management and
powers of the company and its officers. It prescribes several details of the company’s inner
workings such as the manner of making calls, director’s/employees’ qualifications, powers and
duties of auditors, forfeiture of shares etc.
In fact, the articles of association also establish a contract between the members and between the
members and the company. This contract is established, governs the ordinary rights and obligations
that are incidental to having membership in the company. It must be noted, however, that the
articles of association, are subordinate to the memorandum of association of a company, which is
the dominant, fundamental constitutional document of the company.
Further, as laid down in Shyam Chand v. Calcutta Stock Exchange, any and all articles that go
beyond the memorandum of association will be deemed ultra vires. Therefore, there should not be
any provisions in the articles that go beyond the memorandum. In the event of a conflict between
the memorandum and the articles, the provisions in the memorandum will prevail. In case of any
ambiguity or uncertainty regarding details in the memorandum, it should be read along with the
articles.

CONTENTS of AOA-
The articles set out the rules and regulations framed by the company for its own working. The
articles should contain generally the following matters:

22
1. Adoption of preliminary contracts.
2. Share Capital, variation of rights, Number and value of shares.
3. Issue of preference shares.
4. Allotment of shares.
5. Calls on shares.
6. Lien on shares.
7. Transfer and transmission of shares.
8. Nomination.
9. Forfeiture of shares.
10. Alteration of capital.
11. Buy back.
12. Share certificates.
13. Dematerialisation.
14. Conversion of shares into stock.
15. Voting rights and proxies.
16. Meetings and rules regarding committees of the Board.
17. Directors, their appointment and delegations of powers.
18. Nominee directors.
19. Issue of Debentures and stocks.
20. Audit committee.
21. Managing director, Whole-time director, Manager, Secretary, Chief Executive Officer and
Chief Financial Officer.
22. Additional directors.
23. Seal.
24. Remuneration of directors.
25. General meetings, proceedings at general meetings, adjournment of meeting.
26. Board of Directors, Proceedings of the Board meetings.
27. Borrowing powers.
28. Dividends and reserves.
29. Accounts and audit.
30. Winding up.
31. Indemnity.
32. Capitalisation of profits, reserves.

In case of private companies, the AOA must contain the three restrictions as given in Sec.2(68)
namely restriction on right of members to transfer shares;limitation of number of members to 200
and prohibition of invitation to public for subscription of its securities.

Q 17. What are the procedures for alteration of clauses of Articles of Association?

23
Section 14 of the Companies Act, 2013, permits a company to alter its articles, subject to the
conditions contained in the memorandum of association, by passing a special resolution. This
power is extremely important for the functioning of the company.
The following are some of the ways in which the AoA can be altered:

By a Special Resolution: The AoA can be altered by passing a special resolution in a general
meeting of the shareholders. A special resolution requires the approval of at least 75% of the votes
cast by the shareholders who are present or represented at the meeting.

By the Board of Directors: The AoA can be altered by the board of directors if the power to do so
is specifically given to them in the AoA. However, any such alteration must be ratified by the
shareholders at the next general meeting.

By an Order of the Tribunal: The AoA can be altered by an order of the National Company Law
Tribunal (NCLT) if it is satisfied that the alteration is necessary for the proper functioning of the
company or to protect the interests of the shareholders.

In accordance with the provisions of the AoA: The AoA may contain provisions for its own
alteration or amendment, in which case the alteration must be made in accordance with those
provisions.

It is important to note that any alteration of the AoA must be made in accordance with the
provisions of the Companies Act, 2013, and any other applicable laws. Additionally, the altered
AoA must be filed with the Registrar of Companies within 30 days of the alteration.

In conclusion, the AoA of a company can be altered by a special resolution of the shareholders, by
the board of directors with the ratification of the shareholders, by an order of the NCLT, or in
accordance with the provisions of the AoA itself. Any alteration must be made in accordance with
the provisions of the law and must be filed with the Registrar of Companies.

Q 14. Explain Doctrine of Ultra- Vires and its consequences.

In the case of a company whatever is not stated in the memorandum as the objects or powers is
prohibited by the doctrine of ultra vires. As a result, an act which is ultra vires is void, and does not
bind the company. Neither the company nor the contracting party can sue on it. Also, as stated
earlier, the company cannot make it valid, even if every member assents to it.
The general rule is that an act which is ultra vires the company is incapable of ratification. An act
which is intra vires the company but outside the authority of the directors may be ratified by the

24
company in proper form.

CASE LAW: Railway Carriage and Iron Co. Ltd. v. Riche.

The memorandum of the company in the said case defined its objects thus: “The objects for which
the company is established are to make and sell, or lend or hire, railway plants to carry on the
business of mechanical engineers and general contractors. ”
The company entered into a contract with M/s. Riche, a firm of railway contractors to finance the
construction of a railway line in Belgium. On subsequent repudiation of this contract by the
company on the ground of its being ultra vires, Riche brought a case for damages on the ground of
breach of contract, as according to him the words “general contractors” in the objects clause gave
power to the company to enter into such a contract and, therefore, it was within the powers of the
company. More so because the contract was ratified by a majority of shareholders.
The House of Lords held that the contract was ultra vires the company and, therefore, null and void.
The term “general contractor” was interpreted to indicate as the making generally of such contracts
as are connected with the business of mechanical engineers. The shareholders cannot ratify such a
contract, as the contract was ultra vires the objects clause
However, later on, the House of Lords held in other cases that the doctrine of ultra vires should be
applied reasonably and unless it is expressly prohibited, a company may do an act which is
necessary for or incidental to the attainment of its objects.
Consequences of Ultra Vires
A. Liability of Directors: The directors of the company have a duty to ensure that company’s
capital is used for the right purpose only. If the capital is diverted for another purpose not
stated in the memorandum, then the directors will be held personally liable.
B. Ultra Vires Borrowing by the Company: If a bank lends to the company for the purpose not
stated in the object clause, then the borrowing would be Ultra Vires and the bank will not be
able to recover the amount.
C. Ultra Vires Lending by the Company: If the company lends money for an ultra vires purpose,
then the lending would be ultra vires.
D. Void ab initio – Ultra Vires acts of the company are considered void from the beginning.
E. Injunction – Any member of the company can use the remedy of injunction to prevent the
company from doing ultra vires acts.

Q 18. Explain Doctrine of Constructive Notice.

25
When the Memorandum and Articles of Association of any company, are registered with the
Registrar of Companies they become “public documents” as per section 399 of the Act. This
implies that any member of the general public may view and inspect these documents at a
prescribed fee. A member of the public may make a request to a specific company, and the
company, in turn, must, within seven days send that person a copy of the memorandum, the articles
and all agreements and resolutions that are mentioned in section 117(1) of the Act. If the company
or its officers or both, fail to provide the copies of the requisite documents, every defaulting officer
will be liable to a fine of Rs. 1000, for every day, until the default continues, or Rs. 1,00,000
whichever is less. Therefore, it is the duty of every person that deals with the company to inspect
these public documents and ensure in his own capacity that the workings of the company are in
conformity with the documents. Irrespective of whether a person has actually read the documents or
not, it is assumed that he familiar with the contents of these documents, and that he has understood
them in their proper meaning. The memorandum and articles of association are thus deemed as
notices to the public, hence a ‘constructive notice’. Illustration: If the articles of Company A,
provided that any bill of exchange must be signed by a minimum of two directors, and the payee
receives a bill of exchange signed only by one, he will not have the right to claim the amount.

Q 19. Explain Doctrine of Indoor Management. What are the exceptions to Indoor
Management?
While the doctrine of ‘constructive notice” seeks to protect the company against the outsiders, the
principal of indoor management operates to protect the outsiders against the company.
According to this doctrine, as laid down in Royal British Bank v. Turquand, persons dealing with a
company having satisfied themselves that the proposed transaction is not in its nature inconsistent
with the memorandum and articles, are not bound to inquire the regularity of any internal
proceedings.
In other words, while persons contracting with a company are presumed to know the provisions of
the contents of the memorandum and articles, they are entitled to assume that the provisions of the
articles have been observed by the officers of the company. It is not a part of the duty of an outsider
to see that the company carries out its own internal regulations.
CASE LAW: Royal British Bank v. Turquand
In Royal British Bank v. Turquand, the directors of a banking company were authorized by the
articles to borrow on bonds such sums of money as should from time to time, by resolution of the
company in general meeting, be authorized to borrow.
The directors gave a bond to Turquand without the authority of any such resolution. It was held that
Turquand could sue the company on the strength of the bond, as he was entitled to assume that the

26
necessary resolution had been passed. Lord Hatherly observed: “Outsiders are bound to know the
external position of the company but are not bound to know its indoor management”.

The object of the section is to protect persons dealing with the company - outsiders as well as
members by providing that the acts of a person acting as director will be treated as valid although it
may afterwards be discovered that his appointment was invalid or that it had terminated under any
provision of this Act or the Articles of the company.
The above noted ‘doctrine of indoor management’ is, however, subject to certain exceptions.
In other words, relief on the ground of ‘indoor management’ cannot be claimed by an outsider
dealing with the company in the following circumstances.
1. Where the outsider had knowledge of irregularity – The rule does not protect any person who
has actual or even an implied notice of the lack of authority of the person acting on behalf of the
company. Thus, a person knowing fully well that the directors do not have the authority to make the
transaction but still enters into it, cannot seek protection under the rule of indoor management.

2. No knowledge of memorandum and articles – Again, the rule cannot be invoked in favour of a
person who did not consult the memorandum and articles and thus did not rely on them.

3. Forgery – The rule of indoor management does not extend to transactions involving forgery or to
transactions which are otherwise void or illegal ab initio. In the case of forgery it is not that there is
absence of free consent but there is no consent at all.

4. Negligence – The ‘doctrine of indoor management’, in no way, rewards those who behave
negligently. Thus, where an officer of a company does something which shall not ordinarily be
within his powers, the person dealing with him must make proper enquiries and satisfy himself as to
the officer’s authority. If he fails to make an enquiry, he is estopped from relying on the Rule.

5. This Doctrine is also not applicable where a pre-condition is required to be fulfilled before
company itself can exercise a particular power. In other words, the act done is not merely ultra vires
the directors/ officers but ultra vires the company itself

Q. 20 Differentiate between Memorandum of Association and Article of Association.

The main points of distinction between the memorandum and articles are given below:
 Memorandum of association is the charter of the company and defines the fundamental
conditions and objects for which the company is granted incorporation. Articles of association
are the rules and regulations framed to govern this internal management of the company.

27
 Clauses of the memorandum cannot be easily altered. They can only be altered in accordance
with the mode prescribed by the Act. In some of the cases, alteration requires the permission of
the Central Government or the Court. In the case of articles of association, members have a
right to alter the articles by a special resolution. Generally, there is no need to obtain the
permission of the Court or the Central Government for alteration of the articles.

 Memorandum of association cannot include any clause contrary to the provisions of the
Companies Act. The articles of association are subsidiary both to the Companies Act and the
memorandum of association.

 The memorandum generally defines the relation between the company and the outsiders, while
the articles regulate the relationship between the company and its members and between the
members inter se.

 Acts done by a company beyond the scope of the memorandum are absolutely void and ultra
vires and cannot be ratified even by unanimous vote of all the shareholders. But the acts of the
directors beyond the articles can be ratified by the shareholders.

Q 21. Explain the Prevention of Oppression and Mis-management

Oppression can be defined as an act or instance of oppressing, the state of being oppressed, and the
feeling of being heavily burdened, mentally or physically, by troubles, adverse conditions, and
anxiety. Oppression as per section 397(1) of Companies Act 1956 has been defined as when affairs
of the company are being conducted in a manner prejudiced to public interest or in a manner
prejudicial to public interest or in a manner oppressive to any member or members.
Mismanagement refers to practices of managing the company incompetently and dishonestly.
Violation of Memorandum of Association, Articles of Association, or other statutory provisions
would amount to mismanagement.The term mismanagement does not find a clear meaning in the act
but can be described as conducting company affairs in a prejudicial, dishonest or inept manner.
Section No 241 to 246 provides for remedies to the members when they face oppression and the
company is being mismanaged:

Prevention of Oppression and Mis-management:

A representative action may be brought for prevention of oppression and mismanagement, which
are cases where the majority acts in a manner that oppresses the minority; or where the affairs of

28
the company are being conducted in a manner prejudicial to public interests or oppressive to any
member(s) or in a manner prejudicial to the interests of the company including an adverse material
change in the management or control of the company. Since these proceedings are initiated for the
benefit of the company, it can be considered a form of derivative action and find specific place in
the scheme of the Indian company law under the Companies Act.
In order to obtain relief, the NCLT can be approached by:
244, Comapanies Act, 2013 gives the right to apply to NCLT: S. 244 (1) provides that the
following members of a company shall have the right to apply under section 241, namely-
(a) in the case of a company having a share capital, not less than one hundred members of the
company or not less than one-tenth of the total number of its members, whichever is less, or any
member or members holding not less than one tenth of the issued share capital of the company,
subject to the condition that the applicant or applicants has or have paid all calls and other sums due
on his or their shares;
(b) in the case of a company not having a share capital, not less than one-fifth of the total number of
its members: Provided that the Tribunal may, on an application made to it in this behalf, waive all
or any of the requirements specified in clause (a) or clause (b)so as to enable the members to apply
under section 241. This power of waiver of requirements of s. 244 is very important and was used
by NCLAT in the case of accepting Cyrus Mistry’s application for oppression and mismanagement.

Q 22. What are the powers of NCLT?

The National Company Law Tribunal (NCLT) is a quasi-judicial body established under the Companies Act,
2013 in India. It is responsible for adjudicating and resolving corporate disputes and matters related to
companies, insolvency, and bankruptcy. NCLT plays a crucial role in maintaining transparency, efficiency,
and fairness in corporate governance and ensures effective enforcement of company law.

National Company Law Tribunal enjoys a wide range of powers. Its powers include:

 Power to seek assistance of Chief Metropolitan Magistrate.

 De-registration of Companies.
 Declare the liability of members unlimited.
 De-registration of companies in certain circumstances when there is registration of
companies is obtained in an illegal or wrongful manner.
 Remedy of oppression and mismanagement.
 Power to hear grievance of refusal of companies to transfer securities and rectification of
register of members.

29
 Protection of the interest of various stakeholders, especially non-promoter shareholders and
depositors.
 Power to provide relief to the investors against a large set of wrongful actions committed by
the company management or other consultants and advisors who are associated with the
company.
 Aggrieved depositors have the remedy of class actions for seeking redressal for the
acts/omissions of the company which hurt their rights as depositors.
 Powers to direct the company to reopen its accounts or allow the company to revise its
financial statement but do not permit reopening of accounts. The company can itself also
approach the Tribunal through its director for revision of its financial statement.
 Power to investigate or for initiating investigation proceedings. An investigation can be
conducted even abroad. Provisions are provided to assist investigation agencies and courts of
other countries with respect to investigation proceedings.
 Power to investigate into the ownership of the company.
 Power to freeze assets of the company.
 Power to impose restriction on any securities of the company.
 Conversion of public limited company into private limited company.
 If the company cannot or has not held an Annual General Meeting as required under the
Companies Act or a required Extraordinary General Meeting, then the Tribunal has powers
to call for a General Meetings.
 Power to alter the financial year of a company registered in India.

30
Unit II : Prospectus, Shares, Debentures and Investments

Prospectus
The Companies Act, 2013 defines a prospectus under section 2(70). Prospectus can be defined as
“any document which is described or issued as a prospectus”. This also includes any notice, circular,
advertisement or any other document acting as an invitation to offers from the public. Such an
invitation to offer should be for the purchase of any securities of a corporate body. Shelf prospectus
and red herring prospectus are also considered as a prospectus.
Essentials for a document to be called as a prospectus For any document to considered as a
prospectus, it should satisfy following conditions.
• The document should invite the subscription to public share or debentures, or it should invite
deposits.
• Such an invitation should be made to the public.
• The invitation should be made by the company or on the behalf company.
• The invitation should relate to shares, debentures or such other instruments.
Cases :
Nash vs Lynde : In this case, several copies of a document marked “strictly confidential” and
containing particulars of a proposed issue of shares, were sent by the managing director of a
company to a co-director, who in turn sent a copy to a solicitor, who gave it to a client who,in turn,
passed it on to a relation. Thus, a document was passed on privately througha small circle of friends
of the directors. The House of Lords held that there had beenno issue to the public.
Pramatha Nath Sanyal v. Kali Kumar Dutt : An advertisement was inserted in a newspaper
stating: “some shares are stillavailable for sale according to the terms of the prospectus of the
company whichcan be obtained on application”. This was held to be a prospectus as it invited
thepublic to purchase shares. The directors were, therefore, penalised, for not complying with the
requirements of filing a copy thereof with the Registrar of Companies.

What are the various types of Prospectus?

Types of the prospectus as follows.
• Shelf Prospectus
• Red Herring Prospectus
• Abridged prospectus
• Deemed Prospectus

31
Shelf Prospectus
Shelf prospectus can be defined as a prospectus that has been issued by any public financial
institution, company or bank for one or more issues of securities or class of securities as mentioned
in the prospectus. When a shelf prospectus is issued then the issuer does not need to issue a separate
prospectus for each offering, he can offer or sell securities without issuing any further prospectus.
The provisions related to shelf prospectus has been discussed under section 31 of the Companies
Act, 2013.
The regulations are to be provided by the Securities and Exchange Board of India for any class or
classes of companies that may file a shelf prospectus at the stage of the first offer of securities to the
registrar.
The prospectus shall prescribe the validity period of the prospectus and it should be not be
exceeding one year. This period commences from the opening date of the first offer of the securities.
For any second or further offer, no separate prospectus is required.
While filing for a shelf prospectus, a company is required to file an information memorandum along
with it.
Information Memorandum [Section 31(2)]
The company which is filing a shelf prospectus is required to file the information memorandum. It
should contain all the facts regarding the new charges created, what changes have undergone in the
financial position of the company since the first offer of the security or between the two offers.
It should be filed with the registrar within three months before the issue of the second or subsequent
offer made under the shelf prospectus as given under Rule 4CCA of section 60A(3) under the
Companies (Central Government’s) General Rules and Forms, 1956.
When any company or a person has received an application for the allotment of securities with
advance payment of subscription before any changes have been made, then he must be informed
about the changes. If he desires to withdraw the application within 15 days, then the money must be
refunded to them.
After the information memorandum has been filed, if any offer or securities is made, the
memorandum along with the shelf prospectus is considered as a prospectus.

Red herring prospectus

Red herring prospectus is the prospectus which lacks the complete particulars about the quantum of
the price of the securities. A company may issue a red herring prospectus prior to the issue of
prospectus when it is proposing to make an offer of securities. This type of prospectus needs to be
filed with the registrar at least three days prior to the opening of the subscription list or the offer.

32
The obligations carried by a red herring prospectus are same as a prospectus. If there is any variation
between a red herring prospectus and a prospectus then it should be highlighted in the prospectus as
variations.
When the offer of securities closes then the prospectus has to state the total capital raised either
raised by the way of debt or share capital. It also has to state the closing price of the securities. Any
other details which have not been included in the prospectus need to be registered with the registrar
and SEBI.

Abridged Prospectus
The abridged prospectus is a summary of a prospectus filed before the registrar. It contains all the
features of a prospectus. An abridged prospectus contains all the information of the prospectus in
brief so that it should be convenient and quick for an investor to know all the useful information in
short.
Section33(1) of the Companies Act, 2013 also states that when any form for the purchase of
securities of a company is issued, it must be accompanied by an abridged prospectus. It contains all
the useful and materialistic information so that the investor can take a rational decision and it also
reduces the cost of public issue of the capital as it is a short form of a prospectus.

Deemed Prospectus
A deemed prospectus has been stated under section 25(1) of the Companies Act, 2013.
When any company to offer securities for sale to the public, allots or agrees to allot securities, the
document will be considered as a deemed prospectus through which the offer is made to the public
for sale. The document is deemed to be a prospectus of a company for all purposes and all the
provision of content and liabilities of a prospectus will be applied upon it.

What is the process of issuing of Prospectus?

Application forms
As stated under section 33, the application form for the securities is issued only when they are
accompanied by a memorandum with all the features of prospectus referred to as an abridged
prospectus.
The exceptions to this rule are:
(i) When an application form is issued as an invitation to a person to enter into underwriting
agreement regarding securities.
(ii) Application issued for the securities not offered to the public.

33
Contents
For filing and issuing the prospectus of a public company, it must be signed and dated and contain
all the necessary information as stated under section 26 of the Companies Act,2013:
1. Name and registered address of the office, its secretary, auditor, legal advisor, bankers, trustees,
etc.
2. Date of the opening and closing of the issue.
3. Statements of the Board of Directors about separate bank accounts where receipts of issues are to
be kept.
4. Statement of the Board of Directors about the details of utilization and non-utilisation of receipts
of previous issues.
5. Consent of the directors, auditors, bankers to the issue, expert opinions.
6. Authority for the issue and details of the resolution passed for it.
7. Procedure and time scheduled for the allotment and issue of securities.
8. The capital structure of the in the manner which may be prescribed.
9. The objective of a public offer.
10. The objective of the business and its location.
11. Particulars related to risk factors of the specific project, gestation period of the project, any
pending legal action and other important details related to the project.
12. Minimum subscription and what amount is payable on the premium.
13. Details of directors, their remuneration and extent of their interest in the company.
14. Reports for the purpose of financial information such as auditor’s report, report of profit and loss
of the five financial years, business and transaction reports, statement of compliance with the
provisions of the Act and any other report.

Filing of copy with the registrar

As stated under sub-section 4 of section26 of the Companies Act, 2013, the prospectus is not to be
issued by a company or on its behalf unless on or before the date of publication, a copy of the
prospectus is delivered to the registrar for registration.
The copy should be signed by every person whose name has been mentioned in the prospectus as a
director or proposed director or the assigned attorney on his behalf.
Delivery of copy of the prospectus to the registrar
As per section26(6) of the Companies Act 2013, the prospectus should mention that its copy has
been delivered to the registrar on its face. The statement should also mention the document
submitted to the registrar along with the copy of the prospectus.

34
Registration of prospectus
Section26(7) states about the registration of a prospectus by the registrar. According to this section,
when the registrar can register a prospectus when:
• It fulfils the requirements of this section, i.e., section 26 of the Companies Act, 2013; and
• It contains the consent of all the persons named in the prospectus in writing.
Issue of prospectus after registration
If a prospectus is not issued before 90 days from the date from which a copy was delivered before
the registrar, then it is considered to be invalid.

Issue of Shares
Primarily, issues can be classified as a Public, Rights or preferential issues (also known as private
placements). While public and rights issues involve a detailed procedure, private placements or
preferential issues are relatively simpler.
Chapter III of the Companies Act, 2013 deals with “Prospectus and allotment of securities”, the
chapter is divided into two parts, Part I deals with Public Offer and Part II deals with Private
Placement. Section 23 of the Companies Act, 2013 provides that a company whether public or
private may issue securities. A public company may issue securities:
(a) to public through prospectus ("public offer") by complying with the provisions of Part I of
Chapter III of the Act; or
(b) through private placement by complying with the provisions of Part II of Chapter III of the Act;
or
(c) through a rights issue or a bonus issue in accordance with the provisions of this Act and in case
of a listed company or a company which intends to get its securities listed also with the provisions
of the SEBI Act, 1992 and the rules and regulations made thereunder.
For a private company the section provides that a private company may issue securities (a) by way
of rights issue or bonus issue in accordance with the provisions of this Act; or (b) through private
placement by complying with the provisions of Part II Chapter III of the Act. The section deals with
issue of securities, which is a wider term not restricted to equity, preference or debentures.

What Constitutes Public Offer and Private Placement?

Primarily, issues can be classified as a Public, Rights or preferential issues (also known as private
placements). While public and rights issues involve a detailed procedure, private placements or
preferential issues are relatively simpler.

35
Chapter III of the Companies Act, 2013 deals with “Prospectus and allotment of securities”, the
chapter is divided into two parts, Part I deals with Public Offer and Part II deals with Private
Placement.
Public Offer here includes initial public offer (IPO) or further public offer (FPO) of securities to the
public by a company, or an offer for sale (OFS) of securities to the public by an existing
shareholder, through issue of a prospectus.
Explanation III to Section 42(3) along with the rules framed thereunder provide that if a company,
listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an
agreement to allot, securities to more than 200 persons in a financial year, whether the payment for
the securities has been received or not or whether the company intends to list its securities or not on
any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the
public. Thus, we may say that if any company invites subscription or allots any security to 200 or
more persons in a financial year, it will be said to have made a public offer.
However, while counting the aforesaid figure of 200 persons, the following shall not
be taken into account:
1. Qualified institutional buyers;
2. Employees, who are offered securities under a scheme of employees stock
option as per provisions of section 62(1)(b).
PRIVATE PLACEMENT OF SHARES As per Explanation I to Section 42(3), "private
placement" means any offer or invitation to subscribe or issue of securities to a select group of
persons by a company (other than by way of public offer) through private placement offer-
cumapplication, which satisfies the conditions specified in this section.
Private Placement Offer – cum Application Section 42(1) provides that a company may, subject to
the provisions of this section, make a private placement of securities. Section 42(3) reads, a
company making private placement shall issue private placement offer and application in such form
and manner as may be prescribed to identified persons, whose names and addresses are recorded by
the company in such manner as may be prescribed. The private placement offer and application shall
not carry any right of renunciation. Maximum number of persons to whom offer can be made and
other incidental matters As per section 42(2), a private placement shall be made only to a select
group of persons who have been identified by the Board (herein referred to as "identified persons"),
whose number shall not exceed fifty or such higher number as may be prescribed [excluding the
qualified institutional buyers and employees of the company being offered securities under a scheme
of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a
financial year subject to such conditions as may be prescribed. "qualified institutional buyer" has

36
been defined under the section to mean that the qualified institutional buyer as defined in the SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended from time to time.

Allotment
The allotment of shares under the Companies Act 2013 refers to the process by which a company
issues and allocates its shares to shareholders. In simpler terms, it is the distribution of shares among
individuals who have applied for them.
Statutory restrictions on allotment
I.Minimum subscription and application money [S. 39].—The first requisite of a valid allotment is
that of minimum subscription. When shares areoffered to the public, the amount of minimum
subscription has to be statedin the prospectus.
II.Shares to be dealt in on stock exchange [S. 40].—Every company intending to offer shares or
debentures to the public by the issue of a prospectus has to make an application before the issue to
any one or more of the recognised stock exchanges for permission for the shares or debenturesto be
dealt with at the exchange.

An effective allotment has to comply with the requirements of the law of contract relating to
acceptance of an offer.
1. Allotment by proper authority—In the first place, an allotment must be made by a resolution of
the Board of directors. "Allotment is a duty primarily falling upon the directors", and this duty
cannot be delegated except in accordance with the provisions of the articles.
2. Within reasonable time.—Secondly, allotment must be made within a reasonable period of time,
otherwise the application lapses. What is reasonable time must remain a question of fact in each
case.
3. Must be communicated—Thirdly, the allotment must be communicated to the applicant.
4. Absolute and unconditional—Allotment must be absolute and in accordance with the terms and
conditions of the application, if any.

Statutory restrictions on allotment

I. Minimum subscription and application money [S. 39].—The first requisite of a valid allotment is
that of minimum subscription. When shares are offered to the public, the amount of minimum
subscription has to be stated in the prospectus. No shares can be allotted unless at least so much
amount has been subscribed and the application money, which must not be less than five per cent
SEBI may prescribe different percentage of the nominal value of the share, has been received in by
cheque or other instrument.

37
If the minimum subscription has not been received within 30 days of the issue of the prospectus, or
such other period as may be specified by SEBI, the amount received is to be returned within such
time and manner as may be prescribed. [S. 39(3)] Application money can be appropriated towards
allotment or it has to be refunded. It cannot be adjusted towards any claim of the company against
the applicant."
Return ofallotment [S. 39(4)].—Where a company having a share capital makes an allotment of
securities, it has to file with the Registrar a return of allotment in such manner as may be prescribed.
Penalty for default [S. 39(5)].—In case of any default, the company and its officer who is in default
is liable to a penalty for each default of Rs 1000 for each day during which the default continues or
Rs 1,00,000 whichever is less.
2. Shares to be dealt in on stock exchange [S. 40].—Every company intending to offer shares or
debentures to the public by the issue of a prospectus has to make an application before the issue to
any one or more ofthe recognised stock exchanges for permission for the shares or debentures to be
dealt with at the exchange." The requirement is not merely to apply but also to obtain permission.
The name or names of the stock exchanges to which the application has been made must also be
stated in the prospectus. It is a condition precedent for listing permission that the application money
is deposited in a separate bank account and is to be used only for adjustment against allotment of
securities if the securities have been permitted to be dealt with in the exchange or exchanges
specified in the prospectus. Otherwise the money has to be used for repayment to applicants within
the time specified by SEBI, if the company is for any other reason is unable to allot securities."
[S.40(3)]

Transfer of Shares
Section 44 empowers every shareholder to transfer his shares in the manner laiddown in the Articles
and in accordance with the various provisions of law. However,a private company is statutorily
under obligation to place certain restrictions on the right of its members to transfer shares. One of
the most common restrictions on transfer of shares in a private company is the “Pre-emption
clause”, which states thatthe intending transferor must offer his shares to the existing members of
the company, before offering them to non-members, so long as a member can be found to purchase
them at a fair price to be determined in accordance with the Articles.
In the case of public companies also, there may be some restrictions on the right of members to
transfer shares. It provides that the Board ofdirectors may refuse to register the transfer of partly
paid shares to a person of whom they do not approve. Further, the Board of directors may refuse to
register the transfer of any share on which the company has a lien. Regulation 21 also envisages
certain conditions which may be introduced by a company in its Articles to restrict transfer of

38
shares. It provides that the Board may also decline to recognise any instrument of transfer unless: (a)
the instrument of transfer is in the form as prescribed in rules made under sub-section (1) of section
56; (b) the instrument of transfer is accompanied by the certificate of the shares to which it relates
and suchother evidence as the Board may reasonably require to show the right of the transferor to
make the transfer; and (c) the instrument of transfer is in respect of only one class of shares.
Right of a shareholder to transfer his share is always subject to provisions in Articlesof Association -
Mathrubhumi Printing and Publishing Co. Ltd. v. Vardhaman
Publishers Ltd. [1992].
As per Section 56, a company is required, within one month after the application oftransfer, to
deliver the share certificates duly transferred. Where the Articles of association of a company give
power to the Board to refuse registration of a transfer of shares such power must be exercised by a
resolution of the Board. The Board may refuse to register the transfer as long as they are acting in
the interests of the company, but if they exercise their discretion to refuse malafide, i.e., they act
oppressively, or corruptly, Tribunal will interfere and order registration.
Section 56 has laid down the following procedure for effecting transfer of shares:
1. A company shall not register a transfer of securities of the company unless a proper instrument of
transfer, in such form as may be prescribed, duly stamped, dated and executed by or on behalf of the
transferor and the transferee and specifying the name, address and occupation, if any, of the
transferee has been delivered to the company by the transferor or the transferee.
2. The instrument of transfer, as aforesaid, must have been delivered to the company within a period
of sixty days from the date of execution.
3. The instrument of transfer must be accompanied by the certificate relating to the securities, or if
no such certificate is in existence, along with the letter of allotment of securities.
However, where the instrument of transfer has been lost or the instrument of transfer has not been
delivered within the prescribed period, the company may register the transfer on such terms as to
indemnity as the Board may think fit.

Forfeiture of Shares
A company’s articles usually contain a power for it to forfeit the shares of a member
who fails to pay calls or instalments of the issue price of his shares within a certain
time after they fall due. A company’s articles usually contain a power for it to forfeit the shares of a
memberwho fails to pay calls or instalments of the issue price of his shares within a certain time
after they fall due.
The following rules may be noted in connection with forfeiture of shares :

39
1. In accordance with the Articles - The forfeiture to be valid must be inaccordance with the
provisions contained in the Articles.
2. Proper Notice - Before the shares of a member are forfeited, a proper noticeto that effect must
have been served.
3. Resolution for Forfeiture - If the defaulting shareholder does not pay the amount within the
specified time as required by the notice, the directors may pass a resolution forfeiting the shares.
4. Power of forfeiture must be exercised bona fide and in good faith - The power to forfeit is in the
nature of the trust and must therefore be exercised bonafide and for the benefit of the company.
Fully paid-up shares can also be forfeited in cases like default in fulfilling any engagement between
the members or expulsion of members, where the articles specifically provide therefor - Shyam
Chand v. Calcutta Stock Exchange Assn.
The effect of forfeiture of shares is as follows :
1. Cessation of membership - A person whose shares have been forfeited ceases to be a member in
respect of the forfeited shares.
2. Cessation of liability - The liability of the person whose shares have been forfeited ceases if and
when the company receives payment in full of all such money in respect of the shares forfeited.
3. Liability as past member - The former holder shall remain liable as a past member to pay calls if
liquidation takes place within one year of the forfeiture.

Debenture
Section 2(30) of the Companies Act, 2013 defines the term ‘debenture’ as follows:
“Debenture includes debenture stock, bonds or any other instrument of a company evidencing a
debt, whether constituting a charge on the assets of the company or not.”
Debenture means a document which either creates a debt or acknowledges it, and any document
which fulfils either of those conditions is a debenture.
As per Section 44 of the Act, the debentures of the Company are movable property which will be
transferable as per the provisions given in the Articles of Association of the company.’ As per the
provisions Section 56, securities will be transferable vide Form SH-4. Transferability is governed
by the provisions of the Articles of Association.
Fixed and Floating Charge
Section 2(16) of the Companies Act, 2013 provides that for the purposes of registration under the
Act, “charge includes mortgage”. In the context of advances to companies a charge may be
classified as: (i) a fixed charge, and (ii) a floating charge.
Fixed charge: A charge is fixed when it is made specifically to cover definite and ascertained
assets of permanent nature such as land, building or heavy machinery. A fixed charge passes legal

40
title to certain specific assets, and the company loses the right to dispose of the property
unencumbered, though the company retains possession of the property. In other words, the creation
of fixed charge precludes the company from selling the property charged without the consent of the
charge holder. Floating charge: The floating charge, as a type of security, is peculiar to companies
as borrowers. It is a charge on a class of assets, which may be present or future, and which changes
from time to time in the ordinary course of business, e.g., stock-in-trade. The company can deal
with the property subject to a floating charge in any manner it likes. It has not to seek permission
from the lender of money for disposing it of or converting it into some other assets.
The governing idea of a floating security is to allow a company to carry on its business in the
ordinary course, as if no charge has been created. Thus, the company deals with its property so
charged in any manner it likes until the charge “attaches” or becomes “fixed” or “crystallises”.
Characteristics of a floating charge :
The characteristics of a floating charge are :
1. it is a charge on a class of assets, present and future;
2. the class of assets charged is one which in the ordinary course of business, is changing from time
to time;
3. until some steps are taken to enforce the charge, the company may continue to deal with the
assets charged in the ordinary course of business.

Kinds of debenture
1. Redeemable debentures.—Dehentures are generally redeemable. This means that on expiry of
the term of the loan the company has the right to pay back the debenture-holders and have its
properties released from the mortgage or charge. This is called redemption of debentures.
Redeemed debentures can be re-issued. If there is no provision to the contrary in the articles, or in
the conditions of the issue or if there is no resolution showing an intention to cancel the redeemed
debentures, the company has the power to keep the debentures alive for the purpose of re-issue.The
company may re-issue the same debentures or other debentures in their place. Upon such re-issue
the person entitled to the debentures has the same rights and prior ities as if the debentures had
never been redeemed.
2. Convertible debentures [S. 71(1)].—A company may issue debentures with an option to convert
them into shares, either wholly or partly at the time of redemption. Debentures with such option can
be issued with the approval of a special resolution passed at a general meeting.
3. Perpetual debentures.—A debenture which contains no clause as to payment or which contains a
clause that it shall not be paid back is known as a perpetual or irredeemable debenture.

41
4. Debentures to registered holder and bearer debentures:—A company which has issued
debentures will obviously maintain a register of its debenture-holders, as Section 88 provides that
every company shall keep a register of the holders of its debentures. The name of the holder is
placed both on the debenture certificate and on the company's register. Such a holder is known as
the registered holder. He can transfer his debentures in the open market in just the same way as
shares are transferred." Transfer will have to be registered with the company. The transferee's title
will be subject to all equities between the transferor and the company. Registration of transfer can
be avoided only by issuing debentures payable to bearer, as the company has not to maintain a
register of such debenture-holders. Such debentures are transferable, like negotiable instruments, by
simple delivery and are called debentures payable to bearer

Investment of a Company
As per Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, the Debenture
Trustee shall communicate promptly to the debenture-holders defaults, if any, with regard to
payment of interest or redemption of debentures and action taken by the trustee therefor. Besides,
he will appoint a nominee director on the Board of the company in the event of two consecutive
defaults in payment of interest to the debenture holders or default in redemption of debentures.
Again, section 71 provides that where a company fails to redeem the debentures on the date of their
maturity or fails to pay interest on the debentures when it is due, the Tribunal may, on the
application of any or all of the debenture-holders, or debenture trustee and, after hearing the parties
concerned, direct, by order, the company to redeem the debentures forthwith on payment of
principal and interest due thereon [Section 71(10)].
If any default is made in complying with the order of the Tribunal under this section, every officer
of the company who is in default shall be punishable with imprison ment for a term which may
extend to three years or with fine which shall not be less than two lakh rupees but which may
extend to five lakh rupees, or with both [Section 71(11)].
According to sub-section (1) of section 187, all investments made or held by a company in any
property, security or other asset shall be made and held by it in its own name. However, a company
may hold any shares in its subsidiary company in the name of any nominee or nominees of the
company, if it is necessary to do so, to ensure that the number of members of the subsidiary
company is not reduced below the statutory limit.
The requirement that the investments made by the company must be held in its own name is
confined to only those investments which are made by it on its own behalf. If the company makes
investments on behalf of someone else, such investments need not be held in its own name. Thus,
where the company is a trustee, the investment is supposed to be made on behalf of the

42
beneficiaries of the trust and not on its own behalf. In such a case, there should be no objection to
the investments being made by the company as the trustee but held in the name of the beneficiaries.
Conversely, the mere fact that the trustee chooses to hold the shares in its own name cannot give
rise to any legal inference that the trustee had made the investments on its own behalf. In terms of
the provisions of section 187(2), section 187(1) does not prevent a company : (a) from depositing
with a bank, being the bankers of the company, any shares or securities for the collection of any
dividend or interest payable thereon; or
(b) from depositing with, or transferring to, or holding in the name of, the State Bank of India or a
scheduled bank, being the bankers of the company, shares or securities, in order to facilitate the
transfer thereof. But, if within a period of six months from the date on which the shares or securities
are transferred by the company to, or are first held by the company in the name of, the State Bank
of India or a scheduled bank as aforesaid, no transfer of such shares or securities takes place, the
company shall, as soon as practicable after the expiry of that period, have the shares or securities re-
transferred to it from the State Bank of India or the scheduled bank or, as the case may be, again
hold the shares or securities in its own name; or
(c) from depositing with, or transferring to, any person any shares or securities, by way of security
for the repayment of any loan advanced to the company or the performance of any obligation
undertaken by it; or
(d) from holding investments in the name of a depository when such investments are in the form of
securities held by the company as a beneficial owner.
Thus, it is not necessary for the company to hold the shares or stocks or debentures in its own name
if they are deposited with the bank as aforesaid.
Where any shares or securities in which investments have been made by a company are not held by
it in its own name, the company shall maintain a register which shall contain such particulars as
may be prescribed and such register shall be open to inspection by any member or debenture-holder
of the company without any charge during business hours subject to such reasonable restrictions as
the company may by its articles or in general meeting impose.
PENALTY - If a company contravenes the provisions of this section, the company shall be
punishable with fine which shall not be less than twenty-five thousand rupees but which may extend
to twenty-five lakh rupees and every officer of the company who is in default shall be punishable
with imprisonment for a term which may extend to six months or with fine which shall not be less
than twenty five thousand rupees but which may extend to one lakh rupees, or with both.

43
Inter - Corporate Loans
Section 186 of the Companies Act, 2013 contains provisions with respect to inter corporate loans
and investments. Section 186 provides as follows :
(1) Investments not through more than two layers of investment companies (Sec. 186(1)) - A
company shall unless otherwise prescribed, make investment through not more than two layers of
investment compa nies1 . However, a company may acquire any other company incorporated in a
country outside India if such other company has investment subsidiaries beyond two layers as per
the laws of such country; Again, a subsidiary company may have any investment subsidiary for the
purposes of meeting the requirements under any law or under any rule or regulation framed under
any law for the time being in force.
(2) Ceiling on loans, guarantees, investments, etc. - Section 186(2) provides that no company shall
directly or indirectly — (a) give any loan to any person2 or other body corporate; (b) give any
guarantee or provide security in connection with a loan to any other body corporate or person2 ; and
(c) acquire by way of subscription, purchase or otherwise, the securities of any other body
corporate, exceeding sixty per cent of its paid-up share capital, free reserves and securities
premium account or one hundred per cent of its free reserves and securities premium account,
whichever is more. Approval by way of special Resolution - Where the aggregate of the loans,
investment, guarantee or security so far made or provided to or in all other bodies corporate along
with the investment, loan, guarantee or security proposed to be made or given by the Board, exceed
the limits specified under sub-section (2), no investment or loan shall be made or guarantee shall be
given or security shall be provided unless previously authorised by a special resolution passed in a
general meeting. However, where a loan or guarantee is given or where a security has been
provided by a company to its wholly owned subsidiary company or a joint venture company, or
acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the
securities of its wholly owned subsidiary company, passing of special resolution shall not be
necessary. Further, the company must disclose the details of such loans or guarantee or security or
acquisition in the financial statement as provided under sub section (4).
(3) A company, which is registered under section 12 of the Securities and Exchange Board of
India Act, 1992 and covered under such class or classes of companies as may be prescribed, shall
not take inter-corporate loan or deposits exceeding the prescribed limit and such company shall
furnish in its financial statement the details of the loan or deposits [Sub-section (6)].
(4) Disclosure in financial statement - The company shall disclose to the members in the financial
statement the full particulars of the loans given, investment made or guarantee given or security

44
provided and the purpose for which the loan or guarantee or security is proposed to be utilised by
the recipient of the loan or guarantee or security [Sub-section (4)].
(5) Unanimous resolution of the Board and approval of the public financial institutions- No loan
or investment shall be made or guarantee or security given by the company in pursuance of sub-
section (2) unless the resolution sanctioning it is passed at a meeting of the Board with the consent
of all the directors present at the meeting and where any term loan is subsisting, the prior approval
of the concerned public financial institution is obtained [Sub section (5)]. No prior approval of a
public financial institution shall be required where the aggregate of the loans and investments so far
made, the amount for which guarantee or security so far provided to or in all other bodies corporate,
along with the investments, loans, guarantee or security proposed to be made or given does not
exceed— sixty per cent of its paid-up share capital, free reserves and securities premium account,
or one hundred per cent of its free reserves and securities premium account, whichever is more,
and there is no default in repayment of loan instalments or payment of interest thereon as per the
terms and conditions of such loan to the public financial institution.
(6) Rate of interest - No loan shall be given under this section at a rate of interest lower than the
prevailing yield of one-year, three-year, five-year or ten-year Government Security closest to the
tenor of the loan [Sub-section (7)].
Penalty - If a company contravenes the provisions of this section, the company shall be punishable
with fine which shall not be less than twenty five thousand rupees but which may extend to five lakh
rupees and every officer of the company who is in default shall be punishable with imprisonment for
a term which may extend to two years and with fine which shall not be less than twenty-five
thousand rupees but which may extend to one lakh rupees

45
Unit III: Directors and Meetings

DIRECTORS
The Companies Act 2013 does not contain an exhaustive definition of the term “director”.
Section 2(34) of the Act prescribed that “director” means a director appointed to the Board of
a company. Section 2(10) of the Companies Act, 2013 defined that “Board of Directors” or
“Board”, in relation to a company, means the collective body of the directors of the company.
The term ‘Board of Directors’ means a body duly constituted to direct, control and supervise
the affairs of a company. As per Section 149 of the Companies Act, 2013, the Board of
Directors of every company shall consist of individual only. Thus, no body corporate,
association or firm shall be appointed as director. Again Section 166 (6) of Companies Act,
2013, prohibits assignment of office of director to any other person. Any assignment of office
made by a director shall be void.
As per Section 153 of the Act, every individual intending to be appointed as director of a
company shall make an application electronically in Form DIR-3 for allotment of Director
Identification Number to the Central Government along with the prescribed fees.

TYPES OF DIRECTORS
A director so appointed may either be executive director or non-executive director. An
Executive Director can be either a Whole-time Director of the company (i.e., one who devotes
his whole time of working hours to the company and has a significant personal interest in the
company as his source of income), or a Managing Director (i.e., one who is employed by the
company as such and has substantial powers of management over the affairs of the company
subject to the superintendence, direction and control of the Board). They are generally
responsible for overseeing the administration, programs and strategic plan of the organization.
Other key duties include fund raising, marketing, and community out reach. The position
reports directly to the Board of Directors. In contrast, a non-executive Director is a Director
who is neither a Whole-time Director nor a Managing Director. A director to the Board may
be appointed as
1. First Director
Section 152 of the Act provides for the appointment of first directors, accordingly, where there is
no provision made in Articles of Association of the company for appointment of first directors
then the subscribers to the memorandum who are individuals shall be deemed to be the first
directors of the company until the directors are duly appoint

46
2. Resident Director
Section 149(3) provides that every company shall have at least one director who has
stayed in India for a total period of not less than one hundred and eighty-two days during
the financial year Provided that in case of a newly incorporated company the requirement
under this sub-section shall apply proportionately at the end of the financial year in which it
is incorporated.
3. Women Director
Second proviso to section 149(1) read along with Rule 3 of Companies (Appointment and
Qualifications of Directors) Rules, 2014 require appointment of at least one woman director
on the Board of the following class of companies –
i. every listed company;
ii. every other public company having -
iii. paid-up share capital of one hundred crore rupees or more; or
iv. turnover of three hundred crore rupees or more
4. Alternate Director :

Section 161(2) of the Act empowers the Board of directors ofa company may, if so
authorised by its articles or by a resolution passed by thecompany in general meeting,
appoint an alternate director to act for a director duringhis absence for a period of not less
than three months from India. However, a personholding any alternate directorship for
any other director in the company shall not beappointed. Again, a person who is
already a director of the company cannot beappointed asan alternate director for
another director in the same company. No personshall be appointed as an alternate director
for an independent director unless he isqualified to be appointed as an independent director
under the provisions of this Act. An alternate director is not an agent of the original
director.

5. Additional Director :
Section 161(1) of the Companies Act, 2013, provides that the articles of a company may
confer on its Board of Directors the power to appoint any person, other than a person who
fails to get appointed as a director in a general meeting, as an additional director at any time
who shall hold office up to the date of the next annual general meeting or the last date on
which the annual general meeting should have been held, whichever is earlier. In case of
default in holding annual general meeting, the additional director shall vacate his office on
the last day on which the annual general meeting ought to held. A person who fails to get
47
appointed as a director in a general meeting cannot be appointed as Additional Director.

48
6. Small Shareholder Director
According to section 151 of the Act every listed company may have one director
elected by such small shareholders in such manner and on such terms and conditions as
may be prescribed. “Small shareholder” means a shareholder holding shares of nominal
value of not more than twenty thousand rupeesor such other sum as may be prescribed.

7. Nominee Director
Section 161(3) of the Companies Act, 2013, provides that subject to the articles of a
company, the Board may appoint any person as a director nominated by any institution
in pursuance of the provisions of any law for the time being in force or of any
agreement or by the Central Government or the State Government by virtue of its
shareholding in a Government company

8. Casual Vacancy
Section 161(4) provides that If any vacancy is caused by death or resignation of a
director appointed by the shareholders in General meeting, before expiry of his term,
the Board of directors can appoint a director to fill up such vacancy. The appointed
director shall hold office only up to the term of the director in whose place he is
appointed. Section 161(4) in the case of a public company, if the office of any director
appointed by the company in general meeting is vacated before his term of office
expires in the normal course, the resulting casual vacancy may, in default of and
subject to any regulations in the articles of the company, be filled by the Board of
Directors at a meeting of the Board which shall subsequently approved by the
members in the immediate next general meeting. The person so appointed shall hold
office only upto the day upto which the director in whose place he has been
appointed, would have held office if he had not vacated as aforesaid. Where a person
appointed by the Board vacates his office it is not a case of casual vacancy and cannot
be filled by the Board in the place.

9. Independent director
Independent Directors under the Companies Act, 2013:
Every listed public company is to have at least one-third of the total number of
directors as independent directors. The Central Goverrunent may prescribe the
minimum number of independent directors in a class or classes of public companies.

49
They act as a check on the decisions of the board of directors, especially in companies
where a significant shareholding is concentrated in the hands of a few.

Definition:

1. Section 149(6) of the Companies Act, 2013 defines an Independent

Director as a director other than a managing director, whole-time
director, or nominee director, who is not related to the company, its
promoters, or its management in any material way and who possesses
the integrity and relevant expertise.

Appointment:

1. Independent Directors are appointed by the shareholders of the

company based on the recommendation of the Nomination and
Remuneration Committee.
2. They serve a maximum term of 5 years, which can be renewed for
another 5 years.

Roles and Responsibilities:

1. Corporate Governance: Ensuring that the company's activities are

aligned with ethical standards and principles.
2. Objective Decision-Making: Act impartially, making decisions that
are in the best interests of the company and its stakeholders.
3. Board Committees: Serve on various committees such as the Audit
Committee, Stakeholders Relationship Committee, etc.
4. Review and Oversight: Review and critically evaluate the company's
financial statements, management performance, and internal controls.
5. Conflict Resolution: Mediate in conflicts of interest that may arise
between management and shareholders.
6. Compliance and Legal Compliance: Ensure that the company
complies with all relevant laws and regulations.

Independence Criteria:

50
 1. Section 149(6) lays down specific criteria that define the independence
of directors, including financial and non-financial aspects.
2. Independent Directors must not have any pecuniary relationship with
the company, its promoters, or its management.

Remuneration:

1. Independent Directors are entitled to remuneration, but they cannot

participate in stock option plans and are not eligible for performance-
based incentives.

Liabilities and Duties:

1. Independent Directors are held to the same duties, responsibilities, and

liabilities as other directors, but they are protected from certain civil
liabilities if they have acted diligently.

Training and Familiarization:

1. The company should provide independent directors with adequate

orientation and familiarization programs to help them understand the
company's operations and their roles.

Code of Conduct:

1. Independent Directors are required to adhere to a Code of Conduct, as

per Schedule IV of the Companies Act, which outlines ethical and
professional standards.

Removal:

1. They can be removed by an ordinary resolution passed by shareholders,

but the company must follow due process.

51
Important Sections
Section 149(6) - Definition of Independent Director:

1. This section provides the legal definition of an Independent Director.

According to this section, an Independent Director is a director of the
company who is not related to the company, its promoters, or its
management in any material way. The key elements of this definition
include:
1. Not Related: Independent Directors should not have any
significant financial or familial ties with the company or its
management that could compromise their impartiality.
2. Material Way: The term "material way" implies that the
director should not have any substantial relationship or
transaction that could influence their independence.
3. Integrity and Expertise: Independent Directors are expected
to possess the integrity and relevant expertise to contribute
effectively to the board's decision-making process.

Section 149(8) - Criteria for Independence:

1. This section lays down the specific criteria that determine the
independence of directors. These criteria are meant to ensure that
Independent Directors maintain a certain level of autonomy and
objectivity. Some key criteria include:
1. Not being a promoter of the company or its holding, subsidiary,
or associate company.
2. Not being related to promoters or directors in a way that could
compromise independence.
3. Not having any pecuniary relationship with the company, its
promoters, or its management during the preceding three years.
4. Not having received remuneration, other than sitting fees, from
the company or its holding, subsidiary, or associate company.

Section 149(10) - Term of Office and Conditions for Reappointment:

52
 1. This section stipulates that Independent Directors can serve a
maximum of two consecutive terms of five years each. After this, they
must take a break of three years before they can be reappointed. The
intent is to bring fresh perspectives to the board and prevent the
entrenchment of directors.

Section 149(11) - Duties and Responsibilities:

Section 149(11) outlines the duties and responsibilities of Independent

Directors, which include:

1. Safeguarding the interests of the company and its stakeholders.

2. Reviewing the performance of management.
3. Ensuring that the company's financial statements are accurate
and transparent.
4. Overseeing the effectiveness of internal control systems.
5. Monitoring compliance with laws and ethical standards.

Section 149(12) - Code of Conduct:

1. This section refers to Schedule IV of the Companies Act, which

contains a Code of Conduct for Independent Directors. The code
outlines ethical and professional standards that Independent Directors
are expected to follow, including acting in an ethical manner, being
diligent, and maintaining confidentiality.

Section 150 - Appointment of Alternate Directors:

1. This section deals with the appointment of alternate directors for

Independent Directors. In case an Independent Director is unable to
attend board meetings or fulfill their duties for a specific period, they
can appoint an alternate director to act on their behalf, subject to
certain conditions.

Section 152(6) - Removal of Independent Directors:

53
 1. This section explains the process for the removal of Independent Directors.
They can be removed by an ordinary resolution passed by shareholders, but
the company must follow due process and provide an opportunity for the
director to be heard.

These sections collectively define the roles, qualifications, and responsibilities of

Independent Directors, ensuring that they play a vital role in promoting corporate
governance, transparency, and accountability in Indian companies. Independent Directors
are a critical component of the corporate governance framework, and these legal
provisions help maintain their independence and effectiveness.

LEGAL POSITION OF DIRECTORS

It is really difficult to explain as to what is the exact legal position of directors in a company.
There are certain explanations given by the judges for defining directors, sometimes as agents,
sometimes as trustees, and sometimes as managing partners. They are the persons who are duly
appointed by the company for the purpose of directing and managing the company’s affairs. All
the expressions to which directors are referred, like agents, trustees, etc., are not exhaustive of
their powers and responsibilities. It was observed in the case of Ram Chand & Sons Sugar Mills
Pvt. Ltd. v. Kanhayalal Bhargava(1966), that it is really difficult to exactly explain the legal
position of directors in a company. Judges have summarised it as a multi-dimensional position
which is held in the capacities of an agent, trustee, or manager, even though these terms don’t
hold the same meaning in a true legal sense.

1. Directors as an agent

As discussed, a company cannot act by itself in its own capacity. It would always need
someone to act on its behalf. A company can only act through directors, and this hence
makes it a principal and agent relationship. This relationship gives the directors the
power to act and make decisions on behalf of the company. Any contract or transaction
made on behalf of the company makes the company liable and not the directors. No
liability occurs upon the directors, they only sign and make contracts on the company’s
behalf.

In the case of Ferguson v. Wilson (1904), it was established that the directors are the
agents of the company. This was established in the eyes of the law that a company
cannot work as an artificial person in its own capacity that’s why it needs an agent to
54
operate. In the case of Ray Cylinders & Containers v. Hindustan General Industries
Limited (1998), it was noticed that directors are the agents of the company but not of the
members of the company. This means that the directors are the agents of the company
and not its individual members, except in the case where the relationship between the
two arises out of special facts. A company is a different legal entity apart from its
members, i.e., shareholders.

In the case of Kirlampudi Sugar Mills Ltd. v. G. Venkata Rao [2003], it was noticed
that if the CEO of the company executes a promissory note and borrows money from
outside for the company’s use, it cannot be said that he has borrowed money for himself.
Even if the company fails to pay the amount promised, there shall incur no liability on
the one who borrowed money as an agent of the company. However, in the case of H.P.
State Electricity Board v. Shivalik Casting (P.) Ltd. [2003], it was established that if a
director gives surety in his own capacity/personal capacity and not for and/or on behalf
of the company, then the company cannot be sued for the amount of surety. There were
some circumstances that were pointed out in the case of Vineet Kumar Mathur v.
Union of India [1996] in which the directors incurred liability on themselves-

1. In cases where directors contract in their own names rather than the company.

2. In cases where directors omit or use the company’s name incorrectly.

3. In cases where directors sign the contracts or agreements in such a manner that it
is not evident whether it is the company (principal) or the director (agent) who is
signing and who shall be liable for future circumstances.

4. In cases where directors exceed the allowed limit and borrow in excess of funds.
There are ways in which unauthorised actions can be ratified. In Bhajekar v. Shinkar
[1933], it was mentioned that if a transaction made by the director exceeds the power
given to him but falls within the ambit of the power held by the company, then it can be
ratified by passing a resolution of the company. However, if the company has been
struck off by the registrar and dissolved, then it cannot ratify its actions. This is because
a non-existent entity cannot initiate action in the first place.

2. Director as a trustee

In a company, a director is regarded as a trustee as well. A director is known as a trustee

because he administers the assets and works toward the interests of the company. A
trustee is someone who can be entrusted with the company’s assets and performs
55
towards achieving the company’s goals rather than for their personal advantage. Besides
these, a trustee is given powers like allotment of shares, making calls, accepting or
rejecting transfers, etc., which are known as powers in trust. In the case of Dale &
Carrington Investment (P.) Ltd. v. P.K. Prathapan [2004], it was noticed that the
directors have to act within their fiduciary capacity, which means that they have a duty
to act on behalf of the company with the utmost care, skill, good faith, and due diligence,
most importantly towards the interests of the company that they are representing.

As observed by the Madras High Court in the landmark case of V.S. Ramaswami Iyer
v. Brahmayya and Co. (1966), the directors can be rendered liable as trustees with
reference to their power to apply funds of the company. A director may misuse these in
many ways. Due to this, if legal action is taken against a director with reference to the
mentioned offence, then the cause of action will survive even after the death of the
director against his legal representative. In both the cases of Percival v. Wright
(1902) and Peskin v. Anderson (2001), it was held that the directors of a company owe
their duty to the company as a whole, and are not trustees for individual shareholders or
owe them a fiduciary duty merely by virtue of their offices. They may purchase their
shares without disclosing pending negotiations for the sale of the company’s
undertaking.

3. Director as a managing partner

The directors of a company represent the shareholders’ will and wants. They tend to act
on behalf of the shareholders and their goals. Due to this, they enjoy vast powers and can
perform many functions that are proprietary in nature. Due to the provisions mentioned
in the MOA and AOA of the companies, the board of directors acts as the supreme
policy and decision-making authority.

4. Director as an employee/officer

Shareholders elect directors in a general meeting held by the company. Once the director
is elected, he then enjoys the rights and powers that are given to him as per the Act.
These powers and rights cannot be taken away by the shareholders and they cannot
interfere in the decision-making of the directors as such. Since directors possess such
powers and rights, they cannot be termed employees of the company. This is because
employees have limited authority vested in them and always work under the directions
of the employer and cannot interfere in the employer’s decision-making.
56
 In the case of Lee Behrens & Co., Re [1932], it was seen that it is the shareholders who
elect their representatives who shall engage in directing the affairs of the company on
their behalf. This means that they are acting in the capacity of an agent in this scenario.
It can also be seen that they are not the employees or servants of the company. However,
in the case of R.R. Kothandaraman v. CIT (1957), was held by the Madras High Court
that since there is nothing mentioned in the law, no one can prevent the director from
accepting his position as an employee under a special contract made with the company.

Directors are also treated as an officer in a company for certain matters. They can be
held liable for penalties for failure to comply with the law. To summarize the legal
position of directors in a company, Jessel M.R can be quoted from Forest of Dean Coal
Mining Co., Re [1878], “Directors have sometimes been called as trustees or commercial
trustees, and sometimes they have been called managing partners; it does not matter
much what you call them so long as you understand what their real position is, which is
that they are really commercial men managing a trading concern for the benefit of
themselves and of all the shareholders in it. They stand in a fiduciary position towards
the company in respect of their powers and capital under their control.”

APPPOINTMENT OF DIRECTOR

 Appointment of first directors (section. 152)

Section 152(1) of the Act provides for the appointment of the first directors of the companies.
The first directors hold their offices from the date of formation of the companies.

As per Section 152(1), the Articles of Association of Companies have provisions through which
the companies appoint the first directors. Where the articles do not provide such provisions, the
companies consider the following persons as first directors:

1. One-Person Companies: Individuals being members.

2. In other circumstances: Individuals who subscribe to the Memorandum of

Associations of companies.
The first directors hold their offices until the members appoint directors as per the provisions of
Section 152.

57
Where, for any reason, for example, death, the first directors do not assume their offices, the
subscribers of the Memorandum (who will then be only members) have to convene meetings for
the appointment of directors.

 Appointment of directors at general meetings

According to Section 152(2), the companies appoint directors in general meetings except where
the Act provides otherwise.

However, in the case of public companies, shareholders appoint two-thirds of the total number
of directors. They appoint the remaining one-third of the members as per the Articles of
Association in general meetings.

In the case of Swapan Dasgupta v. Navin Chand Suchanti (1988), the Calcutta High Court held
that the Articles of Association of private companies prescribe methods to appoint directors. If
the articles do not specify such methods, the shareholders appoint directors in general meetings.

 Appointment of Directors by Nomination

Section 161(3) This new sub-section now provides for appointment of Nominee Directors. It
states that subject to the articles of a company, the Board may appoint any person as a director
nominated by any institution in pursuance of the provisions of any law for the time being in
force or of any agreement or by the Central Government or the State Government by virtue of
its shareholding in a Government Company.

 Appointment of Directors in causal vacancy-

Section 161 (4) If any vacancy is caused by death or resignation of a director appointed by the
shareholders in General meeting, before expiry of his term, the Board of directors can appoint a
director to fill up such vacancy. The appointed director shall hold office only up to the term of
the director in whose place he is appointed.

 Appointment of directors to be voted individually

Section 162(1) A single resolution shall not be moved for the appointment of two or more
persons as directors of the company unless a proposal to move such a motion has first been
agreed to at the meeting without any vote being cast against it. A resolution moved in
contravention of aforesaid provision shall be void, whether or not any objection was taken when
it was moved. A motion for approving a person for appointment, or for nominating a person for
58
appointment as a director, shall be treated as a motion for his appointment.

 Appointment of directors by tribunal (section 242)

1) While giving order on an application made under section 241, i.e., for relief in cases of
oppression the Tribunal may provide order for appointment of such numbers of persons
as directors of the company and ask them to report to the Tribunal on matters as the
Tribunal may direct.
2) The directors, so appointed, may or may not be the members of the company.
3) Such directors are not liable to retire by rotation. But they can be removed by the
Tribunal at any time and other persons can be appointed by it in their place.
4) Where the directors have been appointed by the Tribunal, it may also issue such
directions to the company, as it may consider necessary or appropriate in regard to their
affairs.

REMOVAL OF DIRECTORS- SECTION 169

 A company may, remove a director except the director appointed by National Company
Law Tribunal u/s 242, before the expiry of the period of his office after giving him a
reasonable opportunity of being heard after passing the ordinary resolution.
Provided that nothing contained in this sub-section shall apply where the
company has availed itself of the option given to it under section 163 to appoint not less
than two thirds of the total number of directors according to the principle of proportional
representation.

 A special notice shall be required of any resolution, to remove a director under this section,
or to appoint somebody in place of a director so removed, at the meeting at which he is
removed.

 On receipt of notice of a resolution to remove a director under this section, the company
shall forthwith send a copy thereof to the director concerned, and the director, whether or
not he is a member of the company, shall be entitled to be heard on the resolution at the
meeting.

59
 Where notice has been given of a resolution to remove a director under this section and the
director concerned makes with respect thereto representation in writing to the company and
requests its notification to members of the company, the company shall, if the time permits
it to do so,—
a) in any notice of the resolution given to members of the company, state the fact
of the representation having been made; and
b) send a copy of the representation to every member of the company to whom
notice of the meeting is sent (whether before or after receipt of the
representation by the company), and if a copy of the representation is not sent
as aforesaid due to insufficient time or for the company’s default, the director
may without prejudice to his right to be heard orally require that the
representation shall be read out at the meeting.
Provided that copy of the representation need not be sent out and the representation need
not be read out at the meeting if, on the application either of the company or of any other person
who claims to be aggrieved, the Tribunal is satisfied that the rights conferred by this sub-section
are being abused to secure needless publicity for defamatory matter; and the Tribunal may order
the company’s costs on the application to be paid in whole or in part by the director
notwithstanding that he is not a party to it.

 A vacancy created by the removal of a director under this section may, if he had been
appointed by the company in general meeting or by the Board, be filled by the appointment
of another director in his place at the meeting at which he is removed, provided special
notice of the intended appointment has been given under sub-section (2).

 A director so appointed shall hold office till the date up to which his predecessor would
have held office if he had not been removed.

 If the vacancy is not filled under sub-section (5), it may be filled as a casual vacancy in
accordance with the provisions of this Act:
Provided that the director who was removed from office shall not be re-appointed as a
director by the Board of Directors.
Nothing in this section shall be taken— (a) as depriving a person removed under this section of
any compensation or damages payable to him in respect of the termination of his appointment as
director as per the terms of contract or terms of his appointment as director, or of any other
appointment terminating with that as director; or (b) as derogating from any power to remove a
60
director under other provisions of this Act.

BOARD OF DIRECTORS

 The Board of directors of a company is a nucleus, selected according to the procedure

prescribed in the Act and the Articles of Association.
 Members of the Board of directors are known as directors, who unless especially
authorised by the Board of directors of the Company, do not possess any power of
management of the affairs of the company.
 The Board of Directors oversees how the management serves and protects the long-term
interests of all the stakeholders of the company.
 The institution of Board of Directors is based on the premise that a group of trustworthy
people look after the interests of the large number of shareholders who are not directly
involved in the management of the company.
 The position of board of directors is that of trust as the board is entrusted with the
responsibility to act in the best interests of the company. Acting collectively as a Board of
directors, they can exercise all the powers of the company except those, which are
prescribed by the Act to be specifically exercised by the company in general meeting.
 The Board formulate policies and establish organisational set up for implementing those
policies and to achieve the objectives contained in the Memorandum, muster resources for
achieving the company objectives and control, guide, direct and manage the affairs of the
company.

Section 2(10) of the Companies Act, 2013 defines that “Board of Directors” or “Board”, in
relation to a company, means the collective body of the directors of the company. The term
‘Board of Directors’ means a body duly constituted to direct, control and supervise the affairs
of a company.

As per Section 149 of the Companies Act, 2013, the Board of Directors of every company
shall consist of individual only. Thus, no body corporate, association or firm shall be appointed
as director.

61
 BOARD COMPOSITION

 Minimum/Maximum Number of Directors in a Company Section 149(1) of the Companies

Act, 2013 requires that every company shall have a minimum number of
 three directors in the case of a public company,
 two directors in the case of a private company, and
 one director in the case of a One Person Company.

 A company can appoint maximum 15 fifteen directors without any specific compliance. A
company may appoint more than fifteen directors after passing a special resolution in
general meeting.

 The restriction of maximum number of directors shall not apply to section 8

companies. Minimum number of directors;
• Public Company - 3 Directors
• Private Company - 2 directors
• One Person Company (OPC) - 1 Director

 Maximum Number of Director is 15, which can be increased by passing a special

resolution. Section 8 companies can have more than 15 directors.

 Section 149(3) provides that every company shall have at least one director who has
stayed in India for a total period of not less than one hundred and eighty-two days in
the previous calendar year. Further, Second proviso to Section 149(1) read Rule 3 of
Companies (Appointment and Qualification of Directors) Rules, 2014 following class of
companies must have at least one Women Director. Alternate directorship shall also be
included while calculating the directorship of 20 companies.

 Maximum limit on total number of directorship has been fixed at 20 companies and the
maximum number of public companies in which a person can be appointed as a director
shall not exceed ten. The members of a company may, by special resolution, specify any
lesser number of companies in which a director of the company may act as director.

62
 POWERS OF THE BOARD [SECTION. 179]

The Board of Directors of the Company, without the permission of shareholders may exercise
following powers namely:
1. To make calls on shareholders in respect of money unpaid on their shares;
2. To authorize buy-back of securities under section 68;
3. To issue securities, including debentures, whether in or outside India;
4. To borrow monies;
5. To invest the funds of the company;
6. To grant loans or give guarantee or provide security in respect of loans;
7. To approve financial statement and the Board’s report;
8. To diversify the business of the company.
9. To approve amalgamation, merger or reconstruction;
10. To take over a company or acquire a controlling or substantial stake in another company;
11. To make political contributions;
12. To appoint or remove key managerial personnel (KMP);
13. To take note of appointment(s) or removal(s) of one level below the Key Management
Personnel;
14. To appoint internal auditors and secretarial auditor;
15. To take note of the disclosure of director’s interest and shareholding;
16. To buy, sell investments held by the company (other than trade investments), constituting
five percent or more of the paid-up share capital and free reserves of the investee company.
17. To invite or accept or renew public deposits and related matters;
18. To review or change the terms and conditions of public deposit;
19. To approve quarterly, half yearly and annual financial statements or financial results as the
case may be.

RESTRICTION ON POWERS OF THE BOARD [SECTION 180]

The company shall with the consent of the shareholders by way of a special resolution exercise
following powers namely:-
a) To sell, lease or otherwise dispose of the whole or substantially the whole of the
undertaking of the company or where the company owns more than one undertaking, of the
whole or substantially the whole of any of such undertakings.

63
b) To invest otherwise in trust securities the amount of compensation received by it as a result
of any merger or amalgamation;
c) To borrow money, where the money to be borrowed, together with the money already
borrowed by the company will exceed aggregate of its paid-up share capital, free reserves
and securities premium, apart from temporary loans obtained from the company’s bankers
in the ordinary course of business;
d) To remit, or give time for the repayment of, any debt due from a director.

DUTIES OF BOARD OF DIRECTORS

Major corporate failures in recent years, such as Kingfisher, Sahara, and Satyam, have
repeatedly shown the ineffectiveness of the Company Act 1956 in enforcing corporate
governance. Every time, it is the Directors who are responsible for failing to meet Shareholder
expectations and, on occasion, betraying stakeholder sentiments under the guise of charisma,
thereby exploiting corporate mechanisms for personal gain. Companies Act 2013 was passed
almost 50 years after the last amendment to address this challenge. It is founded on the
principles of board accountability, shareholder protection, self-regulation, and transparency by
disclosures.

The 2013 amendment has ensured a number of successful steps by specifically specifying the
Directors' liabilities and duties, as well as the penalties that would be imposed if they are not
followed.

Section 166 of the 2013 Act enumerates the duties of directors, which apply to all categories of
directors, including independent directors.
The following are two broad categories of duties and responsibilities:

1. The roles, liabilities, and obligations that foster corporate governance through directors'
sincere efforts inefficient management and quick resolution of critical corporate issues,
as well as sincere and mature decision-making to avoid unnecessary risks to the
corporate organization and its shareholders.
2. Putting the company's and its stakeholders' interests ahead of personal ones.

The Duties as in section 166 of 2013 Act:

64
 A director must behave in compliance with the company's Articles of Association
 A director must act in the best interests of the company's stakeholders and promote the
company's objectives in good faith.
 A director must exercise impartial judgment in carrying out his responsibilities with due
consideration, ability, and diligence.
 A director should always be mindful of potential conflicts of interest and strive to
prevent them in the best interests of the company
 Before authorizing related party transactions, the Director must ensure that proper
deliberations have to be taken place and that the transactions are in the company's best
interests.
 To ensure that the company's vigilance system and users are not harmed as a result of
such use.
 Confidentiality of confidential proprietary knowledge, business secrets, inventions, and
unpublished prices must be maintained and should not be revealed until the board has
authorized it or the legislation requires it
 A Company's Director can not appoint his or her office, and any such assignment is
invalid.
 If a company director violates the provisions of this section, he or she will be fined not
less than one lakh rupees but not more than five lakh rupees.
 The Companies Act of 2013 also assigns different roles to Independent Directors in
order to ensure the Board's independence and fairness. An Independent Director is a
member of the Board of Directors who does not hold any stock in the company and has
no financial ties to it other than the fees it earns for serving on the board. According to
the Companies Act of 2013, Schedule IV
 Protecting and promoting the interests of all stakeholders, especially minorities
shareholders.
 In the event of a conflict of interest among the stakeholders, acting as a mediator.
 Assistance in delivering an independent and fair decision to the Board of Directors.
 Adequate attention is paid to transactions between related parties.
 Any unethical activity, code of ethics breach, or alleged fraud in the company should be
reported honestly and impartially.

65
 LIABILITIES OF BOARD OF DIRECTORS

For any and all acts prejudicial to the company's interests, the directors may be held jointly or
collectively liable. Despite the fact that the Director and the Company are distinct bodies, the
Director can be held responsible on behalf of the Company in the following situations:

 Directors who fail to make the necessary disclosures under the SEBI (Acquisition of
Shares & Takeovers) Regulations, 1997 and SEBI (Prohibition of Insider Trading)
Regulations, 1992 can face legal action from SEBI.
 Refunding of share application or excess in share application fee
 To pay for qualification shares
 Civil Liability for Prospectus Misrepresentation

 Tax Liability:
Unless a Director or a Former Director can show that the non-recovery or non-payment of
taxes is due to gross negligence or violation of duty, any present or past Director (during the
defaulter's time period) will be liable to pay the tax deficit as well as any penalties.

 The Following are some Criminal Liabilities Associated with Director’s Action:

 Bounced or dishonored checks: Under the Negotiable Instruments Act of 1881, a

Director's signature on a dishonored check may result in criminal charges, in addition to
the company's income tax violations under the 1961 Income Tax Act.
 Also, under the Employees Provident Funds and Miscellaneous Provisions Act, 1952,
and the Factories Act, 1948.
 Derivative action is characterized as an action taken by one or more shareholders of a
corporation in which the company is the plaintiff and relief is sought on its behalf. It
must, however, be presented in a representative manner.
 A shareholder can bring an action against the company and its directors for matters that
are in violation of the company's Memorandum or Articles and that no majority
shareholder can sanction.
 Directors and the corporation could be held liable if the majority of shareholders engage
in "fraud on the minority," or discriminatory conduct. As a result, this is an extremely
valuable clause for Directors to be aware of and strive to take advantage of as much as
possible.

66
  The Companies Act requires a corporation to purchase insurance to cover itself against
losses caused by its directors. A director may also purchase insurance to compensate for
losses incurred due to liability to the company, with the premium charged by the
company.

MEETINGS

The word meeting is not defined anywhere in the Companies Act. Ordinarily, a company may
be defined as gathering, assembling or coming together of two or more persons (by previous
notice or by mutual arrangement) for discussion and transaction of some lawful business.
A company meeting may be defined as a concurrence or coming together of at least a quorum of
members in order to transact either ordinary or special business of the company.

Some important definitions of meeting are given below:

1. In the case of Sharp vs. Dawes (1971), the meeting is defined as An assembly of people
for a lawful purpose or the coming together of at least two persons for any lawful
purpose.
2. According to P.K. Ghosh Any gathering, assembly or coming together of two or more
persons for the transaction of some lawful business of common concern is called
meeting.
3. According to K. Kishore, A concurrence or coming together of at least a quorum of
members by previous notice or mutual agreement for transaction business for a common
interest is meeting.
4. From the above definitions of meeting, it can be concluded that meeting is the
congregation of several persons in a particular place for the purpose of discussing some
important matters and expressing their opinion on the questions raised.

 Types of Company Meeting

There are eight main types of company meetings. The types are:

(ix) Statutory Meeting

(x)Annual General Meeting

(xi) Extraordinary General Meeting

(xii) Meeting of the Board of Directors

67
(xiii) Class Meeting

(xiv) Meeting of Creditors

(xv) Meeting of Debenture Holders

(xvi) Meeting of Creditors and Contributories.

1. Statutory Meeting:

 Every public company limited by shares—and every company limited by guarantee and
having a share capital—must, within a period of not less than one month and not more
than six months from the date at which the company is entitled to commence business,
hold a general meeting of the members which is to be called the Statutory Meeting.

 In this meeting the members are to discuss a report by the Directors, known as the
Statutory Report, which contains particulars relating to the formation of the company.

 Private companies are exempted from holding this meeting.

 Statutory Report:

The nature of business conducted at the statutory meeting involves

consideration and adoption of the Statutory Report. The Statutory Report is
drafted by Directors and certified as correct by at least two of them. A copy of
the report must be sent to every member at least 21 days before the date of the
meeting. A copy is also to be sent to the Registrar for registration.

 Section 165(3) provides that the Statutory Report must contain the following particulars:
(i) The total number of fully paid-up and partly paid-up shares allotted;

(ii) The total amount of cash received by the company in respect of the shares;

(iii) An abstract of the receipts, classifying them according to source and

mentioning the expenses incurred for commission, brokerage etc.

(iv) The names, addresses and occupations of directors, auditors, managers and
sec- retaries and changes of the names, addresses etc.

(v) Particulars of contracts which are to be submitted to the meeting for

approval, with proposed modifications, if any;

(vi) If any underwriting contracts have not been carried out, the reasons therefor;

(vii) The arrears due on calls from directors and others;

(viii) Particulars of commissions and brokerages paid to directors and managers.

68
 Particulars as regards cash in the Statutory Report are to be certified as correct by the
auditors of the company.
 The members of the company who are present in the Statutory Meeting are at liberty
to discuss any matter relating to the formation of the company or arising out of the
Statutory Report, whether previous notice has been given or not. But no resolution can
be passed of which notice has not been given in accordance with the provisions of the
Act.
 If default is made in complying with the provisions of Section 165, every Director or
any other officer of the company who is in default shall be punishable with a fine
which may extend to Rs. 500.

2. Annual General Meeting:

General Meeting of a company means a meeting of its members for specified purposes.

There are two kinds of General Meetings:

(i) The Annual General Meeting and

(ii) Other General Meetings.

The statutory provisions regarding the Annual General Meeting are:

(a) Section 166:

The first Annual General Meeting of a company may be held within a period of not more
than 18 months from the date of its incorporation. If such a meeting is held within the
period, it is not necessary for the company to hold any annual general meeting in the year of
its incorporation or in the following year.
Subject to the above-mentioned provision, a company must hold an Annual GeneralMeeting
each year. Not more than 15 months shall elapse between the date of one Annual General
Meeting and the next. The Registrar may, for any special reason, extend the time of holding
an Annual General Meeting (other than the first Annual General Meeting) by a period not
exceeding 3 months.
The notice, by which an Annual General Meeting is called, must specify it as such. Every
Annual General meeting shall be called during business hours, on a day which is not a public

69
 holiday, at the Registered Office of the company or at some other place within the town or
village where the Registered Office is situated. The Central Govt. may exempt any class of
companies from the provisions mentioned in this paragraph.
The time of holding of the Annual General Meeting may be fixed by the articles of the
company. A public company or a private company which is a subsidiary of a public
company, may, by a resolution passed in one general meeting, fix the time for its subsequent
general meetings. Other private companies may do so by a resolution agreed to by all the
members thereof.

(b) Section 167:

If default is made in holding an Annual General Meeting in accordance with Sec. 166, the
Regional Director of the Company Law Board may, on the application of any member of the
company, call or direct the calling of a general meeting. He may also give directions
regarding the calling, holding and conducting the meeting. Such a meeting shall be deemed to
be an Annual General Meeting of the company

(c) Section 168:

If the provisions of Sections 166 and 167 are not complied with, the company and every
officer of the company be fined.

(d) Section 171:

A general meeting may be called by giving not less than 21 days’ notice in writing. The
Annual General Meeting may be called with a shorter notice if it is agreed to by all the
members entitled to vote in the meeting. The Court has no power to direct the calling of the
Annual General Meeting.

3. Extraordinary General Meeting:

 Any general meeting of the company which is not an Annual General Meeting or a
Statutory Meeting is called Extraordinary General Meeting.

 An Extraordinary General Meeting is held for dealing with some business of special or
extraordinarynature and which is outside the scope of the Annual General Meeting.

70
 This meeting is also held to transact some urgent business that cannot be deferred till
the next Annual General Meeting.

 This meeting may be called by the Directors or requisitioned by the member’s

according to Sec.169 of the Companies Act, 1956. The Board of Directors can be
compelled to hold
 Extraordinary General Meeting upon request or requisition made for it, under the
following conditions:

(a) The requisition must be signed by members holding at least 1/10th of the
paid- up capital of the company, in the case of companies having a share-capital;
and by members holding at least 1/10th of the total voting power in other cases.

(b) The requisition must set out the matters which will be considered at the meeting.

(c) The requisition must be deposited at the Registered Office of the company.

 The Board must, within 21 days of the receipt of a valid requisition, issue a notice for the
holding of the meeting on a date fixed within 45 days of the receipt of the requisition. If
the Board does not hold the meeting as aforesaid, the requisitionists can call a meeting to
be held on a date fixed within 3 months of the date of requisition.

4. Meeting of the Board of Directors:

The management of the company is vested on the Board of Directors. Therefore, the
Directors are to meet frequently to decide both policy and routine matters.

The provisions regarding Board Meeting are:

1. Board Meeting must be held once in every three calendar months and at least fourtimes in
every year. This provision may be exempted by the Central Govt.

2. Notice of Board Meeting shall be given in writing to every director for the time being
in India and at his usual address in India.

5. Class Meeting:

These meetings are held by a particular class of shareholders for the purpose of effecting

71
 variation in the Articles in respect of their rights and privileges or for conversion of one
class into another.

The provision for variation must be contained in the Memorandum or Articles and this
variation must not be prohibited by the terms of issue of shares of that particular class. Such
resolutions are to be passed by three-fourth majority of the members of that class.

6. Meeting of Creditors:

These meetings are called when the company proposes to make a scheme of arrangement
with its creditors. The Court may order a meeting of the creditors or a class of creditors on
the application of the company or of liquidator in case of a com- pany being wound-up.
Such a meeting is held and conducted in such a manner as the Court directs. If arrangement
is passed by a majority of three-fourth in value of creditors and the same is sanctioned by the
Court, it is binding on all the creditors.

7. Meeting of Debenture Holders:

These meeting are called according to the rules and regulations of the Trust Deed or
Debenture Bond. Such meetings are held from time to time where the interests of debenture
holders are involved at the time of re-organisation, reconstruction, amalgamation or
winding-up of the company. The rules regarding the appointment of Chairman, notice of the
meeting, quorum etc. are contained in the Trust Deed.

8. Meeting of Creditors and Contributories:

These meetings are held when the company has gone into liquidation to ascertain the total
amount due by the company to its creditors. The main purpose of these meetings is to obtain
the approval of the creditors and contributories to the scheme of compromise or
rearrangement to save the company from financial difficulties.
Sometimes, the Court may also order for such a meeting to be held.

When a company desires to vary the rights of debenture-holders, such meetings are to be
held according to the rules laid down in the Debenture Trust Deed. They are also held to
enable the company to issue new debentures or to vary the rate of interest payable to
debenture-holders. The term “contributory” covers every person who is liable to contribute
to the assets of the company when the company is being wound-up.

72
 REQUISITES OF A VALID COMPANY MEETING

If the business carried on in a company is valid and legally binding, it is necessary that the
meeting called to conduct such business also be held in a valid manner. To understand the same,
there are some pointers one must understand to consider a meeting valid. The following are
the requisites for conducting a valid company meeting:

1. The meeting is convened by proper authority.

2. The announcement of holding the meeting is served through a proper notice. The same
has been discussed under Section 101 and 102 of the Companies Act, 2013.

3. While holding the meeting, it is crucial that a proper quorum is present.

4. To conduct the meeting, it is important that it must be presided over by a proper

chairman.

5. At the meeting, business must be validly transacted.

6. It is crucial that proper minutes of the meeting must be prepared.

PROCEDURE FOR CONDUCTING BOARD MEETINGS

1) Directors may participate in a meeting either in person or through video conferencing
or through audio visual means.
2) Every company shall make necessary arrangements to avoid failure of video or audio
visual connection.
3) The chairperson of the meeting and the company secretary, if any, shall take due
and reasonable care:
a. to safeguard the integrity of the meeting by ensuring sufficient security and
b. identification procedures;
c. to ensure the availability of proper video conferencing or other audio visual
equipment or facilities for providing transmission of the communications for
effective participation of the directors and other authorised participants at the
Board meeting;
d. to record the proceedings and prepare the minutes of the meeting;
e. to store for safekeeping and marking the tape recording(s) or other electronic
recording mechanism as part of the records of the company at least before the time
of completion of audit of that particular year;
f. to ensure that no person other than the concerned director are attending or have
73
 access to the proceedings of the meeting through video conferencing mode or other
audio visual means; and
g. to ensure that participants attending the meeting through audio visual means are
able to hear and see the other participants clearly during the course of the meeting,
but the differently abled persons, may make request to the Board to allow a person
to accompany him.

4) Notice of the meeting:

a. The notices of the meeting shall be sent to all the directors in accordance with the
provisions of sub-section (3) of section 173 of the Act.
b. The notice of the meeting shall inform the directors regarding the option available
to them to participate through video conferencing mode or other audio visual
means, and shall provide all the necessary information to enable the directors to
participate through video conferencing mode or other audio visual means.
c. A director intending to participate through video conferencing mode or audio
visual means shall communicate his intention to the chairman or the company
secretary of the company.
d. If the director intends to participate through video conferencing or other audio
visual means, he shall give prior intimation to that effect sufficiently in advance so
that company is able to make suitable arrangement in this behalf.
e. The director, who desire, to participate may intimate his intention of participation
through the electronic mode at the beginning of the calendar year and such
declaration shall be valid for one calendar year.
f. In the absence of any such intimation from the director, it shall be assumed that the
director will attend the meeting in person.

5. At the commencement of the meeting, a roll call shall be taken by the Chairperson when
every director participating through video conferencing or other audio visual means shall state,
for the record, the following namely :
a. name;
b. the location from where he is participating;
c. that he can completely and clearly see, hear and communicate with the other
participants;
d. that he has received the agenda and all the relevant material for the meeting; and
e. that no one other than the concerned director is attending or having access to the
74
 proceedings of the meeting at the location mentioned in (b) above.

6. After the roll call, the Chairperson or the Secretary shall inform the Board about the names
of persons other than the directors who are present for the said meeting at the request or
with the permission of the Chairman and confirm that the required quorum is complete.
Explanation: It is clarified that a director participating in a meeting through video
conferencing or other audio visual means shall be counted for the purpose of quorum,
unless he is to be excluded for any items of business under any provisions of the Act or the
Rules.
The roll call shall also be made at the conclusion of the meeting and at the re-commencement
of the meeting after every break to confirm the presence of a quorum throughout the meeting
7. With respect to every meeting conducted through video conferencing or other audio
visual means authorised under these rules, the scheduled venue of the meeting as set forth in the
notice convening the meeting, which shall be in India, shall be deemed to be the place of the
said meeting and all recordings of the proceedings at the meeting shall be deemed to be made at
such place.
8. The statutory registers which are required to be placed in the Board meeting as per the
provisions of the Act shall be placed at the scheduled venue of the meeting and where such
registers are required to be signed by the directors, the same shall be deemed to have been
signed by the directors participating through electronic mode if they have given their consent
to this effect and it is so recorded in the minutes of the meeting.

(xvii) Every participant shall identify himself for the record before speaking on any item of
business on the agenda. If a statement of a director in the meeting through video conferencing or
other audio visual means is interrupted or garbled, the Chairperson or company secretary shall
request for a repeat or reiteration by the director.

10. If a motion is objected to and there is a need to put it to vote, the Chairperson shall call the
roll and note the vote of each director who shall identify himself while casting his vote.

11. From the commencement of the meeting until the conclusion of such meeting, no person
other than the Chairperson, directors, Secretary and any other person whose presence is required
by the Board shall be allowed access to the place where any director is attending the meeting
either physically or through video conferencing without the permission of the Board.
a. At the end of discussion on each agenda item, the Chairperson of the meeting
75
 shall announce the summary of the decision taken on such item along with names
of the directors, if any, dissented from the decision taken by majority.
b. The minutes shall disclose the particulars of the directors who attended the
meeting through video conferencing or other audio visual means.

12. The draft minutes of the meeting shall be circulated among all the directors within
fifteen days of the meeting either in writing or in electronic mode as may be decided by the
Board.
13. Every director who attended the meeting, whether personally or through video conferencing
or other audio visual means, shall confirm or give his comments, about the accuracy of
recording of the proceedings of that particular meeting in the draft minutes, within seven days or
some reasonable time as decided by the Board, after receipt of the draft minutes failing which
his approval shall be presumed.
14. After completion of the meeting, the minutes shall be entered in the minute book as
specified under section 118 of the Act and signed by the Chairperson.

RESOLUTION
Resolution is a decision or agreement mane by the directors and shareholders of the company.
When a resolution is proposed it is called motion. After passing a resolution company is bound
to act according to it. A resolution is a formal way in which a company can note decisions that
are made at a meeting of company members.

Types of Resolution

Ordinary and Special resolution (Section 114)

Decisions in a company are taken by passing resolutions to that regard. The resolutions can be
ordinary, special and resolutions requiring special notice, depending upon the nature of the
decision to be taken.
Ordinary resolution is said to be passed when the votes cast by the eligible members in favour
exceed the votes casted against any resolution. Here the members can either vote in person or
through proxy. The Chairman of the meeting possesses a casting vote in case of a tie.
Whereas a special resolution is said to be passed for a resolution when a notice duly given for
the
purpose clearly specifies that the resolution to be passed is a special one. Such resolutions
require
76
that the votes by the eligible members must be three times in favour in comparison to the votes
cast against the resolution. Here the person can either vote in person or through a proxy.

1. Ordinary Resolution
The Companies Act, under section 114 talks about ordinary resolution. In an ordinary
resolution, the votes are cast by show of hands/ electronically/ by polling system in favor of the
resolution. The concept of ordinary resolution under the Companies Act, 2013 is a majority
vote-based resolution. Only eligible members can cast their votes in ordinary resolution.
Therefore, a member who abstains or is prohibited to vote shall not be counted.

The votes cast in favor of the ordinary resolution must exceed the votes cast against it. There
should be a simple majority in favor of the motion allowing the resolution to pass. Notice should
be served to all the members in advance. Additionally, there should be a consent of at least 51%
of the member. A copy of the ordinary resolution should be filed with the ROC once the
signatures are given.

It is a formal written document, binding on the company. Ordinary resolutions are similar to
polling systems, where the members cast their votes simply in the form of yes or no. In a small
company, it is generally done by show of hands. The directors can participate in person or by
any audio or video conferencing. The notice for the meeting in writing should be served in not
less than 7 days. It should be sent to the registered address of the director.

Ordinary Resolution Matters

 If the matter deals with alteration in authorized capital.

 Deals with the change of name of the company.
 Alteration of MOA under section 61.
 If there is a declaration of dividend.
 If the matter revolves around the appointment of auditors and the fixation of remuneration.
 Under section 65 of the Companies Act, the unlimited company to provide for reserve share
capital on conversion into a limited company
 Matter dealing with the appointment of an alternate director under section 161 or
appointment of managing director, whole-time director subject to section 196 and 197, and
removal of director before the expiry of the term under section 169.
 If the matter is about the restricted non-cash transactions then an ordinary resolution is
made.
 If there is voluntary winding up of company or appointment of official liquidator.

77
 Lastly, if the matter deals with the election of directors.

2. Special Resolution

According to section 114(2) of the Companies Act, a resolution is a special resolution when
there is the intention to propose a resolution as a special resolution and it has been mentioned in
the notice calling for the general meeting. This resolution is special if the votes are cast on a
show of hands/ electronically or by-poll by the members.

Pre-requisites before passing a special resolution

 Notice should be given of the intention to have a special resolution specifically mentioning
the main agenda of passing the special resolution.
 The votes casted in favor of the resolution should not exceed 3 times the total vote casted
against the resolution. A special resolution is adopted only with 75% of the valid votes.
That means 75% of the members should be voting in the favour of the resolution.
 Voting in special resolution can be done by the display of hands, electronic, or any other
permissible voting mode.
 The number of votes of the entitled and voting representatives should be counted.
Matter where a special resolution is taken

 If the matter deals with the alteration of AOA while converting from a private limited
company to a public limited and vice-versa.
 If there is a change in the registered office under section 12.
 For alteration in MOA and AOA under sections 13 and 14.
 For issuance of global depository receipt in any foreign country under section 41.
 Issue of sweat equity shares under section 54.
 If there is an issue of shares to the employees of the company under section 62.
 When there is a reduction of share capital in section 66.
 If there is buy-back of shares in section 68.
 If the matter is about the issuance of debentures convertible into shares either wholly or
partly.
 Section 149(1) appointment of more than 15 directors and when there is re-appointment of
independent director for a further period of 5 years.
 If the matter relates to loans and investments under section 186.
 If the issue is regarding the payment of remuneration to directors.

78
 For the approval of scheme of merger and amalgamation and winding up of a company
under section 271.
 If the company has voluntary winding up.

79
Unit IV : Winding Up

Winding Up and Grounds for Winding up

Winding up of a company is defined as a process by which the life of a company is brought
to an end and its property administered for the benefit of its members and creditors.
Under the process, the life of the company is ended & its property is administered for the
benefits of the members & creditors. A liquidator is appointed to realise the assets &
properties of the company. After payments of the debts, is any surplus of assets is left out
they will be distributed among the members according to their rights. Winding up does not
necessarily mean that the company is insolvent. A perfectly solvent company may be
wound up by the approval of members in a general meeting.
Winding up a registered company
The Companies Act provides for two modes of winding up a registered company.
Grounds for Compulsory Winding Up or Winding up by the Tribunal:
1. If the company has, by a Special Resolution, resolved that the company be wound up by
the Tribunal.
2. If default is made in delivering the statutory report to the Registrar or in holding the
statutory meeting. A petition on this ground may be filed by the Registrar or a contributory
before the expiry of 14 days after the last day on which the meeting ought to have been
held. The Tribunal may instead of winding up, order the holding of statutory meeting or the
delivery of statutory report.
3. If the company fails to commence its business within one year of its incorporation or
suspends its business for a whole year. The winding up on this ground is ordered only if
there is no intention to carry on the business and the Tribunal's power in this situation is
discretionary.
4. If the number of members is reduced below the statutory minimum i.e. below seven in
case of a public company and two in the case of a private company.
4. If the company is unable to pay its debts.
5. If the tribunal is of the opinion that it is just and equitable that the company should be
wound up.
6. Tribunal may inquire into the revival and rehabilitation of sick units. It its revival is
unlikely; the tribunal can order its winding up.

80
7. If the company has made a default in filing with the Registrar its balance sheet and profit
and loss account or annual return for any five consecutive financial years.
8. If the company has acted against the interests of the sovereignty and integrity of India,
the security of the State, friendly relations with foreign States, public order, decency or
morality.
Procedure of Winding up
The winding up petition must be presented to the Tribunal. If the petition has been filed by
the Company, it shall be accompanied by a statement of affairs in the form and manner
prescribed. In case the petition is filed by any person other than the company, the Tribunal
will require the company to file its objections along with a statement of affairs within thirty
days. Before passing an order as such; the Tribunal must be satisfied about the existence of
a prima facie case for winding up.
On receipt of the winding up petition under Section 272, the Tribunal may:
(i) dismiss it, with or without costs24; or
(ii) appoint a provisional liquidator or the company till the making up of a winding up
order; or
(iii) make any interim order that it thinks fit; or
(iv) make an order for winding up the company with or without costs; or
(v) make any other order that it thinks fit
Section 275 of the Act provides that for the purposes of winding up by the Tribunal, it is
authorized to appoint an Official Liquidator or a liquidator from the panel maintained
amongst the insolvency professionals registered under the Insolvency and Bankruptcy Code,
2016, as the Company Liquidator. The Tribunal is also empowered to appoint a provisional
liquidator till the making of a winding up order.
Section 277(4) requires the Company Liquidator to make an application to the Tribunal for
constitution of a winding up committee to assist and monitor the progress of liquidation.
The application is required to be made within three weeks from the date of winding up
order. The company shall have nominee of secured creditors, a professional nominated by
the Tribunal and Official Liquidator attached to the Tribunal. The Company Liquidator is
the convener of the Committee. The winding up committee shall monitor the following
aspects relating to liquidation proceedings:
(i) taking over assets;
(ii) examination of the statement of affairs;

81
(iii) recovery of property, cash or any other assets of the company including benefits
derived therefrom;
(iv) review of audit reports and accounts of the Company;
(v) sale of assets;
(vi) finalisation of list of creditors and contributories;
(vii) compromise, abandonment and settlement of claims and payment of dividends; and
(viii) any other function, as the Tribunal may direct from time to time.

Dissolution of a Company
When the affairs of a company have been completely wound up, the Company Liquidator
shall make an application to the Tribunal for dissolution of the company. Upon receipt of
the report from the Company Liquidator or otherwise, the Tribunal on forming an opinion
that it is just and reasonable to order dissolution, shall make an order for dissolution of the
company. The company shall be dissolved effective from the date of the order [Section
302(2)].
Powers of Liquidators
The Company Liquidator can exercise certain powers subject to the directions and overall
control of the Tribunal. The Tribunal may require the Company Liquidator to perform any
other duty. The powers of the Company Liquidator as specified in section 290(1) are
reproduced below:
(a) to carry on the business of the company so far as may be necessary for the beneficial
winding up of the company;
(b) to do all acts and to execute, in the name and on behalf of the company, all deeds,
receipts and other documents, and for that purpose, to use, when necessary, the company’s
seal;
(c) to sell the immovable and movable property and actionable claims of the company by
public auction or private contract, with power to transfer such property to any person or
body corporate, or to sell the same in parcels;
(d) to sell the whole of the undertaking of the company as a going concern;
(e) to raise any money required on the security of the assets of the company;
(f) to institute or defend any suit, prosecution or other legal proceeding, civil or
criminal, in the name and on behalf of the company;

82
(g) to invite and settle claim of creditors, employees or any other claimant and distribute
sale proceeds in accordance with priorities established under this Act;
(h) to inspect the records and returns of the company on the files of the Registrar or any
other authority;
(i) to prove rank and claim in the insolvency of any contributory for any balance against his
estate, and to receive dividends in the insolvency, in respect of that balance, as a separate
debt due from the insolvent, and rateably with the other separate creditors;
(j) to draw, accept, make and endorse any negotiable instruments including cheque, bill of
exchange, hundi or promissory note in the name and on behalf of the company, with the
same effect with respect to the liability of the company as if such instruments had been
drawn, accepted, made or endorsed by or on behalf of the company in the course of its
business;
(k) to take out, in his official name, letters of administration to any deceased contributory,
and to do in his official name any other act necessary for obtaining payment of any money
due from a contributory or his estate which cannot be conveniently done in the name of the
company, and in all such cases, the money due shall, for the purpose of enabling the
Company Liquidator to take out the letters of administration or recover the money, be
deemed to be due to the Company Liquidator himself;
(l) to obtain any professional assistance from any person or appoint any professional, in
discharge of his duties, obligations and responsibilities and for protection of the assets of the
company, appoint an agent to do any business which the Company Liquidator is unable to
do himself;
(m) to take all such actions, steps, or to sign, execute and verify any paper, deed, document,
application, petition, affidavit, bond or instrument as may be necessary (i) for winding up of
the company; (ii) for distribution of assets; (iii) in discharge of his duties and obligations
and functions as Company Liquidator; and
(n) to apply to the Tribunal for such orders or directions as may be necessary for the
winding up of the company.

Winding up of an Unregistered Company

Winding up an Unregistered Company

83
According to the Companies Act, an unregistered company includes any partnership,
association, or company consisting of more than seven persons at the time when petition for
winding up is presented. But it will not cover the following: -
a. A railway company incorporated by an Act of Parliament or other Indian law or any Act
of the British Parliament.
b. A company registered under the Companies Act, 1956.
c. A company registered under any previous company laws.
d. An illegal association formed against the provisions of the Act.
However, a foreign company carrying on business in India can be wound up as an
unregistered company even if it has been dissolved or has ceased to exist under the laws of
the country of its incorporation. The provisions relating to winding up of an unregistered
company: -
a. Such a company can be wound up by the Tribunal but never voluntarily.
b. Circumstances in which unregistered company may be wound up are as follows: -
• If the company has been dissolved or has ceased to carry on business or is carrying on
business only for the purpose of winding up its affairs.
• If the company is unable to pay its debts.
• If the Tribunal regards it as just and equitable to wind up the company.
• Contributory means a person who is liable to contribute to the assets of a company in the
event of its being wound up. Every person shall be considered a contributory if he is liable
to pay any of the following amounts - Any debt or liability of the company;
Any sum for adjustment of rights of members among themselves; Any cost, charges and
expenses of winding up; on the making of winding up order, any legal proceeding can be
filed only with the leave of the Tribunal.
Winding up subject to the Supervision of Court
1. Winding up subject to supervision of court, is different from "Winding up by court."
2. Here the court can only supervise the winding up procedure. Resolution for winding up,
is passed by members in the general meeting. It is only for some specific reasons, that court
may supervise the winding up proceedings. The court may put up some special terms and
conditions also.
3. However, liberty is granted to creditors, contributories or other to apply to court for some
relief. (522) Where a Company is being wound up voluntarily, any person who would have
been entitled to petition for compulsory winding up may petition instead for the voluntary

84
winding up to be continued subject to the supervision of court.
4. The Petitioner must prove that voluntary winding up cannot continue with fairness to all
concerned parties.
5. Court may then appoint an additional Liquidator or continue with the existing Liquidator
to give security.
6. The Liquidator must file with the Registrar every three months a report of the progress of
the liquidation - The court may also appoint liquidators, in addition to already appointed, or
remove any such liquidator. The court may also appoint the official liquidator, as a
liquidator to fill up the vacancy.
7. Liquidator is entitled to do all such things and acts, as he thinks best in the interest of
company. He shall enjoy the same powers, as if the company is being wound-up voluntarily.
8. The court also may exercise powers to enforce calls made by the liquidators, and such
other powers, as if an order has been made for winding up the company altogether by court.

Voluntary Winding up of a registered company

When a company is wound up by the members or the creditors without the intervention of
Tribunal, it is called as voluntary winding up. It may take place by: -
1. By passing an ordinary resolution in the general meeting if: -
• the period fixed for the duration of the company by the articles has expired.
• some event on the happening of which company is to be dissolved, has happened.
2. By passing a special resolution to wind up voluntarily for any reason whatsoever. Within
14 days of passing the resolution, whether ordinary or special, it must be advertised in the
Official Gazette and also in some important newspaper circulating in the district of the
registered office of the company.
Members' voluntary winding up
It is possible in the case of solvent companies which are capable of paying their liabilities in
full.
There are two conditions for such winding up: -
a. A declaration of solvency must be made by a majority of directors, or all of them if they
are two in number. It will state that the company will be able to pay its debts in full in a
specified period not exceeding three years from commencement of winding up; and
b. Shareholders must pass an ordinary or special resolution for winding up of the company.
The provisions applicable to members' voluntary winding up are as follows: -

85
1) Appointment of liquidator and fixation of his remuneration by the General Meeting.
2) Cessation of Board's power on appointment of liquidator except so far as may have been
sanctioned by the General Meeting, or the liquidator.
3) Filling up of vacancy caused by death, resignation or otherwise in the office of liquidator
by the general meeting subject to an arrangement with the creditors.
4) Sending the notice of appointment of liquidator to the Registrar.
5) Power of liquidator to accept shares or like interest as a consideration for the sale of
business of the company provided special resolution has been passed to this effect.
6) Duty of liquidator to call creditors' meeting in case of insolvency of the company and
place a statement of assets and liabilities before them.
7) Liquidator's duty to convene a General Meeting at the end of each year.
8) Liquidator's duty to make an account of winding up and lay the same before the final
meeting.
The liquidator shall take the following steps, when affairs of the company are fully wound
up:
1. Call a general meeting of the members of the company, a lay before it, complete picture
of accounts, winding up procedure and how the properties of company are disposed of.
2. The meeting shall be called by advertisement, specifying the time, place and object of the
meeting.
3. The liquidator shall send to, the Registrar and official Liquidator copy of account, within
one week of the meeting.
4. If from the report, official liquidator comes to the conclusion, that affairs of the company
are not being carried in manner prejudicial to the interest of its members, or public, then the
company shall be deemed to be dissolved from the date of report to the court.
4. However, if official liquidator comes to a finding, that affair have been carried in a
manner prejudicial to interest of member or public, then court may direct the liquidator to
investigate furthers.

Creditors Voluntary Winding Up

A winding up petition is a perfectly proper remedy for enforcing payment of a just debt. It is
the mode of execution which the Court gives to a creditor against a company unable to pay
its debts.
The provisions applicable to creditors' voluntary winding up are as follows: -

86
1. The Board of Directors shall convene a meeting of creditors on the same day or the next
day after the meeting at which winding up resolution is to be proposed. Notice of meeting
shall be sent by post to the creditors simultaneously while sending notice to members. It
shall also be advertised in the Official Gazette and also in two newspapers circulating in the
place of registered office.
2. A statement of position of the company and a list of creditors along with list of their
claims shall be placed before the meeting of creditors.
3. A copy of resolution passed at creditors' meeting shall be filed with Registrar within 30
days of its passing.
4. It shall be done at respective meetings of members and creditors. In case of difference,
the nominee of creditors shall be the liquidator.
5. A five-member Committee of Inspection is appointed by creditors to supervise the work
of liquidator.
6) Fixation of remuneration of liquidator by creditors or committee of inspection.
6. Cessation of board's powers on appointment of liquidator.

Preferential Payment
In the event of winding-up, certain payments are to rank in priority to others. The payments
to be so made first are called as ‘preferential payments’. Such payments, as per section 326
and section 327 are as follows:
Section 326(1)
In the winding up of the company, the following shall be paid in priority to other debts:
1. Workmen’s dues; and
2. Where a secured creditor has realized a secured asset, so much of the dents due to such
secured creditor as could not be realized by him or the amount of the workmen’s portion in
his security (if payable under the law, whichever is less, pari passu with the workmen’s
dues;
Order of Priority - Thus, the order of priority in paying off debts in a winding-up shall be as
follows :
(i) Workmen’s dues and debts due to secured creditors;
(ii) Costs and expenses of winding-up;
(iii) Preferential debts;
(iv) Floating charge; and

87
(v) Unsecured creditors.

Liablity of Past Members

A past member shall not be liable to contribute
1. If he has ceased to be a member for one year or more before the commencement of the
winding-up.
2. In respect of any debt or liability of the company contracted after he ceased to be a
member.
3. If it appears to the Tribunal that the present members will be able to satisfy the
contributions required to be made by them.

Unpaid Dividend
According to section 124, where a dividend has been declared by a company but has not
been paid or claimed within 30 days from the date of the declaration to any shareholder
entitled to the payment of the dividend, the company shall within 7 days from the date of
expiry of the said period of 30 days transfer the total amount of dividend which remains
unpaid or unclaimed within the said period of 30 days to a special account to be opened by
the company in that behalf in any scheduled bank to be called “Unpaid Dividend Account”.
Sub-section (2) of section 124 requires that the company shall, within a period of ninety
days of making any transfer of an amount under sub-section (1) to the Unpaid Dividend
Account, prepare a statement containing the names, their last known addresses and the
unpaid dividend to be paid to each person and place it on the website of the company, if
any, and also on any other website approved by the Central Government for this purpose, in
such form, manner and other particulars as may be prescribed. If any default is made in
transferring the total amount referred to in sub-section (1) or any part thereof to the Unpaid
Dividend Account of the company, it shall pay, from the date of such default, interest on so
much of the amount as has not been transferred to the said account, at the rate of 12% per
annum and the interest accruing on such amount shall enure to the benefit of the members
of the company in proportion to the amount remaining unpaid to them. Any person
claiming to be entitled to any money transferred under sub-section (1) to the Unpaid
Dividend Account of the company may apply to the company for payment of the money
claimed.
Section 124(5) provides that any money transferred to the Unpaid Dividend Account of a

88
company in pursuance of this section which remains unpaid or unclaimed for a period of
seven years from the date of such transfer shall be transferred by the company along with
interest accrued, if any, thereon to the Fund established under sub-section (1) of section 125
and the company shall send a statement in the prescribed form of the details of such transfer
to the Authority which administers the said Fund and that Authority shall issue a receipt to
the company as evidence of such transfer.
All shares in respect of which dividends have not been paid or claimed for seven
consecutive years or more shall be transferred by the company in the name of Investor
Education and Protection Fund along with a statement containing such details as may be
prescribed [Sub-section (6)].
However, any claimant of shares transferred above shall be entitled to claim the transfer of
shares from Investor Education and Protection Fund in accordance with such procedure and
on submission of such documents as may be prescribed.
If a company fails to comply with any of the requirements of this section, the company shall
be punishable with fine which shall not be less than five lakh rupees but which may extend
to twenty-five lakh rupees and every officer of the company who is in default shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to
five lakh rupees [Sub-section (7)].

89